SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended June 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from _____________ to _____________
Commission File No. 0-10248
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FONAR CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 11-2464137
(State of incorporation) (IRS Employer Identification Number)
110 Marcus Drive, Melville, New York 11747
(Address of principal executive offices) (Zip Code)
(631) 694-2929
(Registrant's telephone number, including area code)
____________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.0001 per share
(Title of Class)
________________________________________________________________
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 _______
As of September 20, 2001, 60,044,124 shares of Common Stock, 4,211 shares of
Class B Common Stock, 9,562,824 shares of Class C Common Stock and 7,836,287
shares of Class A Non-voting Preferred Stock of the registrant were outstanding.
The aggregate market value of the approximately 57,521,655 shares of Common
Stock held by non-affiliates as of such date (based on the closing price per
share on September 20, 2001 as reported on the NASDAQ System) was approximately
$82.3 million. The other outstanding classes do not have a readily determinable
market value.
DOCUMENTS INCORPORATED BY REFERENCE
None
ITEM 1. BUSINESS
GENERAL
FONAR Corporation (the "Company" or "FONAR") is a Delaware corporation
which was incorporated on July 17, 1978. The Company's address is 110 Marcus
Drive, Melville, New York 11747 and its telephone number is (631) 694-2929.
FONAR also maintains a WEB site at www.fonar.com.
FONAR is engaged in the business of designing, manufacturing, selling and
servicing magnetic resonance imaging ("MRI" or "MR") scanners which utilize MRI
technology for the detection and diagnosis of human disease. FONAR introduced
the first MRI scanner in 1980 and is the originator of the iron-core
non-superconductive and permanent magnet technology.
FONAR's iron frame technology made FONAR the originator of "open" MRI
scanners. FONAR introduced the first "open" MRI in 1980. It has concentrated
since on further application of its "open" MRI, introducing the Stand-Up MRI
scanner, the QUAD MRI, the Open Sky MRI and its works in progress MRI operating
room.
Health Management Corporation of America (formerly U.S. Health Management
Corporation and hereinafter sometimes referred to as "HMCA") was formed 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. HMCA provides management services, administrative
services, office space, equipment, repair and maintenance service and clerical
and other non-medical personnel to physicians and other medical providers,
including diagnostic imaging centers.
See Note 21 to the Financial Statements for separate financial information
respecting the Company's medical equipment and physician and diagnostic
management services segments.
FORWARD LOOKING STATEMENTS.
Certain statements made in this Annual Report on Form 10-K are
"forward-looking statements" (within the meaning of the Private Securities
Litigation Reform Act of 1995) regarding the plans and objectives of Management
for future operations. Such statements involve known and unknown risks,
uncertainties and other factors that may cause actual results, performance or
achievements of the Company to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. The forward-looking statements included herein are based on current
expectations that involve numerous risks and uncertainties. The Company's plans
and objectives are based, in part, on assumptions involving the expansion of
business. Assumptions relating to the foregoing involve judgments with respect
to, among other things, future economic, competitive and market conditions and
future business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Although the
Company believes that its assumptions underlying the forward-looking statements
are reasonable, any of the assumptions could prove inaccurate and, therefore,
there can be no assurance that the forward-looking statements included in this
Report will prove to be accurate. In light of the significant uncertainties
inherent in the forward-looking statement included herein, the inclusion of such
information should not be regarded as a representation by the Company or any
other person that the objectives and plans of the Company will be achieved.
RECENT DEVELOPMENTS AND OVERVIEW.
The Company's products and works-in-progress (dubbed the "Fonar Seven") are
intended to significantly improve the Company's competitive position. The
Company's products are the "Stand-Up MRI" also called "Indomitable (TM), the
Fonar 360(TM), the "QUAD(TM)" MRI scanner and the Echo(TM) MRI scanner.
Indomitable(TM) permits, for the first time, MRI diagnoses to be made in
the weight-bearing state. It is also anticipated that in the future
Indomitable(TM) will enable MRI-guided surgical and interventional procedures to
be performed when the patient is upright. The Company received FDA approval for
Indomitable in October, 2000.
The Fonar 360, approved for marketing by the FDA on March 16, 2000,
includes the "Open Sky(TM)" MRI. The magnet frame is incorporated into the
floor, ceiling and sidewalls of the scan room and is open. Consequently,
physicians and family members can walk inside the magnet to approach the
patient. The Open Sky version of the Fonar 360 is decoratively designed so that
it is incorporated into the panoramic landscape that decorates the walls of the
scan room. The ability of the Fonar 360 to give physicians direct 360 access to
patients and the availability of MRI compatible surgical instruments will also
enable the Fonar 360, in its future "OR-360(TM)" version, to be used for image
guided surgery.
The "QUAD(TM) 12000" MR scanner utilizes a electromagnet and is accessible
from four sides. The QUAD 12000 is the first "open" MR scanner at high field.
The greater field strength of the QUAD'S magnet, when enhanced by the
electronics already utilized by the Company's scanners, produces images of a
quality and clarity competitive with high field superconductive magnets. The
QUAD 12000 scanner magnet is the highest field "open MRI" in the industry.
In addition, the Company offers a low cost, low field strength open MRI
scanner, the "Echo(TM)"
The Company's current "works in progress" include the "Pinnacle(TM)" which
combines many of the features of the QUAD scanners with a superconducting
magnet. (See "Works in Progress".)
The Company's "works in progress" also include an in-office, weight-bearing
extremities scanner designed for examining the knee, foot, elbow, hand and wrist
under both weight-bearing and non-weight bearing conditions.
Fonar has increased its internal sales force to approximately 24 persons,
concentrating on domestic sales. Fonar continues to use distributors for its
foreign sales efforts. Fonar has also expanded its website to a full-scale
interactive product information desk for reaching new customers and assisting
existing customers.
In March 1997, FONAR formed Health Management Corporation of America
(formerly U.S. Health Management Corporation and hereinafter sometimes referred
to as "HMCA") as a wholly-owned subsidiary for the purpose of engaging in the
business of providing comprehensive management and administrative services,
office space, equipment, repair and maintenance service for equipment and
clerical and other personnel (other than physicians) to physicians' practices
and other medical providers, including diagnostic centers.
HMCA currently is managing 19 diagnostic imaging centers and 11 primary
care and specialty medical practices located principally in New York State and
Florida.
PRODUCTS
The Company's principal products are its Stand-Up MRI, also called
Indomitable, the Fonar 360, the QUAD 12000 series and the Echo.
The Company's Indomitable(TM) scanner will allow patients to be scanned
while standing, sitting or reclining. As a result, for the first time, MRI will
be able to be used to show abnormalities and injuries under full weight-bearing
conditions, particularly the spine and joints.
A floor-recessed elevator brings the patient to the height appropriate for
the targeted image region. A custom-built adjustable bed will allow patients to
sit or lie on their backs, sides or stomachs.
Full-range-of-motion studies of the joints in virtually any direction will
be possible, an especially promising feature for sports injuries. Full range of
motion cines, or movies, of the lumbar spine will be achieved under full body
weight.
Indomitable(TM) will also be useful for MR-directed surgical procedures as
the surgeon would have unhindered access to the patient with no restrictions in
the vertical direction.
This easy-entry, mid-field-strength scanner should be ideal for trauma
centers where a quick MRI-screening within the first critical hour of treatment
will greatly improve patients' chances for survival and optimize the extent of
recovery.
The Company received approval from the FDA for Indomitable in October,
2000.
The Fonar 360 has an enlarged room sized magnet in which the magnet frame
is incorporated into the floor, ceiling and walls of the scan room. This is made
possible by Fonar's patented Iron-Frame(TM) technology which allows the
Company's engineers to control, contour and direct the magnet's lines of flux in
the patient gap where wanted and almost none outside of the steel of the magnet
where not wanted. Physicians and family members are able to actually enter the
scanner and approach the patient. In its Open Sky version, the Fonar 360 serves
as an open patient friendly scanner which allows 360 access to the patient on
the scanner bed. The walls can be decorated with panoramic murals and the entire
scan room can be decorated to be incorporated into the pictured landscape. The
Company received approval from the FDA for the Fonar 360 in March 2001.
In its future interventional OR-360 version, which is still in the planning
stages, the enlarged room sized magnet and 360 access to the patient afforded by
the Fonar 360 permit full-fledged surgical teams to walk into the magnet and
perform surgery on the patient inside the magnet. Most importantly the
exceptional quality of the MRI image and its exceptional capacity to exhibit
tissue detail on the image, by virtue of the nuclear resonance signal's
extraordinary capacity to create image contrast, can then be obtained real time
during surgery to guide the surgeon in the surgery. Thus surgical instruments,
needles, catheters, endoscopes and the like can be introduced directly into the
human body and guided to the malignant lesion by means of the MRI image. The
number of inoperable lesions should be greatly reduced by the availability of
this new capability. Most importantly treatment can be carried directly to the
target tissue.
A Neurosurgeon, for example, has direct access to the patient's head while
the patient is lying in the scanner and can perform image guided neurosurgery in
this magnet. The unimpeded access in the space above the patient is also useful
for surgical access, positioning of life support devises, neuro-surgical
microscopes and anaesthetic gases. It should be noted that these procedures have
not yet been performed in the scanner, although they are promising
possibilities.
With current treatment methods, therapy must always be restricted in the
doses that can be applied to the malignant tissue because of the adverse effects
on the healthy tissues. Thus chemotherapies must be limited at the first sign of
toxic side effects. The same is the case with radiation therapy. The Company
expects that with the OR-360 treatment agents may be administrated directly to
the malignant tissue through small catheters or needles allowing much larger
doses of chemotherapy, x-rays, laser ablation, microwave, or if to be applied
directly and exclusively to the malignant tissue with more effective results.
Since the procedure of introducing a treatment needle or catheter under image
guidance will be minimally invasive the procedure can be readily repeated should
metastases occur elsewhere, with minimum impact on the patient beyond a
straightforward needle injection.
The presence of the MRI image during treatment will enable the operator to
make assessments during treatment if his treatment is being effective.
The interventional OR-360 version of the Fonar 360 is still in the planning
stages. There is not a prototype. A separate FDA submission for the
interventional 360 has not been made as yet and might not be necessary in that
it was not required of other MRI manufacturers in similar situations. We note
that other manufacturers have incorporated the use of their imaging machine for
use in interventional procedures without separate FDA submissions.
To optimize the patient-friendly character of the Open Sky 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 QUAD
12000, is 0.6 Tesla. The Open Sky MRI shares the fundamental technology of the
QUAD 12000 and offers the same speed, precision and image quality.
The QUAD(TM) 12000 MR scanner utilizes a 6000 gauss iron core electromagnet
and is accessible from four sides. The QUAD 12000 is the first "open" MR scanner
at high field.
In addition to the patient comfort, increased throughput and new
applications (such as MRI directed surgery and MRI breast imaging) made possible
by the QUAD scanners' open design, the QUAD scanners are designed to maximize
image quality through an optimal combination of signal-to-noise (S/N) and
contrast-to-noise (C/N) ratios. The technical improvements realized in the
QUAD's design over its predecessors also include increased image-processing
speed and diagnostic flexibility.
MRI directed surgery (laproscopic surgical procedures) is possible by the
QUAD's ability to supply images to a monitor positioned next to the patient,
enabling a surgeon to view in process surgical procedure from an unlimited
number of vantage points. The marked openness of FONAR's QUAD scanners enables
surgeons to perform a wide range of surgical procedures inside the magnet.
The "QUAD" scanners are unique MR scanners in that four sides are open,
thus allowing access to the scanning area from four vantage points. The
starshaped open design of the QUAD will also make possible a host of new
applications, particularly MRI breast imaging and MRI directed surgery
(Interventional MRI).
With the QUAD's multi-bed patient handling system, many more short scan
procedures such as those used in breast imaging can be done in a day, allowing
the price of MRI breast imaging to drop without reducing the scanner's
revenue-generating capacity. At the same time, there is not the painful
compression of the breast characteristic of X-ray mammography.
The principal difference between the QUAD scanners and other open MRI
scanners is in field strength. Other open MRIs operate at significantly lower
magnetic field strengths and, therefore, are unable to produce the amount of MRI
image-producing signal necessary to make high-quality MRI images (measured by
signal-to-noise ratios, S/N).
The QUAD 12000 scanner utilizes a 6000 gauss (.6 Tesla field strength) iron
core electromagnet. The greater field strength of the 6000 gauss magnet, when
enhanced by the electronics already utilized by the Company's scanners, produces
images of a higher quality and clarity than other open MRI scanners. The QUAD
12000 scanner magnet is the highest field "open MRI" in the industry and
operates at a field strength that is almost two times its closest competitor (.6
Tesla field strength versus .35 Tesla field strength).
The QUAD scanners are designed to maximize image quality through an optimal
combination of signal-to-noise (S/N) and contrast-to-noise (C/N) ratios. The
technical improvements realized in the QUAD's design over its predecessors also
include increased image-processing speed and diagnostic flexibility.
Maximal S/N is achieved when the direction of the magnetic field and the
direction of the receiving coil axis are perpendicular to one another, as is the
case with the QUAD scanners. The orientation of the magnetic field is vertical
and when combined with any one of FONAR's array of solenoidal (wrap-around)
surface coils, the QUAD 12000, for example, produces as much S/N as a supercon
MRI at twice the field strength. So that prospective buyers can make an accurate
comparison, the number 12,000 is used to describe the S/N equivalency of the
QUAD 12000 to 12,000-gauss superconductive machines.
Several technological advances have been engineered into the QUAD scanners
for extra improvements in S/N, including: new high-S/N Organ Specific(TM)
receiver coils\; new ceramic magnet poles that provide advanced eddy-current
control\; new advanced front-end electronics featuring high-speed,
wide-dynamic-range analog-to-digital conversion and a miniaturized
ultra-low-noise pre-amplifier\; high-speed automatic tuning, bandwidth-optimized
pulse sequences, multi-bandwidth sequences, and off-center FOV imaging
capability.
In addition to the signal-to-noise ratio, however, the factor that must be
considered when it comes to image quality is contrast, the quality that enables
reading physicians to clearly distinguish adjacent, and sometimes minute,
anatomical structures. This quality is measured by contrast-to-noise ratios
(C/N). Unlike S/N, which increases with increasing field strength, relaxometry
studies have shown that C/N peaks in the mid-field range and actually falls off
precipitously at higher field strengths. The QUAD 12000 scanners operate
squarely in the optimum C/N range. In addition, the Company's works-in-progress,
the OR-360, Open Sky MRI and Stand-Up MRI are also designed to operate with said
C/N range.
The QUAD provides various features allowing for versatile diagnostic
capability. For example, SMART(TM) scanning allows for same-scan customization
of up to 63 slices, each slice with its own thickness, resolution, angle and
position. This is an important feature for scanning parts of the body that
include small-structure sub-regions requiring finer slice parameters. There's
also Evolving Images(TM), Multi-Angle Oblique (MAO)(TM) imaging, and oblique
imaging.
The QUAD console includes a mouse-driven, multi-window interface for easy
operation and a 19-inch, 1280 x 1024-pixel, 20-up, high-resolution image monitor
with features such as electronic magnifying glass and real-time, continuous zoom
and pan.
The Company also offers a low cost open scanner, the Echo, which operates
at a .3 Tesla field strength. The Echo is an open upgraded version of the
Company's former principal product, the Beta MRI scanner, but open on four sides
to provide four directions for patient access instead of two.
Prior to the introduction of the QUAD scanners, the Ultimate(TM) 7000
scanner, introduced in 1990, was the Company's principal product. The Ultimate
scanner replaced the Company's traditional principal products, the Beta(TM) 3000
scanner (which utilized a permanent magnet) and the Beta(TM) 3000M scanner
(which utilized an iron core electromagnet). All of the Company's current and
earlier model scanners create cross-sectional images of the human body.
During fiscal 2001, sales of the Company's QUAD scanners accounted for
approximately 6.6% of the Company's total revenues and 29% of its medical
equipment segment revenues, as compared to 6.9% of total revenues and 46.4% of
medical equipment revenues during fiscal 2000. During fiscal 2001, sales of the
Company's Stand-Up scanners accounted for approximately 3.5% of total revenues
and 15.5% of medical equipment revenues, and sales of Echo scanners accounted
for 2.3% of total revenues and 10% of medical equipment revenues. There were no
sales of Stand-Up scanners or Echo scanners in fiscal 2000 or of Ultimate
scanners in fiscal 2001 or 2000. There were no sales of Beta scanners in fiscal
2001, but 0.2% of total revenues and 1.4% of medical equipment revenues in
fiscal 2000 were derived from the sale of a refurbished Beta scanner.
The materials and components used in the manufacture of the Company's
products (circuit boards, computer hardware components, electrical components,
steel and plastic) are generally available at competitive prices. The Company
has not had difficulty acquiring such materials.
WORKS-IN-PROGRESS
All of the Company's products and works-in-progress seek to bring to the
public MRI products that are expected to provide important advances against
serious disease.
MRI takes advantage of the nuclear resonance signal elicited from the
body's tissues and the exceptional sensitivity of this signal for detecting
disease. Much of the serious disease of the body occurs in soft tissue. The
principal diagnostic modality currently in use for detecting disease, as in the
case of x-ray mammography, are diagnostic x-rays. X-rays discriminate soft
tissues like healthy breast tissue and cancerous tissue poorly because the x-ray
particle traverses the tissues almost equally thereby rendering the target film
equally exposed by the two tissues and creating healthy and cancerous shadows on
the film that differ very little in brightness. The image contrast between
cancerous and healthy tissue is poor, making the detection of breast cancers by
the x-ray mammogram less than optimal. If microscopic stones
(microcalcifications) are not present to provide the missing contrast the breast
cancer goes undetected. They frequently are not present. The maximum contrast
available by x-ray with which to discriminate disease is 4%. Brain cancers
differ from surrounding healthy brain by only 1.6%.
On the other hand the soft tissue contrasts with which to distinguish
cancers on images by MRI are up to 180%. This is because the nuclear resonance
signals from the body's tissues differ so dramatically. Liver cancer and healthy
liver signals differ by 180%. Thus there is some urgency to bring to market an
MRI based breast scanner that can overcome the x-ray limitation and assure that
mammograms do not miss serious lesions. The added benefit of MRI mammography
relative to x-ray mammography is the elimination of the need for the patient to
disrobe and the painful compression of the breast typical of the x-ray
mammogram. The patient is scanned in her street clothes in MRI mammography.
Moreover MRI mammogram scans the entire chest wall including the axilla for the
presence of nodes which the x-ray mammogram cannot reach.
Among its other uses, the Company envisions that its Open Sky MRI(TM)
scanner will meet the public need for an MRI breast scanner.
The Company is developing a superconductive version of its open iron frame
magnets, the "Pinnacle" (TM), and has completed construction of a prototype with
a 0.6 Tesla superconductive magnet. The Company's design of its superconductive
magnet anticipated the possibility of making its other products available as
superconducting magnets. Therefore, it is the Company's objective to make
Indomitable(TM) and the Fonar 360 available to FONAR's customers as either
iron-frame resistive models or iron-frame superconductive magnets depending on
customer preference and pricing.
The Pinnacle will have a field strength between 0.6 to 1.0 Tesla and a
18-inch gap vertical field. This MRI scanner will combine the benefits of its
open non claustrophobic patented iron-frame, vertical field magnet design with
the high field strength of a superconducting magnet. The Company received FDA
approval for the Pinnacle in June, 2001.
In addition, 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.
PRODUCT MARKETING
The principal markets for the Company's scanners are hospitals and private
scanning centers.
Fonar has increased its internal sales force to approximately 24 persons.
Our internal sales force handles the domestic market while we continue to use
independent distributors for foreign markets. In addition to its internal
domestic sales force, Fonar and G.E. Medical, a division of General Electric,
have entered into an arrangement pursuant to which G.E. Medical will act as
independent distributor for Fonar's Stand-Up MRI scanner.
In addition, the Company has expanded its website to include an interactive
product information desk for reaching customers. The Company plans to commence a
program for providing demonstrations of its products to potential customers on
an international basis.
The Company has exhibited its new products at the annual trade show held by
the Radiological Society of North America ("RSNA") in Chicago since November
1995 and plans to attend the RSNA trade show in November 2001 and future years.
The RSNA trade show is held annually and is attended by most manufacturers of
MRI scanners.
The Company is directing its marketing efforts to meet the demand for both
"open" and high field strength MRI scanners. Fonar plans to devote its principal
efforts to marketing the Stand-Up MRI, which has the unique capability of
scanning patients under weight-bearing conditions. In addition the Company will
continue to market its Fonar 360, QUAD and Echo MRI scanners. Utilizing a 6000
gauss (0.6 Tesla field strength) iron core electromagnet, the Stand-Up, Fonar
360 and QUAD 12000 scanner magnets are the highest field "open MRI" in the
industry.
The Company also will seek to introduce new MRI applications for its
scanners such as MRI-directed surgery and head-to-toe MRI preventive screening.
Fonar's areas of operations are principally in the United States. During
the fiscal year ended June 30, 2001, 0% of the Company's revenues were generated
by foreign sales, as compared to 2.8% and 3.4% for fiscal 2000 and 1999
respectively.
The Company is seeking to promote foreign sales and has sold scanners in
various foreign countries. Foreign sales, however, have not yet proved to be a
significant source of revenue.
SERVICE AND UPGRADES FOR MRI SCANNERS
The Company's customer base of installed scanners has been and will
continue to be an additional source of income, independent of direct sales.
Income is generated from the installed base in two principal areas namely,
service and upgrades. Service and maintenance revenues from the Company's
installed base were approximately $2.3 million in fiscal 1999, $1.7 million in
fiscal 2000 and $2.0 million in fiscal 2001. The decrease in fiscal 2000 was
principally the result of the retirement of old scanners. This trend has been
reversed in 2001.
The Company anticipates that its new line of scanners will result in
upgrades income in future fiscal years. The potential for upgrades income
originates in the versatility and productivity of the MRI technology. New
medical uses for the technology are constantly being discovered. New features
can often be added to the scanner by the implementation of little more than
versatile new software packages. For example, software can be added to current
MRI angiograms to synchronize the angiograms to the cardiac cycle. By doing so
the dynamics of blood vessel filling and emptying can be visualized with movies.
Such enhancements are attractive to the end users because they extend the useful
life of the equipment and enable the user to avoid obsolescence and the expense
of having to purchase new equipment. At the present time, however, upgrade
revenue is not significant. Upgrade revenues were approximately $14,500 in
fiscal 1999, $36,000 in fiscal 2000 and $0 in fiscal 2001.
Service and upgrade revenues are expected to increase as sales of scanners
and the size of the customer base increases.
RESEARCH AND DEVELOPMENT
During the fiscal year ended June 30, 2001, the Company incurred
expenditures of $6,621,225 ($754,804 of which was capitalized) on research and
development, as compared to $5,893,648($361,323 of which was capitalized) and
$6,647,555 (none of which was capitalized) incurred during the fiscal years
ended June 30, 2000 and June 30, 1999, respectively.
Research and development activities have focused principally, on the
development and enhancement of the new Indomitable (TM) and Fonar 360 MRI
scanners and its new extremities scanner. The Indomitable (TM) MRI, Fonar
360(OR-360 and Open Sky MRI), involve significant software and hardware
development as the new products represent entirely new hardware designs and
architecture requiring a new operating software. The Company's research activity
includes developing a multitude of new features for the upright scanning made
possible by the high speed processing power of its scanners. In addition, the
Company's research and development efforts include the development of new
software, such as its "Sympulse" (TM) software and hardware upgrade. The Company
received FDA approval for the Sympulse upgrade in January, 2001.
BACKLOG
The Company's backlog of unfilled orders at July 1, 2001 was approximately
$10.8 million, as compared to $2.05 million at July 1, 2000. Of these amounts,
approximately $1.6 million and $0.45 million had been paid to the Company as
customer advances as at July 1, 2001 and July 1, 2000, respectively. Of the
backlog amounts at July 1, 2001, $4.4 million represented orders from
affiliates. It is expected that the existing backlog of orders will be filled
within the current fiscal year. The Company's contracts generally provide that
if a customer cancels an order, the customer's initial down payment for the MRI
scanner is nonrefundable.
PATENTS AND LICENSES
The Company currently has numerous patents in effect which relate to the
technology and components of the MRI scanners. The Company believes that these
patents, and the know-how it developed, are material to its business.
Dr. Damadian granted an exclusive world-wide license to the Company to
make, use and sell apparatus covered by certain domestic and foreign patents in
his name relating to MRI technology. No patents covered by this license are in
effect any longer.
One of the patents, issued in the name of Dr. Damadian and covered by said
license, was United States patent No. 3,789,832, Apparatus and Method for
Detecting Cancer in Tissue (the "1974 Patent"). The development of the Beta 3000
was based upon the 1974 Patent, and Management believes that the 1974 Patent was
the first of its kind to utilize MR to scan the human body and to detect cancer.
The 1974 Patent was extended beyond its original 17-year term and expired in
February, 1992. None of the recoveries with respect to the enforcement of this
patent were received by Dr. Damadian.
Historically, the patent for multiple angle oblique imaging generated
significant revenues in connection with the enforcement and settlement of our
patent litigations. As a result of these litigations and settlements, our
competitors are now entitled to use this technology as well. This patent will
expire in 2006.
The Company has significantly enhanced its patent position within the
industry and now possesses a substantial patent portfolio which provides the
Company, under the aegis of United States patent law, "the exclusive right to
make, use and sell" many of the scanner features which FONAR pioneered and which
are now incorporated in most MRI scanners sold by the industry. The Company has
59 patents issued and 62 patents pending. A substantial number of FONAR's
existing patents specifically relate to protecting FONAR's position in the high
field iron frame open MRI market. The patents further enhance Dr. Damadian's
pioneer patent (the 1974 Patent), that initiated the MRI industry and provided
the original invention of MRI scanning. The 59 issued patents expire at various
times between June 23, 2004 and November 25, 2018.
The Company has entered into a cross-licensing agreement (utilizing other
than FONAR's MRI technology) with another entity to use prior art developed for
nuclear magnetic resonance technology and has entered into a license to utilize
the MRI technology covered by the existing patent portfolio of a patent holding
company. The Company also has patent cross-licensing agreements with other MRI
manufacturers.
PRODUCT COMPETITION
MRI SCANNERS
A majority of the MRI scanners in use in hospitals and outpatient
facilities and at mobile sites in the United States are based on high field air
core magnet technology while the balance are based on open iron frame magnet
technology. In 1998 the size of the MRI market in the United States was
approximately $957 million. The market share of high field air core MRI's was
approximately 57%. In 1999 the size of the MRI market in the United States was
approximately $1.074 billion. FONAR's open iron frame MRI scanners are competing
principally with high field air core scanners. The QUAD 12000 scanner, however,
utilizing a 6,000 gauss (0.6 Tesla field strength) iron core electromagnet, is
the first "open" MR scanner at high field strength. In addition FONAR's
works-in-progress include a superconductive version of its open iron frame
magnets.
FONAR believes that its MRI scanners have significant advantages as
compared to the high field air core scanners of its competitors. These
advantages include:
1. There is no expansive fringe magnetic field. High field air core
scanners require a more expensive shielded room than is required for the iron
frame scanners. The shielded room required for the iron frame scanners is
intended to prevent interference from external radio frequencies.
2. They are more open, quiet and in the case of the QUAD scanners allow for
faster throughput of patients.
3. Their annual operating costs are lower.
4. They can scan the trauma victim, the cardiac arrest patient, the
respirator-supported patient, and premature and newborn babies. This is not
possible with high field air core scanners because their magnetic field
interferes with conventional life-support equipment.
The principal competitive disadvantage of the Company's products is that
they are not "high field strength" (1.0 Tesla +) magnets. As a general
principle, the higher field strength can produce a faster scan. In some parts of
the body a faster scan can be traded for a clearer picture. Although the Company
believes that the lower cost of its systems plus the benefits of "openness"
provided by its scanners compensate for the lower field strength, certain
customers will still prefer the higher field strength.
FONAR faces competition within the MRI industry from such firms as General
Electric Company; Marconi Medical (formerly Picker International), Philips N.V.,
Toshiba Corporation, Hitachi Corporation and Siemens A.G. Most competitors have
marketing and financial resources more substantial than those available to the
Company and have in the past, and may in the future, heavily discount the sales
price of their scanners. Such competitors sell both high field air core and iron
frame products. FONAR's current market share of the market for MRI scanners is
less than 1.0%. FONAR introduced the first "Open MRI" in 1982. "Open MRI" was
made possible by FONAR's introduction of an MRI magnet built on an iron frame.
Thus the magnetic flux generating apparatus of the magnet (magnet coils or
permanent magnet bricks) was built into a frame of steel. The steel frame
provided a return path for the magnetic lines of force and thereby kept the
magnetic lines of force contained within the magnet. This enabled FONAR, from
1982 on, to show that the FONAR magnet was the only magnet that allowed the
patients to stretch out their arms, the only "open" MRI.
The iron frame, because it could control the magnetic lines of force and
place them where wanted and remove them from where not wanted (such as in the
operating room where surgeons are standing), provided a much more versatile
magnet design than was possible with air core magnets. Air core magnets contain
no iron but consist entirely of turns of current carrying wire. FONAR's patented
work-in-progress superconductive iron frame magnet, however, combines the high
field capability of the air core superconductive magnets with the control and
versatility of the open iron frame magnets, thereby joining the best features of
both designs into a single magnet. Thus the air core superconductive magnets
made by Fonar's large competitors that have dominated the MRI market since 1983
remain the confining "tunnel" design that the public has generally resented.
For an 11 year period from 1983-1994, Fonar's large competitors (with one
exception) generally rejected Fonar's "open" design but by 1994 all (with one
exception) added the iron frame "open" magnet to their MRI product line. In 1997
the sale of iron frame "open" magnets exceeded the sale of traditional air core
superconductive magnets. One principal reason for this market shift, in addition
to patient claustrophobia, is the awareness that the "open" magnet designs
permit access to the patient to perform surgical procedures under MRI image
guidance, a field which is now growing rapidly and is called "interventional
MRI."
Fonar's future OR-360 version of the Fonar 360 explicitly addresses this
growing market reception of MRI guided surgical procedures but is not yet
available as a product. Fonar's Indomitable and QUAD series magnets do also.
Although not enabling a full operating theater as the OR-360 does, the iron
frame "Open" QUAD and Indomitable designs permit ready access to the patient
from four sides and therefore enables a wide range of interventional surgical
procedures such as biopsies and needle or catheter delivered therapies to be
performed under MRI image guidance. The "tunnel" air core superconductive
scanners do not permit access to the patient while the patient is inside the
scanner.
While Fonar's current market share of the domestic MRI market is under
1.0%, FONAR expects to be a leader in domestic open market for several reasons.
In MRI, scanning speed and image quality is controlled by the strength of the
magnetic field. Fonar's QUAD 12000 scanner operates at almost twice the field
strength of the next highest field strength open magnet, manufactured by Toshiba
(0.6 Tesla vs. 0.35 Tesla). The Company's Fonar 360 and Indomitable scanners
also operate at this field strength. High field MRI manufacturers convinced the
marketplace for FONAR, and the marketplace accepts, that higher field strength
translates directly into superior image quality and faster scanning speeds. This
is the principal reason GE's 1.5 Tesla air core superconductive scanner achieved
market dominance in the MRI market before the marketplace shifted and registered
an increased demand for the iron frame "Open MRI." No companies possess the
Fonar 360 and FONAR possesses the pioneer patents on "Open MRI" technology.
OTHER IMAGING MODALITIES
FONAR's MRI scanners also compete with other diagnostic imaging systems,
all of which are based upon the ability of energy waves to penetrate human
tissue and to be detected by either photographic film or electronic devices for
presentation of an image on a television monitor. Three different kinds of
energy waves - X-ray, gamma and sound - are used in medical imaging techniques
which compete with MRI medical scanning, the first two of which involve exposing
the patient to potentially harmful radiation. These other imaging modalities
compete with MRI products on the basis of specific applications.
X-rays are the most common energy source used in imaging the body and are
employed in three imaging modalities:
1. Conventional X-ray systems, the oldest method of imaging, are typically
used to image bones and teeth. The image resolution of adjacent structures that
have high contrast, such as bone adjacent to soft tissue, is excellent, while
the discrimination between soft tissue organs is poor because of the nearly
equivalent penetration of x-rays.
2. Computerized Tomography ("CT") systems couple computers to x-ray
instruments to produce cross-sectional images of particular large organs or
areas of the body. The CT scanner addresses the need for images, not available
by conventional radiography, that display anatomic relationships spatially.
However, CT images are generally limited to the transverse plane and cannot
readily be obtained in the two other planes (sagittal and coronal). Improved
picture resolution is available at the expense of increased exposure to x-rays
from multiple projections. Furthermore, the pictures obtained by this method are
computer reconstructions of a series of projections and, once diseased tissue
has been detected, CT scanning cannot be focused for more detailed pictorial
analysis or obtain a chemical analysis.
3. Digital radiography systems add computer image processing capability to
conventional x-ray systems. Digital radiography can be used in a number of
diagnostic procedures which provide continuous imaging of a particular area with
enhanced image quality and reduced patient exposure to radiation.
Nuclear medicine systems, which are based upon the detection of gamma
radiation generated by radioactive pharmaceuticals introduced into the body, are
used to provide information concerning soft tissue and internal body organs and
particularly to examine organ function over time.
Ultrasound systems emit, detect and process high frequency sound waves
reflected from organ boundaries and tissue interfaces to generate images of soft
tissue and internal body organs. Although the images are substantially less
detailed than those obtainable with x-ray methods, ultrasound is generally
considered harmless and therefore has found particular use in imaging the
pregnant uterus.
X-ray machines, ultrasound machines, digital radiography systems and
nuclear medicine compete with the MRI scanners by offering significantly lower
price and space requirements. However, FONAR believes that the quality of the
images produced by its MRI scanners is generally superior to the quality of the
images produced by those other methodologies.
GOVERNMENT REGULATION
FDA Regulation
The Food and Drug Administration in accordance with Title 21 of the Code of
Federal Regulations regulates the manufacturing and marketing of FONAR's MRI
scanners. The regulations can be classified as either pre-market or post-market.
The pre-market requirements include obtaining marketing clearance, proper device
labeling, establishment registration and device listing. Once the products are
on the market, FONAR must comply with post-market surveillance controls. These
requirements include the Quality Systems (QS) regulation, also known as Good
Manufacturing Practices or GMPs, and Medical Device Reporting (MDR) regulations.
The QS regulation is a quality assurance requirement that covers the design,
packaging, labeling and manufacturing of a medical device. The MDR regulation is
an adverse event-reporting program.
Classes of Products
Under the Medical Device Amendments of 1976 to the Federal Food, Drug and
Cosmetic Act, all medical devices are classified by the FDA into one of three
classes. A Class I device is subject only to certain controls, such as labeling
requirements and manufacturing practices; a Class II device must comply with
certain performance standards established by the FDA; and a Class III device
must obtain pre-market approval from the FDA prior to commercial marketing.
FONAR's products are Class II devices. Class I devices are subject to the
least regulatory control. They present minimal potential for harm to the user
and are often simpler in design than Class II or Class III devices. Class I
devices are subject to "General Controls" as are Class II and Class III devices.
General Controls include: 1. Establishment registration of companies which are
required to register under 21 CFR Part 807.20, such as manufacturers,
distributors, re-packagers and re-labelers. 2. Medical device listing with FDA
of devices to be marketed. 3. Manufacturing devices in accordance with the Good
Manufacturing Practices (GMP) regulation in 21 CFR Part 820. 4. Labeling devices
in accordance with labeling regulations in 21 CFR Part 801 or 809. 5. Submission
of a Premarket Notification [510(k)] before marketing a device.
Class II devices are those for which general controls alone are
insufficient to assure safety and effectiveness, and existing methods are
available to provide such assurances. In addition to complying with general
controls, Class II devices are also subject to special controls. Special
controls may include special labeling requirements, guidance documents,
mandatory performance standards and post-market surveillance.
The Company received approval to market its Beta 3000 and Beta 3000M
scanners as Class III devices on September 26, 1984 and November 12, 1985. On
July 28, 1988, the Magnetic Resonance Diagnostic Device which includes MR
Imaging and MR Spectroscopy was reclassified by the FDA to Class II status.
Consequently, Fonar's products are now classified as Class II products. On June
25, 1992, Fonar received FDA clearance to market the Ultimate Magnetic Resonance
Imaging Scanner as a Class II device. Fonar received FDA clearance to market the
QUAD 7000 in April 1995 and the QUAD 12000 in November 1995. On March 16, 2000,
Fonar received FDA clearance to market the Fonar 360 for diagnostic imaging (the
Open Sky version). On August 9, 2000, the Company applied for FDA clearance for
the Stand-Up MRI. The Company anticipates that it will need FDA clearance for
Pinnacle MRI scanners and may need clearance for the OR-360 version of the Fonar
360.
Premarketing Submission
Each person who wants to market Class I, II and some III devices intended
for human use in the U.S. must submit a 510(k) to FDA at least 90 days before
marketing unless the device is exempt from 510(k) requirements. A 510(k) is a
pre-marketing submission made to FDA to demonstrate that the device to be
marketed is as safe and effective, that is, substantially equivalent (SE), to a
legally marketed device that is not subject to pre-market approval (PMA).
Applicants must compare their 510(k) device to one or more similar devices
currently on the U.S. market and make and support their substantial equivalency
claims.
The FDA is committed to a 90-day clearance after submission of a 510(k),
provided the 510(k) is complete and there is no need to submit additional
information or data.
The 510(k) is essentially a brief statement and description of the product.
As Fonar's scanner products are Class II products, there are no pre-market data
requirements and the process is neither lengthy nor expensive.
An investigational device exemption (IDE) allows the investigational device
to be used in a clinical study pending FDA clearance in order to collect safety
and effectiveness data required to support the Premarket Approval (PMA)
application or a Premarket Notification [510(k)] submission to the FDA. Clinical
studies are most often conducted to support a PMA.
For the most part, however, Fonar has not found it necessary to utilize
IDE's. The standard 90 day clearance for our new MRI scanner products classified
as Class II products makes the IDE unnecessary, particularly in view of the time
and effort involved in compiling the information necessary to support an IDE.
Quality System Regulation
The Quality Management System is applicable to the design, manufacture,
administration of installation and servicing of magnetic resonance imaging
scanner systems. The FDA has authority to conduct detailed inspections of
manufacturing plants, to establish Good Manufacturing Practices which must be
followed in the manufacture of medical devices, to require periodic reporting of
product defects and to prohibit the exportation of medical devices that do not
comply with the law.
Two of the required elements under the QS regulation are design controls
and labeling. Each manufacturer is required by regulation to establish and
maintain design control procedures and proper labeling.
Because the intrinsic quality level of devices and processes is established
during the design phase, the quality system program includes this phase to
assure overall quality, meet customer requirements, meet company quality claims,
and comply with the intent of the Food Drug & Cosmetics Act.
By a formal process under a total quality system during the design phase,
clear and concise printed and/or software labeling are written and reviewed; and
the ink substrate and attachment methods for printed labeling are developed.
Such labeling is designed to meet customer and regulatory requirements.
Thereafter, the procurement, use of the correct label, and correct attachment of
labels will be assured under the quality system element for these activities
during manufacturing.
Medical Device Reporting Regulation
Manufacturers must report all MDR reportable events to the FDA. Each
manufacturer must review and evaluate all complaints to determine whether the
complaint represents an event which is required to be reported to FDA. Section
820.3(b) of the Quality Systems regulation defines a complaint as, "any written,
electronic or oral communication that alleges deficiencies related to the
identity, quality, durability, reliability, safety, effectiveness, or
performance of a device after it is released for distribution."
A report is required when a manufacturer becomes aware of information that
reasonably suggests that one of their marketed devices has or may have caused or
contributed to a death, serious injury, or has malfunctioned and that the device
or a similar device marketed by the manufacturer would be likely to cause or
contribute to a death or serious injury if the malfunction were to recur.
Malfunctions are not reportable if they are not likely to result in a
death, serious injury or other significant adverse event experience.
A malfunction which is or can be corrected during routine service or device
maintenance still must be reported if the recurrence of the malfunction is
likely to cause or contribute to a death or serious injury if it were to recur.
Fonar has established and maintains written procedures for implementation
of the MDR regulation. These procedures include internal systems that:
provide for timely and effective identification, communication and
evaluation of adverse events;
provide a standardized review process and procedures for determining
whether or not an event is reportable; and
provide procedures to insure the timely transmission of complete
reports.
These procedures also include documentation and record keeping requirements
for:
information that was evaluated to determine if an event was
reportable;
all medical device reports and information submitted to the FDA;
any information that was evaluated during preparation of annual
certification report(s); and
systems that ensure access to information that facilitates timely
follow up and inspection by FDA.
FDA Enforcement
FDA may take the following actions to enforce the MDR regulation:
FDA-Initiated or Voluntary Recalls
Recalls are regulatory actions that remove a hazardous, potentially
hazardous, or a misbranded product from the marketplace. Recalls are also used
to convey additional information to the user concerning the safe use of the
product. Either FDA or the manufacturer can initiate recalls.
There are three classifications, i.e., I, II, or III, assigned by the Food
and Drug Administration to a particular product recall to indicate the relative
degree of health hazard presented by the product being recalled.
Class I
Is a situation in which there is a reasonable probability that the use of,
or exposure to, a violative product will cause serious adverse health
consequences or death.
Class II
Is a situation in which use of, or exposure to, a violative product may
cause temporary or medically reversible adverse health consequences or where the
probability of serious adverse health consequences is remote.
Class III
Is a situation in which use of, or exposure to, a violative product is not
likely to cause adverse health consequences.
FONAR has initiated four Class II recalls. The recalls involved making
minor corrections to the product in the field. Frequently, corrections which are
made at the site of the device are called field corrections as opposed to
recalls.
Civil Money Penalties
The FDA, after an appropriate hearing, may impose civil money penalties for
violations of the FD&C Act that relate to medical devices. In determining the
amount of a civil penalty, FDA will take into account the nature, circumstances,
extent, and gravity of the violations, the violator's ability to pay, the effect
on the violator's ability to continue to do business, and any history of prior
violations. The civil money penalty may not exceed $15,000 for each violation
and may not exceed $1,000,000 for all violations adjudicated in a single
proceeding, per person.
Warning Letters
FDA issues written communications to a firm, indicating that the firm may
incur more severe sanctions if the violations described in the letter are not
corrected. Warning letters are issued to cause prompt correction of violations
that pose a hazard to health or that involve economic deception. The FDA
generally issues the letters before pursuing more severe sanctions.
Seizure
A seizure is a civil court action against a specific quantity of goods
which enables the FDA to remove these goods from commercial channels. After
seizure, no one may tamper with the goods except by permission of the court. The
court usually gives the owner or claimant of the seized merchandise
approximately 30 days to decide a course of action. If they take no action, the
court will recommend disposal of the goods. If the owner decides to contest the
government's charges, the court will schedule the case for trial. A third option
allows the owner of the goods to request permission of the court to bring the
goods into compliance with the law. The owner of the goods is required to
provide a bond (security deposit) to assure that they will perform the orders of
the court, and the owner must pay for FDA supervision of any activities by the
company to bring the goods into compliance.
Citation
A citation is a formal warning to a firm of intent to prosecute the firm if
violations of the FD&C Act are not corrected. It provides the firm an
opportunity to convince FDA not to prosecute.
Injunction
An injunction is a civil action filed by FDA against an individual or
company. Usually, FDA files an injunction to stop a company from continuing to
manufacture, package or distribute products that are in violation of the law.
Prosecution
Prosecution is a criminal action filed by FDA against a company or
individual charging violation of the law for past practices.
Foreign and Export Regulation
The Company obtains approvals as necessary in connection with the sales of
its products in foreign countries. In some cases, FDA approval has been
sufficient for foreign sales as well. The Company's standard practice has been
to require either the distributor or the customer to obtain any such foreign
approvals or licenses which may be required.
Legally marketed devices that comply with the requirements of the Food Drug
& Cosmetic Act require a Certificate to Foreign Government issued by the FDA for
export. Other devices that do not meet the requirements of the FD&C Act but
comply with the laws of a foreign government require a Certificate of
Exportability issued by the FDA. All products which Fonar sells have FDA
clearance and would fall into the first category.
Foreign governments have differing requirements concerning the import of
medical devices into their respective jurisdictions. The European Union (EU),
made up of 15 individual countries, has some essential requirements described in
the EU's Medical Device Directive (MDD). In order to export to one of these
countries, FONAR must meet the essential requirements of the MDD and any
additional requirements of the importing country. The essential requirements are
similar to some of the requirements mandated by the FDA. In addition the MDD
requires that FONAR enlist a Notified Body to examine and assess our
documentation (Technical Construction File) and verify that the product has been
manufactured in conformity with the documentation. The notified body must carry
out or arrange for the inspections and tests necessary to verify that the
product complies with the essential requirements of the MDD, including safety
performance and Electromagnetic Compatibility (EMC). Also required is a Quality
System (ISO-9001) assessment by the Notified Body. Fonar was approved for ISO
9001 certification for its Quality Management System in April, 1999.
Fonar received clearance to sell the Quad scanners in the EU in May, 1999
and is working on obtaining clearance for the Fonar 360 and Stand-Up scanners.
Other countries such as China and Russia require that their own testing
laboratories perform an evaluation of our devices. This requires that we must
bring the foreign agency's personnel to the USA to perform the evaluation at
Fonar's expense before exporting.
Some countries, including many in Latin America and Africa, have very few
regulatory requirements.
Because Fonar's export sales are not material at this point, foreign
regulation does not have a material effect on Fonar. In any case, Fonar does not
believe that foreign regulation will deter its efforts to penetrate foreign
markets.
Reimbursement to Medical Providers for MRI Scans
Effective November 22, 1985, the Department of Health and Human Services
authorized reimbursement of MRI scans under the Federal Medicare program. In
addition, most private insurance companies have authorized reimbursement for MRI
scans.
Anti-Kickback and Self-Referral Legislation
Proposed and enacted legislation at the State and Federal levels has
restricted referrals by physicians to medical and diagnostic centers in which
they or their family members have an interest. In addition, regulations have
been adopted by the Secretary of Health and Human Services which provide limited
"safe harbors" under the Medicare Anti-Kickback Statute. These safe harbors
describe payments and transactions which are permitted between an entity
receiving reimbursement under the Medicare program and those having an interest
in or dealings with the entity. Although the Company cannot predict the overall
effect of the adoption of these regulations on the medical equipment industry,
the use and continuation of limited partnerships (where investors may be
referring physicians) to own and operate MRI scanners could be greatly
diminished.
HEALTH MANAGEMENT CORPORATION OF AMERICA
(PHYSICIAN AND DIAGNOSTIC MANAGEMENT SERVICES BUSINESS)
Health Management Corporation of America (formerly known as U.S. Health
Management Corporation and referred to as "HMCA") was organized by the Company
in March 1997 as a wholly-owned subsidiary for the purpose of engaging in the
business of providing comprehensive management services to physicians' practices
and other medical providers, including diagnostic imaging centers and ancilliary
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.
Since its formation, HMCA has completed five acquisitions. HMCA became
actively engaged in the physician and diagnostic management services business
through its initial two acquisitions which were consummated effective June 30,
1997. Following these two initial acquisitions, HMCA completed two additional
acquisitions in fiscal 1998 and one additional acquisition in fiscal 1999. Dr.
Raymond V. Damadian, the President, Chairman of the Board and principal
stockholder of Fonar, was the owner of Raymond V. Damadian, M.D. MR Scanning
Centers Management Company, which was acquired by HMCA in the second
acquisition. The entities acquired in the other acquisitions were not affiliates
of either Fonar or Dr. Damadian.
The first acquisition was of a group of several interrelated corporations,
limited liability companies and a partnership engaged in the business of
managing three diagnostic imaging centers and one multi-specialty practice in
New York State. The transaction was effected through a merger between a
wholly-owned subsidiary of HMCA (formed for the purpose of effecting the
transaction) and Affordable Diagnostics, Inc., one of the acquired companies
which immediately prior to the merger had acquired the assets and assumed the
liabilities of the other acquired companies (together, the "Affordable
Companies"). The consideration paid for the Affordable Companies consisted of
2,340,000 shares of the common stock of Fonar.
The business of the Affordable Companies, which is being continued by HMCA,
consisted of providing management, space, equipment, personnel and other
resources to the four managed facilities. The services provided at the
facilities include MRI scans, CAT scans, x-rays, physical rehabilitation, and in
connection with physical rehabilitation, ultra-sound and SSEP/EMG
electromygographic diagnostics. The four managed facilities are located in
Brewster, New York (MRI), Yonkers, New York (MRI and x-ray), Bronx, New York
(MRI and CT) and Riverdale, New York (multi-specialty practice, ultra-sound and
SSEP/EMG electromygographic diagnostics). The assets acquired through the
acquisition include three MRI scanners, one CT scanner, one x-ray machine,
rehabilitation equipment and ultra-sound and electromygographic machines. The
equipment is leased to and used at the managed facilities. In addition, HMCA
consummated the acquisition of an additional MRI scanner pursuant to a contract
entered into prior to the acquisition.
The second completed acquisition was of Raymond V. Damadian, M.D. MR
Scanning Centers Management Company ("RVDC"). Pursuant to the terms of the
transaction, HMCA purchased all of the issued and outstanding shares of stock of
RVDC from Raymond V. Damadian in exchange for 10,000 shares of the Common Stock
of FONAR. Raymond V. Damadian, the principal stockholder, President and Chairman
of the Board of FONAR, was the sole stockholder, director and President of RVDC
immediately prior to the acquisitions. The business of RVDC, which is being
continued by HMCA, was the management of MRI diagnostic imaging centers in New
York, Florida, Georgia and other locations. The assets of RVDC included nine MRI
scanners, office equipment and office furnishings. RVDC also held partnership
interests in three partnerships owning MRI scanning centers.
As a result of the acquisition of RVDC, HMCA acquired the business of
managing 21 MRI scanning centers. Eighteen of the scanning centers were managed
pursuant to management agreements, and 3 of the centers are partnerships with
RVDC as the general partner. Effective July 1, 1997, HMCA entered into new
management agreements with the centers. Pursuant to the management agreements,
HMCA provided comprehensive management services, including administrative
services, office facilities, office equipment, supplies and personnel (except
for physicians) to the centers. Service for the centers' MRI scanning equipment
is provided under the management agreements in these cases. MRI scanning systems
are provided to 9 of the centers pursuant to scanner leases entered into
effective July 1, 1997. All of the facilities previously managed by RVDC are MRI
scanning centers.
The third completed acquisition, consummated on January 20, 1998, was an
acquisition of the business and assets of Central Health Care Services
Management Company, LLC (Central Health). Central Health is a management service
organization (MSO) managing a multi-specialty practice in Yonkers, New York. The
assets acquired include therapy and rehabilitation equipment, x-ray equipment,
office equipment and office furnishings. The purchase price of Central Health
was $1,454,160, of which $601,665 was paid in cash, $551,665 by notes, $25,000
by assumptions of liabilities and the balance in shares of Fonar common stock
valued at $275,830.
The fourth completed acquisition, consummated effective March 20, 1998, was
the acquisition of A & A Services, Inc. ("A & A Services"), an MSO managing four
primary care practices in Queens County, New York. A & A Services provides the
practices with management services, office space, equipment, repair and
maintenance service for the equipment and clerical and other non medical
personnel. The office locations for the practices are located in Woodhaven,
Richmond Hill, Corona and Ridgewood in Queens County, New York and account for
over 39,000 primary care patient visits per year. The assets owned by A&A
Services included medical and office equipment and office furnishings. The
purchase price for A&A was $10 million, $4 million of which was paid in cash at
closing and $6 million of which is payable pursuant to promissory notes over a
total of six years from closing. The notes are secured by the assets of the
acquired businesses as of the date of the acquisition. Additional consideration
is payable if net income for the acquired business exceeds $2.3 in any of the
five years following the closing as follows: in each year, 75% of net income
between $2.3 million and $2.8 million; 50% of net income between $2.8 million
and $3.5 million and 25% of net income in excess of $3.5 million. During the
fiscal year ended June 30, 2001, the net operating income from the A&A
acquisition was approximately $234,000 million and for the years ended June 30,
2000 and June 30, 1999 approximately $1.2 million and $1.6 million,
respectively.
In connection with the acquisition, one of the companies managed by HMCA
entered into fifteen year term employment agreements with the two former owners
of A & A Services. The agreements provides for a base annual salary of $150,000
per annum for the first five years and of $315,000 per annum for sixth year.
Thereafter the salaries increase 5% per year up to $500,000 per annum.
Additionally, each agreement provides for a bonus commencing in the sixth year
of the agreement, contingent upon meeting thresholds of net income.
The fifth completed acquisition, consummated effective August 20, 1998, was
the acquisition of Dynamic Health Care Management, Inc. ("Dynamic"). Dynamic is
an MSO which manages three physician practices in Nassau and Suffolk Counties on
Long Island, New York. The office locations for these practices are in Bellmore
and Hempstead in Nassau County and Deer Park in Suffolk County and account for
approximately 109,000 patient visits per year. The assets of Dynamic included
therapy and rehabilitation equipment, office equipment and office furnishings.
The purchase price for Dynamic was $11,576,231, consisting of $2.0 million in
cash and the balance payable pursuant to promissory notes over an aggregate
period of five years from the closing. The notes are secured by the assets of
the acquired business as of the date of the acquisition.
In connection with the acquisition of Dynamic, HMCA entered into ten year
term employment agreements with the two former owners of Dynamic. Each agreement
provides for base compensation of $150,000 in the first year with annual cost of
living increases for the first five years and an increase of $100,000 commencing
in the sixth year. In addition, the agreements provide for bonus compensation
contingent upon the pretax earnings of Dynamic.
HMCA GROWTH STRATEGY
In addition to purchasing management companies, HMCA may also pursue
acquisitions in which HMCA would purchase the assets of physicians' practices.
Simultaneously with the acquisition of the assets, HMCA would enter into
agreements with the physicians (or a professional corporation employing the
physicians) pursuant to which HMCA would lease the use of the assets and provide
management services to the physicians or their professional corporations. The
professional corporation could be either affiliated with HMCA or owned by the
selling physicians. This second alternative has not been utilized by HMCA to
date.
HMCA believes that there are numerous existing medical practices that could
benefit from improved management techniques which would allow the physicians to
spend more time treating patients (thereby increasing their revenue) and less
time being concerned with the day to day tasks of managing the business.
Although the disadvantages to physicians would be the increased administrative
costs in the form of management fees payable to HMCA, and the lack of direct
accountability of the nonprofessional staff to the physicians, the Company
believes the ability of the physicians to spend more time practicing medicine
will more than compensate for these disadvantages.
In addition, expansion plans for HMCA's clients include opening more
offices and expanding existing offices so as to enable practices to treat more
patients more efficiently.
HMCA is seeking to create a network of physicians to participate in managed
care and to promote an expansion of the medical services offered by its medical
practice clients.
HMCA believes that the creation of this network will be particularly
helpful to its clients where capitated fee agreements are negotiated with
insurers since its clients will be able to offer more services from more
locations and thereby obtain a higher capitation rate than they might otherwise
have been able to obtain. Capitated fee arrangements are arrangements with HMO's
whereby the physician or physician practice is paid a fixed monthly fee based on
the age and gender of covered person. The fees vary from HMO to HMO and are
essentially set by the HMO's.
HMCA's growth strategy is intended to enable its medical practice clients
to retain and enhance revenues and to offer patients cost-effective medical care
within an integrated practice offering a broad range of evaluation, testing,
diagnostic, treatment and therapeutic services. In the longer term, as the
network of offices to which it provides its management services grows, HMCA
believes that it will be in an excellent position to attract managed care
contracts for its clients from employers and insurance carriers.
During the fiscal years ended June 30, 2001 and June 30, 2000, however,
HMCA did not conclude any additional acquisitions primarily because it has not
had the capital resources to acquire suitable businesses on favorable terms.
HMCA was unable in negotiations to offer substantial cash payments at closing
but had to seek longer payout terms. HMCA has been unable to identify any
businesses available for acquisition which it believed represented good value on
such terms.
PHYSICIAN AND DIAGNOSTIC MANAGEMENT SERVICES
HMCA's services to the facilities and practices it manages encompass
substantially all of the their business operations. The facilities and medical
practices are controlled however, by the physician owners, not HMCA, and all
medical services are performed by the physicians. HMCA is the management company
and performs services of a non-professional nature. These services include:
(1) Offices and Equipment. HMCA provides office space and equipment to its
clients. This includes technologically sophisticated medical equipment.
HMCA also provides improvements to leaseholds, assistance in site selection
and advice on improving, updating, expanding and adapting to new
technology.
(2) Personnel. HMCA staffs all the non-medical positions of its clients with
its own employees, eliminating the client's need to interview, train and
manage non-medical employees, as well as process the necessary tax,
insurance and other documentation relating to employees.
(3) Administrative. HMCA assists in the scheduling of patient appointments,
purchasing of medical supplies and equipment and handling of reporting,
accounting, processing and filing systems. It prepares and files the
physician portions of complex forms to ensure full and timely regulatory
compliance and appropriate cost reimbursement under no-fault insurance and
workers' compensation guidelines.
(4) Billing and Collections. HMCA is responsible for the billing and collection
of revenues from third-party payors including those governed by no-fault
and workers' compensation statutes.
(5) Cost Saving Programs. Based on available volume discounts, HMCA seeks to
obtain favorable pricing for medical supplies, equipment, pharmaceuticals
and other inventory for its clients.
(6) Diagnostic Imaging and Ancillary Services. HMCA can offer access to
diagnostic imaging equipment through diagnostic imaging facilities managed
by it. The Company is expanding the ancillary services offered in its
network to include CT-scans, x-rays, ultrasound, and other ancillary
services useful to its clients.
(7) Marketing Strategies. HMCA is responsible for developing marketing plans
for its clients.
(8) Expansion Plans. HMCA assists the clients in developing expansion plans.
These plans are mutually developed. Additional physicians and physicians
assistants have been added where needed.
HMCA advises clients on all aspects of their business, including expansion
where it is a reasonable objective, on a continuous basis. HMCA's objective is
to free physicians from as many non-medical duties as practicable. Practices can
treat patients more efficiently if the physicians can spend less time on
business and administrative matters and more time practicing medicine.
HMCA provides its services pursuant to negotiated contracts with its
clients. While HMCA believes it can provide the greatest value to its clients by
furnishing the full range of services appropriate to that client, HMCA would
also be willing to enter into contracts providing for a more limited spectrum of
management services.
In the case of contracts with the MRI facilities, fees are charged by HMCA
based on the number of procedures performed. In the case of the physical
rehabilitation and medical practices, flat fees are charged on a monthly basis.
Fees are subject to adjustment on an annual basis, but must be based on mutual
agreement. The per procedure charges to the MRI facilities range from $250 to
$760 per MRI scan. The monthly fees charged to the medical and physical
rehabilitation practices range from approximately $53,850 to $272,500. Only one
medical practice, located in Florida where the corporate practice of medicine is
permitted, is owned by HMCA. Only one chiropractic practice managed by HMCA,
providing HMCA with management fees of approximately $210,000 in fiscal 2001, is
owned by a seller in an acquisitions.
The practices and the facilities enter into contracts with managed care
companies. With the exception of some capitated health plans in which the
medical practices participate, neither HMCA's clients nor HMCA participate in
any risk sharing arrangements capitated plans are those HMO programs where the
provider is paid a flat monthly fee per patient. For the fiscal years ended June
30, 2001 and June 30, 2000, fees to HMCA's clients from capitated plans amounted
to approximately $814,000 and $1.0 million, respectively, an amount equal to
2.2% and 2.9% respectively, of HMCA's revenues for the fiscal year. All of these
were attributable to medical professional corporations managed by A & A
Services, Inc., representing 26%, and 25% of their revenues in fiscal 2001 and
fiscal 2000, respectively.
HMCA MARKETING
HMCA's marketing strategy is to increase the size, number and locations of
medical practices and facilities which it manages. HMCA will also seek to
broaden the types of medical practices which it services and to develop a client
base of primary care and specialty practices as well as diagnostic imaging
facilities and other ancillary services. HMCA will seek to promote growth of its
clients' patient and revenue bases by developing a network of medical providers
and assisting its clients in the development of multi-specialty medical
practices.
Marketing activities include locating medical practices which meet the
size, quality and operating parameters set by HMCA. HMCA will focus on
opportunities for expanding the services clients offer and expanding into new
geographic areas. HMCA will also seek to increase the patient volume of clients.
To date, HMCA has not been able to add a significant number of specialty
practices to its client base. In part this difficulty stems from HMCA's lack of
capital resources to fund acquisitions; this lack of capital resources similarly
has prevented HMCA from broading its client base generally.
DIAGNOSTIC IMAGING CENTERS AND OTHER ANCILLIARY SERVICES
Diagnostic imaging centers managed by HMCA provide diagnostic imaging
services to patients referred by physicians who are either in private practice
or affiliated with managed care providers or other payor groups. The centers are
operated in a manner which eliminates the admission and other administrative
inconveniences of in-hospital diagnostic imaging services. Imaging services are
performed in an outpatient setting by trained medical technologists under the
direction of interpreting physicians. Following diagnostic procedures, the
images are reviewed by the interpreting physicians who prepare a report of these
tests and their findings. These reports are transcribed by HMCA personnel and
then delivered to the referring physician.
In addition, HMCA is expanding the ancillary services offered in its
network to include CT scans, virtual colonoscopies, x-rays, ultrasound and other
modalities as may be appropriate for the physician practice mix.
HMCA develops marketing programs in an effort to establish and maintain
profitable referring physician relationships and to maximize reimbursement
yields. These marketing approaches identify and target selected market segments
consisting of area physicians with certain desirable medical specialties and
reimbursement yields. Corporate and center managers determine these market
segments based upon an analysis of competition, imaging demand, medical
specialty and payor mix of each referral from the local market. HMCA also
directs marketing efforts at managed care providers.
Managed care providers are becoming an increasingly important factor in the
diagnostic imaging industry. To further its position, HMCA will seek to expand
the imaging modalities offered at its managed centers or to create networks with
other imaging centers.
COMPETITION (HMCA)
The physician and diagnostic management services field is highly
competitive. A number of large hospitals have acquired medical practices and
this trend may continue. HMCA expects that more competition will develop. Many
competitors have greater financial and other resources than HMCA.
With respect to the diagnostic imaging centers managed by HMCA, the
outpatient diagnostic imaging industry is highly competitive. Competition
focuses primarily on attracting physician referrals at the local market level
and increasing referrals through relationships with managed care organizations.
HMCA believes that principal competitors for the diagnostic imaging centers are
hospitals and independent or management company-owned imaging centers.
Competitive factors include quality and timeliness of test results, ability to
develop and maintain relationships with managed care organizations and referring
physicians, type and quality of equipment, facility location, convenience of
scheduling and availability of patient appointment times.
GOVERNMENT REGULATION APPLICABLE TO HMCA
FEDERAL REGULATION
Stark Law
Under the federal Self-Referral Law (the "Stark Law") (which is applicable
to Medicare and Medicaid patients) and the self-referral laws of various States,
certain health practitioners (including physicians, chiropractors and
podiatrists) are prohibited from referring their patients for the provision of
designated health services (including diagnostic imaging and physical therapy
services) to any entity with which they or their immediate family members have a
financial relationship, unless the referral fits within one of the specific
exceptions in the statutes or regulations. Statutory exceptions under the Stark
Law include, among others, direct physician services, in-office ancillary
services rendered within a group practice, space and equipment rental and
services rendered to enrollees of certain prepaid health plans. Some of these
exceptions are also available under the State self-referral laws.
Anti-kickback Regulation
Under the federal Anti-kickback statute, which is applicable to Medicare
and Medicaid, it is illegal, among other things, for a provider MRI services to
pay or offer money or other consideration to induce the referral of MRI scans.
Neither HMCA nor its clients engage in this practice.
Approximately 8.8% of the revenues of HMCA's clients are attributable to
Medicare and 0.25% are attributable to Medicaid.
State Regulation
In addition to the federal self-referral law and federal Anti-kickback
statute, many States, including those in which HMCA and its clients operate,
have their own versions of self-referral and anti-kickback laws. These laws are
not limited in their applicability, as are the federal laws, to specific
programs. HMCA believes that it and its clients are in compliance with these
laws.
Various States prohibit business corporations from practicing medicine.
Various States also prohibit the sharing of professional fees or fee splitting.
Consequently, HMCA leases space and equipment to clients and provides clients
with a range of non-medical administrative and managerial services for agreed
upon fees. HMCA does not engage in the practice of medicine or establish
standards of medical practice or policies for its clients in any such State.
HMCA's clients generate revenue from patients covered by no-fault insurance
and workers' compensation programs. For the fiscal year ended June 30, 2001,
Approximately 56% of our clients' receipts were from patients covered by
no-fault insurance and approximately 10% of our client's receipts were from
patients covered by worker's compensation programs. In the event that changes in
these laws alter the fee structures or methods of providing service, or impose
additional or different requirements, HMCA could be required to modify its
business practices and services in ways that could be more costly to HMCA or in
ways that decrease the revenues which HMCA receives from its clients.
HMCA believes that it and its clients are in compliance with applicable
Federal, State and local laws. HMCA does not believe that such laws will have
any material effect on its business.
EMPLOYEES
As of July 1, 2001, the Company employed 585 persons on a full-time and
part-time basis. Of such employees, 29 were engaged in marketing and sales, 43
in research and development, 82 in prodution, 45 in customer support services,
348 in administration (including 244 on site at facilities and offices managed
by HMCA and 85 performing billing, collection and transcription services for
those facilities) and 38 professional MRI technicians on site at diagnostic
imaging centers managed by HMCA.
ITEM 2. PROPERTIES
Fonar leases approximately 135,240 square feet of office and plant space at
its principal offices in Melville, New York and at two other locations in
Melville and Farmingdale, New York at a current aggregate annual rental rate of
approximately $834,000, excluding utilities, taxes and other related expenses.
The term of one of the leases extends through 2002 with options to renew up
through 2008 and the term of the other lease extends to the beginning of 2009.
The Company also leases space in Harrisburg, Pennsylvania at a rental of $1350
per month. Management believes that these premises are adequate for its current
needs. HMCA leases approximately 16,850 square feet for its headquarters in
Melville, New York at a current annual rental rate of $369,865. The term of the
lease extends through September, 2009. In addition, HMCA maintains leased office
premises for its clients at approximately 38 site locations having an aggregate
annual rental rate of approximately $1.9 million under leases having various
terms.
ITEM 3. LEGAL PROCEEDINGS
There is no material litigation pending, or to its knowledge, threatened
against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the Nasdaq SmallCap market under
the National Association of Securities Dealers Automated Quotation System
("NASDAQ") symbol FONR. The following table sets forth the high and low trades
reported in NASDAQ System for the periods shown.
Fiscal Quarter High Low
---------------------------- ---- ----
January - March 1998 3.09 2.38
April - June 1998 2.75 1.94
July - September 1998 2.50 1.25
October - December 1998 2.00 0.97
January - March 1999 1.78 1.19
April - June 1999 1.50 1.03
July - September 1999 1.18 0.91
October - December 1999 3.25 0.69
January - March 2000 5.00 1.63
April - June 2000 3.44 1.44
July - September 2000 3.47 1.50
October - December 2000 2.31 1.03
January - March 2001 2.00 0.97
April - June 2001 1.97 1.28
July - September 17, 2001 2.49 1.50
On September 20, 2001, the Company had approximately 5,340 stockholders of
record of its Common Stock, 12 stockholders of record of its Class B Common
Stock, 4 stockholders of record of its Class C Common Stock and 4,063
stockholders of record of its Class A Non-voting Preferred Stock.
At the present time, the only class of the Company's securities for which
there is a market is the Common Stock.
The Company paid cash dividends in fiscal 1998 and the first three quarters
of fiscal 1999 on monies it received from the enforcement of its patents. Prior
to these dividends, the Company had not paid any cash dividends. The Company
anticipates paying additional dividends on monies it receives from the
enforcement of its patents. Except for these dividends, however, it is expected
that the Company will continue to retain earnings to finance the development and
expansion of its business.
Item 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data has been extracted from
the Company's consolidated financial statements for the five years ended June
30, 2001. This consolidated selected financial data should be read in
conjunction with the consolidated financial statements of the Company and the
related notes included in Item 8 of this form. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for a discussion of
the Company's business plan.
Item 6. SELECTED FINANCIAL DATA (Continued)
As of, or For the Period Ended June 30,
--------------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
STATEMENT OF
OPERATIONS
Revenues $46,459,301 $39,993,797 $36,987,044 $27,554,357 $17,633,066
Cost of $31,983,198 $30,431,069 $29,391,682 $ 23,841,844 $18,428,574
revenues
Research $5,866,421 $5,532,325 $ 6,647,555 $ 6,506,995 $ 3,928,035
and Development
Expenses
Net Income
(loss) $(15,183,862 $(10,955,987) $(14,215,763) $(5,653,086) $ 56,068,771
Basic and Diluted
Net income
(loss) $(.22) $(.17) $(.22) $(.09) $1.00
per common share
Weighted 68,633,758 66,304,716 64,071,151 61,175,986 56,097,965
average number
Of shares
outstanding *
BALANCE SHEET
DATA
Working
capital $17,744,379 $24,439,609 $37,863,029 $54,426,483 $62,659,470
(deficit)
Total $85,155,413 $84,599,037 $97,648,168 $108,447,780 $106,690,561
assets
Long- $21,244,149 $20,969,186 $24,821,834 $16,003,479 $ 4,626,269
term debt
and obligations
under capital
leases
Stock- $41,830,294 $51,284,758 $59,303,773 $72,572,486 $73,245,262
holder's
equity
* Adjusted for stock dividend of Class A Non-voting Preferred Stock
declared in October, 1995.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
INTRODUCTION.
The Company was formed in 1978 to engage in the business of designing,
manufacturing and selling MRI scanners. In 1997, the Company formed a
wholly-owned subsidiary, Health Management Corporation of America ("HMCA"),
formerly known as U.S. Health Management Corporation, in order to expand into
the physician and diagnostic management services business.
FONAR's principal MRI products are its Stand-Up, also called "Indomitable"
(TM), Fonar 360, QUAD and Echo MRI scanners. The Stand-Up MRI allows patients to
be scanned for the first time under weight-bearing conditions. The Company is
aggressively seeking new sales. The Stand-Up MRI is the only MRI capable of
producing images in the weight bearing state. The Fonar 360, QUAD and Stand-Up
MRI scanners are highly competitive and totally new non-claustrophobic scanners
not previously available in the MRI market. At 0.6 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. The Fonar 360 and Stand-Up MRI(TM) share the fundamental technology of the
QUAD scanners and also have a field strength of 0.6 Tesla. The Company's
work-in-progress Pinnacle MRI scanner will combine Fonar's iron frame magnet
with a superconducting driver, and is expected to have a field strength between
0.6 and 1.0 Tesla. Fonar also offers the Echo, a low cost open MRI scanner.
Fonar's works in progress also include an in-office extremities scanner. (See
"Description of Business - Products, Works-in-Progress and Product Marketing.")
HMCA commenced operations in July, 1997 and generates revenues from
providing comprehensive management services (including development,
administration, accounting and billing and collection services) together with
office space, medical equipment, supplies and non-medical personnel to its
clients. Revenues are in the form of management and leasing fees.
RESULTS OF OPERATIONS. FISCAL 2001 COMPARED TO FISCAL 2000
In fiscal 2001, the Company experienced a net loss of $15.2 million on
revenues of $46.5 million, as compared to net loss of $11.0 million on revenues
of $40.0 million for fiscal 2000. This represents a increase in the net loss of
38% and an increase in revenues of 16.2%. The Company's consolidated operating
loss increased by 4.5% to $16.2 million for fiscal 2001 from a loss of $15.5
million for fiscal 2000.
Revenues attributable to the Company's physician and diagnostic management
services segment (HMCA) increased by 5.9% to $36.0 million in fiscal 2001 from
$34.0 million in fiscal 2000. Operating income of $1.0 million was recognized
from the Company's physician and diagnostic management services in fiscal 2001,
as compared to an operating income of $2.5 million in fiscal 2000, representing
a decrease of 60%.
Revenues attributable to the Company's medical equipment segment increased
by 75% to $10.5 million in fiscal 2001 from $6.0 million in fiscal 2000,
reflecting an increase in scanner sales of 79.4%, from $3.4 million in fiscal
2000 to $6.1 million in fiscal 2001 and an increase in service revenue of 11.1%,
from $1.7 million in fiscal 2000 to $2.0 million in fiscal 2001. The Company
attributes the increase in scanner sales to the growing market penetration of
its products, particularly its Stand-Up MRI, also called "Indomitable", which is
unique in that it permits MRI scans to be performed on patients in the
weight-bearing state.
Notwithstanding the Company's expectation of increased demand for its MRI
scanners, sales to unrelated parties increased by 113% in fiscal 2001 from $1.6
million in fiscal 2000 to $3.4 million in fiscal 2001. Sales to unrelated
parties declined by 50% in fiscal 2000 from $3.2 million in fiscal 1999 to $1.6
million in fiscal 2000. The Company believes that its difficulties in achieving
greater market penetration are primarily attributable to the better name
recognition and larger sales forces of its larger competitors such as General
Electric, Siemens and Hitachi and the ability of some of its competitors to
offer attractive financing terms through affiliates, such as G.E. Capital.
Results of operations for the medical equipment segment improved by 9% from
a loss of $18.9 million in fiscal 2000 to a loss of $17.2 million in fiscal
2001. Increased license and royalty revenue (from $920,000 in fiscal 2000 to
$2.4 million in fiscal 2001) was a principal factor.
Other income of $1.0 million (principally the sales of a partnership
interest) and investment income of $1.8 million were recognized by the Company
in fiscal 2001 as compared to other income of approximately $5.6 million
(principally the net proceeds from the Company's patent enforcement lawsuits)
and investment income of $1.9 million in fiscal 2000. This represents a decrease
of 82% in other income and a decrease of 5.2% in investment income. As a result,
the net loss increased from $11.0 million in fiscal 2000 to $15.2 million in
fiscal 2001.
Costs of revenues and expenses increased by 12.9% to $62.7 million in fiscal
2001 from $55.5 million in fiscal 2000. The increase in selling, general and
administrative expenses was attributable primarily to the expansion of HMCA and
expansion of Fonar's internal sales force.
Cost of revenue for the Company's physician management services segment
decreased from $23.6 million or 69.4% of related revenues for the year ended
June 30, 2000 to $23.5 million or 65.2% of related revenues for the year ended
June 30, 2001. Operating income of this segment declined from $2.5 million in
fiscal 2000 to $1.0 million in fiscal 2001 due to increases in selling, general
and administrative expenses of $1.9 million, increases in compensatory element
of stock issueance of $1.4 million, increases in provision for bad debt expense
of $.2 million offset by an improvement in gross profit of $2.0 million.
Research and development expenses increased by 6.8% to $5.9 million in
fiscal 2001 as compared to $5.5 million in fiscal 2000. This increase
represented continued research and development of Fonar's scanners and its new
hardware and software product, "Sympulse (TM)".
Overall, costs of revenues and expenses for the Company's medical equipment
segment, however, increased by 13.9% to $28.7 million in fiscal 2001 from $25.3
million in fiscal 2000.
This reflects an increase of 41% in costs of product sales from $4.4
million in fiscal 2000 to $6.2 million in fiscal 2001. This also reflects an
increase of 8.3% in selling, general and administrative expenses to $11.7
million in fiscal 2001 from $10.8 million in fiscal 2000.
The increase in compensatory element of stock issuances from approximately
$1.9 million in fiscal 2000 to $4.0 million in fiscal 2001 reflected greater use
of Fonar's stock bonus plan to pay certain highly compensated employees and
others in stock rather than cash.
The higher provision for bad debt of $442,505 in fiscal 2001 as compared to
$177,162 in fiscal 2000, reflected reserves for fees from HMCA managed
facilities that were closed during the year.
The amortization expense in fiscal 2001 and 2000 of approximately $1.2
million in each year reflects the amortization of goodwill attributable to
HMCA's acquisitions.
The Company recognized revenues of $1.6 million from the sale of its new
Stand-Up scanners and of $1.1 million from the sale of Echo scanners in fiscal
2001. There were no sales of Stand-Up scanners or Echo scanners in fiscal 2000.
Revenues generated by sales of QUAD MRI scanners decreased slightly by 6.3% from
$3.2 million (8.1% of total revenues) in fiscal 2000 to $3.0 million (6.5% of
total revenues) in fiscal 2001. Revenues attributable to sales of the Company's
Ultimate scanners during the same periods were $0.00.
Sales of Beta scanners were $0 in fiscal 2001 (0% of total revenues) and
$84,255 (approximately 0.2% of total revenues) in fiscal 2000. The sales in
fiscal 2000 represented the sale of refurbished equipment, as the company no
longer manufactures Beta scanners.
Product sales revenues for fiscal 2001 included revenues from the sale of
seven scanners. Product sales revenues for fiscal 2000 included revenues from
the sales of three scanners and for fiscal 1999, five MRI scanners, two of which
were used scanners which Fonar had reacquired.
Sales to affiliated parties, consisting of professional corporations owned
by Dr. Damadian represented approximately 5.8% ($2,686,646) of the Company's
revenues in fiscal 2001, as compared to 4.4% ($1,752,298) of the Company's
revenues in fiscal 2000.
Negative gross profit margins on product sales (negative 0.3% in fiscal
2001 and negative 31.7% in fiscal 2000) were principally attributable to the
medical equipment segment operating at a low level of capacity and reflect the
inefficiencies attendant to Fonar's fixed factory overhead expenses, such as
salaries and benefits. The improvement in fiscal 2001 reflects increased sales
volume.
The Company is enthusiastic about the future of its FONAR 360 product line
and Indomitable(TM) scanners which will bring a new plateau of "openness" to
diagnostic MRI and a new frontier in surgery for performing surgical treatments
using MRI images to guide surgery. The Company believes its new products are
beginning to successfully penetrate the market, as reflected in the increase in
product sales from approximately $3.4 million in fiscal 2000 to $6.1 million in
fiscal 2001. In addition to increased product sales, the decline in service and
repair fees has been reversed, as reflected by the increase in service and
repair fees from $1.7 million in fiscal 2000 to $2.0 million in fiscal 2001.
Continuing its tradition as the originator of MRI, the Company remained
committed to maintaining its position as the leading innovator of the industry
through aggressive investing in research and development. In fiscal 2001 the
Company continued its investment in the development of its new MRI scanners,
together with software and upgrades, with an investment of $6,621,225 in
research and development ($754,804 of which was capitalized) as compared to
$5,893,648 ($361,623 of which was capitalized) in fiscal 2000. The research and
development expenditure was approximately 108% of revenues attributable to the
Company's medical equipment segment (and 14.2% of total revenues) in 2001 and
174% of medical equipment segment revenues in 2000 (and 14.7% of total
revenues). This represented a increase of approximately 12% in research and
development expenses from fiscal 2000 to fiscal 2001.
During the fiscal year ended June 30, 2001, the Company realized other
income of approximately $1.0 million, principally from the sale of a partnership
interest, as compared to other income of approximately $5.6 million (principally
from the settlement of patent infringement disputes) in fiscal 2000. This
represented a decline of 82%.
RESULTS OF OPERATIONS. FISCAL 2000 COMPARED TO FISCAL 1999
In fiscal 2000, the Company experienced a net loss of $11.0 million on
revenues of $40 million as compared to a net loss of $14.2 million on revenues
of $37 million for fiscal 1999. This represented an decrease in the net loss of
22.5% and an increase in revenues of 8%.
Revenues attributable to the Company's physician and diagnostic management
services segment (HMCA) increased to $34.0 million in fiscal 2000 from $31.3
million in fiscal 1999, representing an increase of 8.6%.
Operating income of $2.5 million was recognized from the Company's
physician and diagnostic management services in fiscal 2000, as compared to
income of $3.1 million in fiscal 1999, representing a decrease of 19.4%.
Revenues attributable to the Company's medical equipment segment increased
by 5.3% to $6.0 million in fiscal 2000 from $5.7 million in fiscal 1999,
reflecting higher license fees and royalties in fiscal 2000.
Results of operations for the medical equipment segment declined, from a
loss of $18.7 million in fiscal 1999 to a loss of $18.9 million in fiscal 2000,
representing a 1.1% decline.
Other income of $1.0 million (principally the net proceeds from the
Company's patent enforcement lawsuits) and investment income of $2.1 million
were recognized by the Company in fiscal 1999 as compared to other income of
$5.6 million (principally the net proceeds from the Company's patent enforcement
lawsuits) and investment income of $1.9 million in fiscal 2000, representing an
increase of 460% in other income and a decrease of 9.5% in investment income.
Costs of revenues and expenses increased by 5.5% from $52.6 million in
fiscal 1999 to $55.5 million in fiscal 2000, reflecting the expansion of the
Company's physician and diagnostic management services operations.
Costs of revenue and expenses for the Company's physician and diagnostic
management services increased by 8.3% to $23.6 million in fiscal 2000 from $21.8
million in fiscal 1999.
Research and development expenses decreased by 16.7% to $5.5 million in
fiscal 2000 as compared to $6.6 million in fiscal 1999.
Overall, costs of revenues and expenses for the Company's medical equipment
segment, however, declined by 3.2% to $24.3 million in fiscal 2000 from $25.1
million in fiscal 1999.
This reflects reductions of 10.2% in costs of product sales from $4.4
million in fiscal 2000 to $4.9 million in fiscal 1999.
This also reflects an increase of 13% in general and administrative
expenses to $8.7 million in fiscal 2000 from $7.7 million in fiscal 1999.
Costs of revenue declined by 16.8% to $7.9 million in fiscal 2000 as
compared to $9.5 million in fiscal 1999.
Revenues generated by sales of QUAD MRI scanners were $2.6 million
(approximately 7% of total revenues) in fiscal 1999 and $3.2 million (8% of
total revenues) in fiscal 2000, representing an increase 23%. Revenues
attributable to sales of the Company's Ultimate scanners during the same period
were $0.00.
Sales of Beta scanners were $430,000 in fiscal 1999 (approximately 1% of
total revenues) and approximately $84,255 (approximately 0.2% of total revenues)
in fiscal 2000.
Product sales revenues for fiscal 2000 included revenues from the sale of
three scanners, and for fiscal 1999, five MRI scanners, two of which were used.
Sales to affiliated parties represented approximately 4.4% ($1.8 million)
of the Company's revenues in fiscal 2000, as compared to approximately 0.4%
($150,000) in fiscal 1999.
Gross profit margins on product sales to unrelated parties were negative
(49%) in fiscal 1999 and negative (86.7%) in fiscal 2000. This reflected the
losses on sales of the Company's QUAD scanners.
To reduce the cost of manufacturing its QUAD scanners, the Company expanded
its manufacturing capacity in fiscal 2000, 1999 and 1998 by acquiring
approximately $2.1 million, $3.8 million and $1.4 million, respectively, worth
of new capital equipment. In addition, the Company expanded its operating
capacity by hiring additional personnel.
Notwithstanding the Company's increased manufacturing activities, revenues
attributable to the Company's medical equipment segment declined by 4.6% to
approximately $6.2 million in fiscal 2000 from approximately $6.5 million in
fiscal 1999. This trend reflected a decline in service revenue of 26.1% from
$2.3 million in fiscal 1999 to $2.7 million in fiscal 2000.
In fiscal 2000 the Company continued its investment in the development of
its new MRI scanners, together with software and upgrades, with an investment of
$5,893,648 ($361,323 of which was capitalized) in research and development as
compared to $6,647,555 in fiscal 1999. The research and development expenditure
was approximately 98% of revenues attributable to the Company's medical
equipment segment and 14.7% of total revenues in 2000 and 102% of medical
equipment segment revenues and 18% of total revenues in fiscal 1999.
During the fiscal year ended June 30, 2000, the Company realized income of
approximately $5.6 million from the settlement of various legal disputes, which
were essentially its patent infringement actions, as compared to approximately
$1.0 million in fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and marketable securities declined by 9% from $23.3
million at June 30, 2000 to $20.7 million at June 30, 2001. Principal uses of
cash during fiscal 2001 included capital expenditures of $2.6 million, repayment
of indebtedness and capital lease obligations in the amount of $5.7 million,
costs of capitalized software development of $800,000 and costs in connection
with debt financing of $200,000.
Marketable securities approximated $6.1 million as of June 30, 2001 as
compared to $11.5 million as of June 30, 2000. From June 30, 2000 to June 30,
2001 the Company maintained investments in equity securities of $0, reduced its
investments in U.S. Government obligations from approximately $10.2 million to
$4.1 million and increased its investments in corporate and government agency
bonds from approximately $1.6 million to $1.9 million. This has had the intended
effect of reducing the volatility of the Company's investment portfolio.
Cash provided by operating activities for fiscal 2001 approximated
$1,316,000. Cash used in operating activities was attributable substantially to
the funding of the net loss for fiscal 2001.
Cash provided by investing activities for fiscal 2001 approximated $2.6
million. The principal source of cash from investing activities during fiscal
2001 consisted of the proceeds from the sale of marketable securities of $5.7
million less expenditures for property and equipment of approximately $2.6
million.
Cash used in financing activities for fiscal 2001 approximated $1,085,000.
The principal uses of cash in financing activities during fiscal 2001 consisted
of repayment of principal on long-term debt of approximately $5.7 million and
the principal sources were proceeds from the issuance of convertible debentures
of $4.5 million and proceeds from the sale of a partnership interest of
$750,000.
Total liabilities increased since June 30, 2000 by approximately $9.9
million, or 30% to approximately $43.2 million at June 30, 2001. The increase in
liabilities from June 30, 2000 was attributable principally to the issuance of
convertible debentures and deferred license fee revenue.
As at June 30, 2001, the Company's obligations included approximately $2.7
million in various state taxes. The Company has entered into payment plans with
taxing authorities with respect to $1.5 million past due taxes.
As of June 30, 2001, the Company had a bank credit facility of $5,500,000.
The unused portion of the facility was approximately $329,000. 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.
Advances and notes to affiliates and related parties increased by 33.33%
from $1.2 million at June 30, 2000 to $1.6 million at June 30, 2001. As these
are long-term assets, they tend to reduce the Company's liquidity.
The Company's working capital surplus as of June 30, 2001 approximates
$17.7 million, as compared to a working capital surplus of $24.9 million as of
June 30, 2000.
The change in the Company's working capital position resulted primarily
from its investments in new equipment ($2.6 million), note payments primarily on
the purchase prices for HMCA's acquisitions ($5.7 million), its overall
operating losses, and an increase in its current liabilities of approximately $5
million ($23.4 million as at June 30, 2001 as compared to $18.4 million as at
June 30, 2000.
As at June 30, 2001, the Company had current assets of $41.1 million and
current liabilities of $23.4 million, resulting in working capital of $17.7
million. The Company believes that these resources alone provide an adequate
reserve to fund its operations for approximately two years. For the longer term,
the Company will need to rely on income generated by sales of its MRI products
and the profitability of HMCA.
In order to conserve its capital resources, the Company has issued common
stock under its stock bonus and stock option plans to compensate employers and
non-employees for services rendered. In fiscal 2001, the compensatory element of
stock issuances was $4.0 as compared to $1.9 for fiscal 2000. Utilization of
equity in lieu of cash compensation has improved the Company's 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.
Capital expenditures for fiscal 2001 and 2000 approximated $2.6 million and
$2.8 million, respectively, and substantially consisted of office and production
equipment.
Fonar has not committed to making capital expenditures in the 2002 fiscal
year other than its intention to continue research and development expenditures
at current levels.
The Company's business plan currently includes an aggressive program for
manufacturing and selling its new line of Open MRI scanners. In addition, the
Company is enhancing its revenue by participating into the physician and
diagnostic management services business through its subsidiary, HMCA.
The Company's plan calls for a continuing emphasis on providing its
customers with enhanced equipment service and maintenance capabilities and
delivering state-of-the-art, innovative and high quality equipment upgrades at
competitive prices. Fees for on-going service and maintenance from the Company's
installed base of scanners were $1.7 million for the year ended June 30, 2000
and $2.0 million for the year ended June 30, 2001 (transactions between the
Company and its subsidiaries are eliminated in the consolidation).
The Company believes that the above mentioned financial resources will
provide the cash flows needed to achieve the sales, service and production
levels necessary to support its operations. In addition, the Company is
exploring other financing alternatives which may become available as the success
of the previously described programs accelerates.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET
RISK
The Company has investments in fixed rate instruments. None of the fixed
rate instruments in which the Company invests extend beyond June 30, 2007. Below
is a tabular presentation of the maturity profile of the fixed rate instruments
held by the Company at June 30, 2001.
INTEREST RATE SENSITIVITY
PRINCIPAL AMOUNT BY EXPECTED MATURITY
WEIGHTED AVERAGE INTEREST RATE
Date Investments in Fixed Rate Weighted Average
Instruments Interest Rate
6/30/02 512,110 5.4%
6/30/03 3,377,898 5.8%
6/30/04 1,157,820 5.4%
6/30/05 353,734 6.5%
6/30/06 399,569 6.0%
6/30/07 200,000 6.1%
Total: 6,001,131
Fair Value
at 6/30/01 6,085,266
All of the Company's revenue, expense and capital purchasing activities are
transacted in United States dollars.
See Note 11 to the Company's Financial Statements for information on long
term debt.
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FONAR CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
INDEPENDENT AUDITORS' REPORT
CONSOLIDATED BALANCE SHEETS
At June 30, 2001 AND 2000
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Years Ended June 30, 2001, 2000 and 1999
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Three Years Ended June 30, 2001, 2000 and 1999
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Years Ended June 30, 2001, 2000 and 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SELECTED FINANCIAL DATA (*)
For the Five Years Ended June 30, 2001
SCHEDULE OF VALUATION ALLOWANCES
For the three years ended June 30, 2001, 2000 and 1999 (**)
(*) Included in Part II, Item 6 of the Form.
(**) Included in Part II, Item 14 of this Form.
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors
FONAR Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of FONAR
Corporation and Subsidiaries as at June 30, 2001 and 2000, and the related
consolidated statements of operations, stockholders' equity and cash flows and
schedules for each of the three years ended June 30, 2001. These financial
statements and schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements and schedules referred to
above present fairly, in all material respects, the consolidated financial
position of FONAR Corporation and Subsidiaries at June 30, 2001 and 2000, and
the consolidated results of their operations and cash flows for each of the
years in the three-year period ended June 30, 2001, in conformity with
accounting principles generally accepted in the United States of America.
During each of the years in the three-year period ended June 30, 2001, a
significant portion of the Company's revenues was from related parties (see
Notes 2, 3, 5, 8 and 20).
/s/ Grassi & Co., CPAs, P.C.
GRASSI & CO., CPAs, P.C.
New York, New York
September 28, 2001
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
------
June 30,
-----------------------------
2001 2000
------------ -------------
Current Assets:
Cash and cash equivalents $ 14,630,334 $ 11,810,519
Marketable securities 6,085,266 11,484,176
Accounts receivable - net 7,450,284 8,025,940
Accounts receivable - related medical
practices 6,245,110 6,362,722
Costs and estimated earnings in excess of
billings on uncompleted contracts 1,768,856 968,159
Inventories 3,725,375 3,536,169
Investment in sales-type leases with related
parties 191,304 57,832
Investment in sales-type lease 119,549 -
Prepaid expenses and other current assets 903,751 604,059
------------ ------------
Total Current Assets 41,119,829 42,849,576
Restricted Cash 5,500,000 5,000,000
Property and Equipment - Net 10,637,397 11,227,454
Advances and Notes to Related Parties,
Net of discounts and allowance for
doubtful accounts of $316,035 and $904,000
at June 30, 2001 and 2000, respectively 1,559,159 1,158,998
Investment in Sales-Type Leases with Related
parties 2,513,703 872,603
Investment in Sales-Type Lease 861,249 -
Notes Receivable, Net of allowance for
doubtful accounts of $-0- and $477,456 at
June 30, 2001 and 2000, respectively 375,000 500,810
Excess of Cost Over Net Assets of
Businesses Acquired, Net of accumulated
amortization of $3,935,551 and $2,716,859
at June 30, 2001 and 2000, respectively 20,438,298 21,656,990
Other Intangible Assets, Net 1,853,506 1,035,924
Other Assets 297,272 296,682
------------ ------------
Total Assets $ 85,155,413 $ 84,599,037
============ ============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
June 30,
------------------------------
2001 2000
------------ -------------
Current Liabilities:
Current portion of long-term
debt and capital leases $ 6,634,863 $ 6,224,727
Accounts payable 3,020,832 1,738,847
Other current liabilities 6,430,757 8,966,929
Customer advances 1,672,522 582,551
Income taxes payable 764,884 896,913
Billings in excess of costs
and estimated earnings on
uncompleted contracts 351,592 -
Convertible debentures 4,500,000 -
------------ ------------
Total Current Liabilities 23,375,450 18,409,967
Long-term Debt and Capital Leases,
Less Current Maturities 10,109,286 14,744,459
Deferred Revenue - License Fee 9,360,000 -
Other Liabilities 327,411 138,338
------------ ------------
Total Liabilities 43,172,147 33,292,764
------------ ------------
Minority Interest 152,972 21,515
------------ ------------
Commitments, Contingencies and
Other Matters (Notes 1, 2,
3, 5, 11, 12, 13, 16 and 21)
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
(Continued)
June 30,
----------------------------
2001 2000
------------ ------------
Stockholders' Equity:
Common stock - $.0001 par value; authorized
- 85,000,000 and 60,000,000 shares;
issued - 59,524,455 and 56,315,471
shares at June 30, 2001 and 2000,
respectively; outstanding - 59,233,391
and 56,026,207 shares at June 30,
2001 and 2000, respectively $ 5,952 $ 5,631
Class B common stock (10 votes per share) -
$.0001 par value; authorized - 4,000,000
shares; issued and outstanding - 4,211
shares at June 30, 2001 and 2000, respectively - -
Class C common stock (25 votes per share) -
$.0001 par value; authorized - 10,000,000
shares; issued and outstanding - 9,562,824
shares at June 30, 2001 and 2000 956 956
Class A non-voting preferred stock - $.0001
par value; authorized - 8,000,000 shares;
issued and outstanding - 7,836,287 shares
at June 30, 2001 and 2000 784 784
Preferred stock - $.001 par value;
authorized - 10,000,000 shares; issued
and outstanding - none - -
Paid-in capital in excess of par value 104,984,020 98,581,757
Accumulated other comprehensive income 84,133 (264,808)
Accumulated deficit (60,000,686) (44,816,824)
Notes receivable from stockholders (1,040,457) (1,338,005)
Unearned compensation (1,529,018) (213,374)
Treasury stock - 291,064 and 289,264 shares
of common stock at June 30, 2001 and 2000,
respectively (675,390) (671,359)
------------ ------------
Total Stockholders' Equity 41,830,294 51,284,758
------------ ------------
Total Liabilities and Stockholders' Equity $ 85,155,413 $ 84,599,037
============ ============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30,
-----------------------------------------------
2001 2000 1999
------------- -------------- -------------
Revenues
Product sales - net $ 3,370,826 $ 1,606,229 $ 3,230,467
Product sales - related parties - net 2,686,646 1,752,298 150,000
Service and repair fees - net 2,016,337 1,692,537 2,301,488
Patient revenue - net 18,429,598 16,953,404 13,431,480
Management and other fees - related
medical practices - net 17,531,894 17,069,329 17,831,609
License fees and royalties 2,424,000 920,000 42,000
------------- -------------- -------------
Total Revenues - Net 46,459,301 39,993,797 36,987,044
------------- -------------- -------------
Costs and Expenses
Costs related to product sales 3,206,385 2,281,709 4,786,773
Costs related to product sales -
related parties 2,956,668 2,141,207 145,030
Costs related to service and repair fees 2,361,026 2,396,609 2,697,695
Costs related to patient revenue 13,579,824 11,862,405 8,894,414
Costs related to management and other
fees - related parties 9,879,295 11,929,139 12,867,770
Research and development 5,866,421 5,532,325 6,647,555
Selling, general and administrative 19,118,276 16,211,414 14,383,842
Compensatory element of stock issuances for
selling, general and administrative expenses 4,044,826 1,929,706 275,242
Provision for bad debts 442,505 177,162 628,836
Amortization of excess of cost over
net assets of businesses acquired 1,218,692 1,218,693 1,225,942
------------- -------------- -------------
Total Costs and Expenses 62,673,918 55,500,369 52,553,099
------------- -------------- -------------
Loss from Operations (16,214,617) (15,506,572) (15,566,055)
Interest Expense (1,255,440) (1,710,188) (2,051,290)
Investment Income 1,841,869 1,919,744 2,110,780
Other Income 964,488 4,655,375 1,001,119
Minority Interests in Income of partnerships (480,166) (270,669) (300,235)
------------- -------------- -------------
Loss Before Provision (Benefit) for Taxes (15,143,866) (10,912,310) (14,805,681)
Provision (Benefit) for Income Taxes 39,996 43,677 (589,918)
------------- -------------- -------------
Net Loss $(15,183,862) $(10,955,987) $(14,215,763)
============= ============== =============
Basic and Diluted Net Loss Per Share $(.22) $(.17) $(.22)
===== ===== =====
Weighted Average Number of Shares 68,633,758 66,304,716 64,071,151
Outstanding ============= ============== =============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2001
Class A
Non- Paid-in
Per Class A Common Stock Class C Voting Capital in Treasury
Share -------------------- Common Preferred Excess of Stock
Amount Shares Amount Stock Stock Par Value Amount
------ ---------- -------- --------- --------- ------------ ----------
Balance - June 30, 2000 $ - 56,315,471 $ 5,631 $ 956 $ 784 $98,581,757 $ (671,359)
Net loss - - - - - - -
Other comprehensive income,
net of tax:
Unrealized losses on
securities arising
during the year,
net of tax - - - - - - -
Less:
Reclassification
adjustment
for (gains)losses
included in net loss - - - - - - -
Exercise of stock options 1.17 24,000 2 - - 28,170 -
Purchase of common stock 1.44 - - - - - (4,031)
Stock issued to employees
under stock bonus plans 1.61 1,636,602 164 - - 2,636,417 -
Issuance of stock for
professional services 1.50 435,976 44 - - 653,895 -
Shares returned in
cancellation of notes
receivable - - - - - - -
Issuance of stock under
consulting contracts 1.77 923,482 92 - - 1,632,980 -
Issuance of stock for
research and development
expenses 1.87 183,924 18 - - 344,839 -
Issuance of stock for note
receivable shareholders 2.06 5,000 1 - - 10,311 -
Value assigned to
warrants issued in
debt financing 1.14 - - - - 1,095,651 -
Net reduction in notes
receivable from
stockholders - - - - - - -
Amortization of unearned
compensation - - - - - - -
---------- -------- --------- -------- ------------ ----------
BALANCE - JUNE 30, 2001 59,524,455 $ 5,952 $ 956 $ 784 $104,984,020 $(675,390)
========== ======== ========= ======== ============ ==========
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2001
Notes Accumulated
Receivable Other
from Unearned Comprehensive Accumulated Comprehensive
Stockholders Compensation Income Deficit Total Income (Loss)
------------ ------------ ------------- ------------- ------------ --------------
Balance - June 30, 2000 $(1,338,005) $ (213,374) $ (264,808) $(44,816,824) $51,284,758 -
Net loss - - - (15,183,862) (15,183,862) $ (15,183,862)
Other comprehensive
income, net of tax:
Unrealized gains on
securities arising during
the year, net of tax - - 342,050 - - 342,050
Less: Reclassification
adjustment for
(gains) losses
included in net loss - - 6,891 - 348,941 6,891
Exercise of stock options - - - - 28,172 -
Purchase of common stock - - - - (4,031) -
Stock issued to employees
under stock bonus plans - - - - 2,636,581 -
Issuance of stock for
professional services - - - - 653,939 -
Shares returned in
cancellation of notes
receivable - - - - - -
Issuance of stock under
consulting contracts - (1,247,813) - - 385,259 -
Issuance of stock for research
and development expenses - - - - 344,857 -
Issuance of stock for notes
receivable shareholders (10,312) - - - - -
Value assigned to warrants
in debt financing - (1,095,651) - - - -
Net reduction in notes
receivable from
stockholders 307,860 - - - 307,860 -
Amortization of unearned
Compensation - 1,027,820 - - 1,027,820 -
------------ ------------ ------------- ------------- ------------ --------------
$(1,040,457) $(1,529,018) $ 84,133 $(60,000,686) $41,830,294 $ (14,834,921)
BALANCE - JUNE 30, 2001 ============ ============ ============= ============= ============ ==============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2000
Class A
Non- Paid-in
Per Class A Common Stock Class C Voting Capital in Treasury
Share -------------------- Common Preferred Excess of Stock
Amount Shares Amount Stock Stock Par Value Amount
------ ---------- -------- -------- --------- ----------- -----------
Balance - June 30, 1999 $ - 53,793,042 $ 5,378 $ 956 $ 784 $95,385,863 $ (592,239)
Net loss - - - - - - -
Other comprehensive income,
net of tax:
Unrealized losses on
securities arising
during the year, net
of tax - - - - - - -
Less: Reclassification
adjustment for (gains)
losses included in net
loss - - - - - - -
Exercise of stock options 1.13 389,000 39 455,780 -
Purchase of common stock .95 - - - - - (79,120)
Stock issued to employees
under stock bonus plans 2.00 193,523 20 - - 396,662 -
Issuance of stock for
professional services 1.51 490,000 49 - - 742,323 -
Shares returned in
cancellation of notes
receivable - - - - - - -
Issuance of stock under
consulting contracts 1.07 1,429,574 143 - - 1,539,378 -
Issuance of stock for
acquisition of Central
Health Care 3.19 19,332 2 - - 61,751 -
Net reduction in notes
receivable from
stockholders - - - - - - -
Amortization of unearned
compensation - - - - - - -
Conversion of Class B
common stock to Class A
common stock - 1,000 - - - - -
---------- -------- -------- --------- ----------- ----------
BALANCE - JUNE 30, 2000 56,315,471 $ 5,631 $ 956 $ 784 $98,581,757 $ (671,359)
========== ======== ======== ========= =========== ==========
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2000
Notes Accumulated
Receivable Other Comprehensive
from Unearned Comprehensive Accumulated Income
Stockholders Compensation Income Deficit Total (Loss)
------------ ------------ ------------- ------------- ------------ -------------
Balance - June 30, 1999 $(1,226,148) $ (206,878) $ (203,106) $(33,860,837) $59,303,773
Net loss - - - (10,955,987) (10,955,987) $ (10,955,987)
Other comprehensive income,
net of tax:
Unrealized losses on
securities arising
during the year, net
of tax - - (47,830) - (47,830) (47,830)
Less: Reclassification
adjustment for (gains)
losses included in net
loss - - (13,872) - (13,872) (13,872)
Exercise of stock options (391,250) - - - 64,569 -
Purchase of common stock - - - - (79,120) -
Stock issued to employees
under stock bonus plans - - - - 396,682 -
Issuance of stock for
professional services - - - - 742,372 -
Shares returned in
cancellation of notes
receivable - - - - - -
Issuance of stock under
consulting contracts - (726,962) - - 812,599 -
Issuance of stock for
acquisition of Central
Health Care - - - - 61,753 -
Net reduction in notes
receivable from
stockholders 279,393 - - - 279,393 -
Amortization of unearned
compensation - 720,466 - - 720,466 -
Conversion of Class B
common stock to Class A
common stock - - - - - -
------------ ------------ ------------- ------------- ------------ -------------
BALANCE - JUNE 30, 2000 $(1,338,005) $ (213,374) $ (264,808) $(44,816,824) $51,284,758 $ (11,017,689)
============ ============ ============= ============= ============ =============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 1999
Class A
Non- Paid-in
Per Class A Common Stock Class C Voting Capital in Treasury
Share -------------------- Common Preferred Excess of Stock
Amount Shares Amount Stock Stock Par Value Amount
------ ---------- -------- -------- --------- ----------- -----------
Balance - June 30, 1998 $ - 52,954,465 $ 5,294 $ 956 $ 784 $94,502,717 $ (395,445)
Net loss - - - - - - -
Other comprehensive income,
net of tax:
Unrealized losses on
securities arising
during the year, net
of tax - - - - - - -
Less: Reclassification
adjustment for losses
included in net loss - - - - - - -
Purchase of common stock 2.03 - - - - - (196,794)
Stock issued to employees
under stock bonus plans 1.54 161,180 16 - - 206,267 -
Issuance of stock for
professional services - 463,161 47 - - 664,609 -
Shares returned in
cancellation of notes
receivable - (190,000) (19) - - (539,357) -
Issuance of stock under
consulting contracts 1.37 202,018 20 - - 275,817 -
Issuance of stock for
acquisition of Central
Health Care 1.37 202,018 20 - - 275,810 -
Net change in notes
receivable from
stockholders - - - - - - -
Amortization of unearned
compensation - - - - - - -
Conversion of Class B
common stock to Class A
common stock - 200 - - - - -
---------- -------- -------- --------- ----------- -----------
BALANCE - JUNE 30, 1999 53,793,042 $ 5,378 $ 956 $ 784 $95,385,863 $ (592,239)
========== ======== ======== ========= =========== ===========
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 1999
Notes Accumulated
Receivable Other Comprehensive
from Unearned Comprehensive Accumulated Income
Stockholders Compensation Income Deficit Total (Loss)
------------ ------------ ------------- ------------- ------------ --------------
Balance - June 30, 1998 $(1,854,450) $ - $ (42,296) $(19,645,074) $72,572,486
Net loss - - - (14,215,763) (14,215,763) $(14,215,763)
Other comprehensive income,
net of tax:
Unrealized losses on
securities arising
during the year, net
of tax - - (194,647) - (194,647) (194,647)
Less: Reclassification
adjustment for losses
included in net loss - - 33,837 - 33,837 33,837
Purchase of common stock - - - - (196,794)
Stock issued to employees
under stock bonus plans - - - - 206,283
Issuance of stock for
professional services - - - - 664,656
Shares returned in
cancellation of notes
receivable 539,376 - - - -
Issuance of stock under
consulting contracts - (275,837) - - -
Issuance of stock for
acquisition of Central
Health Care - - - - 275,830
Net change in notes
receivable from
stockholders 88,926 - - - 88,926
Amortization of unearned
compensation - 68,959 - - 68,959
Conversion of Class B
common stock to Class A
common stock - - - - -
------------ ------------ ------------- ------------- ------------ --------------
BALANCE - JUNE 30, 1999 $(1,226,148) $ (206,878) $ (203,106) $(33,860,837) $59,303,773 $(14,376,573)
============ ============ ============= ============= ============ ==============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30,
-----------------------------------------------
2001 2000 1999
------------- -------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(15,183,862) $ (10,955,987) $(14,215,763)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Minority interest in income of
partnerships 480,166 270,669 300,235
Depreciation and amortization 4,712,767 4,670,473 4,657,819
Amortization of unearned license fee (2,340,000) - -
License fee 11,700,000 - -
Gain on sale of partnership interest (750,000) - -
Issuance of stock for research and
development expenses 344,839 - -
Gain on sale of equipment (150,000) - (53,573)
Imputed interest on deferred payment
obligations 52,087 397,521 482,716
Provision for bad debts 442,505 177,162 628,836
Compensatory element of stock
issuances 4,049,210 1,929,706 275,242
Stock issued for professional services 653,895 742,372 664,656
Liabilities assumed by purchaser
on sale of subsidiary - (824,394) -
Deferred income taxes - - (793,794)
(Increase) decrease in operating
assets, net:
Accounts receivable 215,656 (2,659,218) 643,202
Accounts receivable - related
parties 35,107 2,030,128 (3,431,425)
Notes receivable 125,810 (476,014) 40,955
Costs and estimated earnings
in excess of billings on
uncompleted contracts (800,697) 495,291 (629,835)
Inventories (189,206) 701,609 (724,156)
Sales-type lease receivable -
related party (1,895,000) (935,000) -
Sales-type lease receivable (1,083,192) 4,565 -
Principal payments received on
sales-type lease - related
parties 120,428 - -
Principal payments received on
sales-type lease 102,394 - -
Prepaid expenses and other current
assets (299,692) 97,374 (415,468)
Other assets (590) (3,064) 239,817
Receivables and advances to
related parties (400,161) 275,691 65,425
Increase (decrease) in operating
liabilities, net:
Accounts payable 1,281,985 (434,425) 372,374
Other current liabilities (1,487,133) (674,669) 56,758
Customer advances 1,089,971 487,033 (574,213)
Billings in excess of costs
and estimated earnings on
uncompleted contracts 351,592 - (31,032)
Other liabilities 189,073 6,709 17,966
Income taxes payable (52,029) (60,227) 2,498
------------- -------------- -------------
NET CASH (USED IN) PROVIDED
BY OPERATING ACTIVITIES 1,315,923 (4,736,695) (12,420,760)
------------- -------------- -------------
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30,
-----------------------------------------------
2001 2000 1999
------------- -------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in marketable securities $ 5,747,851 $ 8,651,820 $ (106,676)
Expenditures for acquisitions - - (2,651,665)
Purchases of property and equipment (2,556,982) (2,807,264) (4,774,603)
Costs of capitalized software development (752,285) (361,323) -
Proceeds from sale of equipment 150,000 - -
Cost of patents and copyrights - - (19,686)
------------- -------------- -------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 2,588,584 5,483,233 (7,552,630)
------------- -------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from convertible debenture 4,500,000 - -
Proceeds from long-term debt 500,000 - -
Increase in restricted cash (500,000) - -
Costs in connection with debt financing (270,729) - -
Repayment of borrowings and capital
lease obligations (5,739,395) (3,750,205) (2,097,596)
Proceeds from exercise of stock options
and warrants 28,172 64,569 -
Proceeds from sale of partnership interest 750,000 - -
Dividends paid - - (3,909,366)
Purchase of common stock (4,031) (79,120) (196,794)
Distributions to holders of minority
interests (348,709) (347,067) (398,754)
------------- -------------- -------------
NET CASH USED IN FINANCING ACTIVITIES (1,084,692) (4,111,823) (6,602,510)
------------- -------------- -------------
INCREASE (DECRERASE) IN CASH 2,819,815 (3,365,285) (26,575,900)
CASH - BEGINNING OF YEAR 11,810,519 15,175,804 41,751,704
------------- -------------- -------------
CASH - END OF YEAR $ 14,630,334 $ 11,810,519 $ 15,175,804
============= ============== =============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
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
physicians' practices and other medical providers, including diagnostic imaging
centers and ancillary services. The services provided by the Company include
development, administration, leasing of office space, facilities and medical
equipment, provision of supplies, staffing and supervision of non-medical
personnel, legal services, accounting, billing and collection and the
development and implementation of practice growth and marketing strategies.
HMCA entered the physician and diagnostic management services business through
the consummation of two acquisitions effective June 30, 1997, two acquisitions,
which were consummated during fiscal 1998, and one acquisition consummated in
August of 1998. The acquired companies in all cases were actively engaged in the
business of managing medical providers. The medical providers are diagnostic
imaging centers, principally MRI scanning centers, multi-specialty practices and
primary care practices.
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 and partnerships and certain medical
practices managed as a result of the 1998 acquisitions of A&A Services, Inc. and
Dynamic Health Care Management, Inc. Through its contractual arrangements with
such medical practices, HMCA has established a controlling financial interest in
such medical practices by meeting the six requirements of Emerging Issues Task
Force ("EITF") Consensus No. 97-2. The six requirements met by HMCA that
establish a controlling financial interest are as follows:
Term
----
The contractual agreement between HMCA and the medical practices have
a term of 10 years or more.
The contractual agreements are not terminable by the medical practice
except in the case of gross negligence, fraud, or other illegal acts
by HMCA, or the bankruptcy of HMCA.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Principles of Consolidation (Continued)
---------------------------
Control
-------
HMCA has the exclusive authority over all decision making related to
both of the following:
Ongoing, major, or central operations of the medical practices,
except for the dispensing of medical services.
Total practice compensation of the licensed medical professionals
as well as the ability to establish and implement guidelines for
the selection, hiring and firing of these professionals.
Financial Interest
------------------
HMCA has a significant financial interest in the medical practices
that meets both of the following criteria:
The financial interest is unilaterally salable or transferable by
HMCA.
The financial interest provides HMCA with the right to receive
income, both as ongoing fees and as proceeds from the sale of its
interest in the medical practices, in an amount that fluctuates
based on the performance of the operations of the medical
practices and the change in the fair value thereof.
Accordingly, HMCA has commenced consolidation of such medical practices in 1998.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
Net revenue from the consolidated medical practices including Superior Medical
Services, Inc., Alliance Physical Medicine and Rehabilitation, P.C., Bellmore
Medical Practice, P.C. and Dr. Giovanni Marciano and Dr. Glenn Muraca,
Physicians, P.C. and the Company's wholly-owned Florida multi-specialty practice
are reflected in the accompanying Consolidated Statement of Operations under the
caption "Patient Revenues - Net". Net revenue from the management of related
medical practices is reflected in the accompanying Consolidated Statements of
Operations under the caption "Management and Other Fees - Related Medical
Practices - Net".
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Principles of Consolidation (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.
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 re-evaluates such designations as of each balance sheet date. At June 30,
2001, 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.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
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 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.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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 from sales-type leases are recognized when collectibility of the minimum
lease payments is reasonably predictable and no important uncertainties surround
the amount of unreimbursable costs yet to be incurred by the Company as lessor
under the lease. The minimum lease payments, plus the unguaranteed residual
value accruing to the benefit of the Company as lessor, are recorded as the
gross investment in the lease. The difference between the gross investment in
the lease and the sum of the present value of the minimum lease payments and
unguaranteed residual value, accruing to the Company's benefit as lessor, are
recorded as unearned income.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition (Continued)
-------------------
Revenue under management and lease contracts is recognized based upon
contractual agreements for management services rendered by the Company and
leases of medical equipment under various agreements with related medical
providers (the "PC's"). 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 and equipment leased, 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.
Patient revenue from consolidated physician practices and the Company's
wholly-owned Florida multi-specialty practice is recorded in the period that the
services are rendered at established rates reduced by provisions for doubtful
accounts and contractual adjustments. Such adjustments represent the difference
between charges at established rates and estimated recoverable amounts and are
recognized in the period the services are rendered. Any differences between
estimated contractual adjustments and actual final settlements are recognized as
contractual adjustments in the year final settlements are determined.
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.
During the year ended June 30, 2001, the Company acquired a minority interest in
a development stage company through the issuance of 270,000 shares valued at
344,857. The entire amount of the purchase price was charged to research and
development expenses.
Advertising Costs
-----------------
Advertising costs are expensed as incurred.
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.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Earnings (Loss) Per Share
-------------------------
Basic earnings (loss) per share is computed based on weighted average shares
outstanding and excludes any potential dilution. 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 4,036,000, 427,000 and 388,000 shares of common
stock were outstanding at June 30, 2001, 2000 and 1999, 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.
Additionally, convertible debentures, which are convertible into 2,200,000
shares at June 30, 2001 were antidilutive.
Cash and Cash Equivalents
-------------------------
The Company considers all short-term highly liquid investments with a maturity
of three months or less when purchased to be cash or cash equivalents.
At June 30, 2001, the Company had cash deposits of $13,877,660 in excess of
federally insured limits.
Restricted Cash
---------------
At June 30, 2001 and 2000, $5,500,000 of cash has been pledged as collateral on
an outstanding bank loan and has been classified as restricted cash on the
accompanying balance sheet.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Value of Financial Instruments
-----------------------------------
The financial statements include various estimated fair value information at
June 30, 2001, 2000 and 1999, 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.
Stock-Based Compensation
------------------------
The Company accounts for its compensation and stock option plans in accordance
with the provisions of Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. As such,
compensation expense would be recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price. In accordance
with SFAS No. 123, Accounting for Stock-Based Compensation, the Company provides
proforma net income and proforma earnings per share disclosures for employee
stock option grants, as if the fair-value-based method defined in SFAS No. 123
had been applied.
Stock-based compensation issued to employees and consultants is valued based on
the quoted market price of the common stock at the time of issuance.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Deferred and Unearned Financing Costs
-------------------------------------
Financing costs in connection with the May 24, 2001 convertible debenture
offering is being amortized over one-year period of the obligation.
Comprehensive Income (Loss)
---------------------------
Comprehensive income (loss) generally includes all changes in equity during a
period, except those resulting from investments by shareholders and
distributions to shareholders.
Computer Software
-----------------
Effective July 1, 1998, the Company adopted the provisions of 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
requires the capitalization of certain costs. No adjustments were required as a
result of this adoption.
Recent Accounting Pronouncements
--------------------------------
In fiscal 2001, the Company adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of SFAS No.
133", and SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities an amendment of SFAS No. 133". These statements
outline the accounting treatment for all derivative activity and the adoption
did not have a significant effect on the Company's consolidated results of
operations or financial position.
In fiscal 2001, the Company adopted the Securities and Exchange Commission Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition". SAB 101 provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements. The adoption of SAB 101 had no effect on the Company's consolidated
results of operations or financial position.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
--------------------------------
In June 2001, the Financial Accounting Standards Board 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, which is expected to be
June 30, 2002. The Company has six months from the date it adopts SFAS No. 142
to test for impairment and any impairment charge resulting from the initial
application of the new rule must be classified as the cumulative effect of a
change in accounting principle. Thereafter, goodwill and intangible assets with
indeterminate lives should be tested for impairment annually or as needed.
Management is currently assessing the impact that the adoption of SFAS No. 142,
but has not yet determined the impact that the adoption will have on its
consolidated financial statements.
Reclassifications
-----------------
Certain prior year balances have been reclassified to conform with the current
year presentation.
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, and an
additional 576,000 shares of the Company's common stock were issued in June of
1998 valued at $923,442. The additional 576,000 shares were issued in connection
with a one-year earnout provision, which was achieved during fiscal 1998.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 3 - ACQUISITIONS (Continued)
Affordable Diagnostics, Inc. (Continued)
----------------------------
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 $3,719,000 and is being
amortized on a straight-line basis over 20 years. The accompanying consolidated
financial statements include the operations of Affordable from the date of the
acquisition (June 30, 1997).
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. The entire $1,096,000 was
charged to operations during the year ended June 30, 1998.
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.
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. ("Central"), a
management service organization ("MSO"), operating in Westchester County, New
York. The purchase price was determined based on a multiple of the net positive
cash flow from the acquired business over the succeeding twelve-month period.
The purchase price was determined to be $1,454,160, $601,665 payable in cash,
$551,665 payable in notes, assumption of liabilities aggregating $25,000, and
the balance payable in shares of common stock of FONAR valued at $275,830.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 3 - ACQUISITIONS (Continued)
Central Health Care Management Service, Inc. (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 $1,254,160 and is being
amortized on a straight-line basis over 20 years. The accompanying consolidated
financial statements include the operations of Central from the date of the
acquisition (January 23, 1998).
In April of 1999, HMCA entered into consulting agreements with the former
shareholders of Central. Under such agreements, 202,018 registered shares of
FONAR's common stock, valued at $275,837, were issued pursuant to consulting
agreements covering the one-year period commencing April 1999. For the period
ended June 30, 2001 $206,878 was charged to operations related to these
agreements.
A&A Services, Inc.
------------------
On March 20, 1998, the Company's physician and diagnostic 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.
Contemporaneously with the acquisition of the management company, Dr. Damadian
acquired 100% of the stock of the medical practices for nominal consideration.
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.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 3 - ACQUISITIONS (Continued)
A&A Services, Inc. (Continued)
------------------
Additional consideration is payable to the former shareholders of A&A, if
operating income, as defined for the acquired business, exceeds $2.3 million in
any of the five years following the closing as follows: in each year, 75% of
operating income, as defined, between $2.3 million and $2.8 million; 50% of
operating income, as defined, between $2.8 million and $3.5 million, and 25% of
operating income, as defined, in excess of $3.5 million. The contingent
additional purchase price is not determinable as of June 30, 2001 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. No
additional payments were due under the earnout provision for the years ended
June 30, 2001, 2000 and 1999.
Dynamic Health Care Management, Inc.
------------------------------------
On August 20, 1998, the Company's physician and diagnostic 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 $1,216,230 bearing interest
at 7.5% per annum, payable in sixty monthly installments, commencing one month
following the closing date, a note payable for $2,870,000 bearing interest at
7.5% per annum payable in three annual installments of principal and interest
commencing one year after the closing date, and promissory 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.
Contemporaneously with the acquisition of the management company, Dr. Damadian
acquired 100% of the stock of the medical practices for nominal consideration.
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.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 4 - MARKETABLE SECURITIES
The following is a summary of marketable securities at June 30, 2001 and 2000:
2001
-------------------------------------------
Unrealized
Holding Fair Market
Cost Gain Value
----------- ---------- ------------
U.S. Government Obligations $ 4,128,191 $ 63,849 $ 4,192,039
Corporate and government 1,872,942 20,285 1,893,227
agency bonds ----------- ---------- ------------
$6,001,132 $ 84,134 $ 6,085,266
=========== ========== ============
2000
-------------------------------------------
Unrealized
Holding Fair Market
Cost Loss Value
----------- ---------- ------------
U.S. Government Obligations $10,198,273 $(210,045) $ 9,988,228
Corporate and government
agency bonds 1,550,711 (54,763) 1,495,948
----------- ---------- ------------
$11,748,984 $(264,808) $ 11,484,176
=========== ========== ============
All debt securities are due within five years. Of the cost, at June 30, 2001,
$512,110 is due within one year.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 5 - ACCOUNTS RECEIVABLE AND ACCOUNTS RECEIVABLE - RELATED MEDICAL
PRACTICES, NET
Accounts receivable and accounts receivable - related medical practices, net are
comprised of the following:
As of June 30, 2001
-------------------------------------------------
Allowance
For Doubtful
Accounts and
Gross Contractual
Receivable Allowances Net
----------- ------------ ----------
Receivable from equipment $ 1,885,071 $ 1,033,331 $ 849,740
sales and service
contracts
Receivable from medical 16,899,702 10,299,158 6,600,544
services
----------- ------------ ----------
$18,784,773 $ 11,332,489 $7,450,284
=========== ============ ==========
Receivable from related PC's $ 6,783,407 $ 538,297 $6,245,110
=========== ============ ==========
As of June 30, 2000
-------------------------------------------------
Allowance
For Doubtful
Accounts and
Gross Contractual
Receivable Allowances Net
----------- ------------ ----------
Receivable from equipment $ 2,036,960 $ 788,331 $1,248,629
sales and service
contracts
Receivable from medical 12,774,781 5,997,470 $6,777,311
services
----------- ----------- ----------
$14,811,741 6,785,801 $8,025,940
=========== =========== ==========
Receivable from related PC's $ 6,516,454 $ 153,732 $6,362,722
=========== =========== ==========
The Company's customers are concentrated in healthcare industry.
The Company's receivable from the related PC's substantially consists 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.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 5 - ACCOUNTS RECEIVABLE AND ACCOUNTS RECEIVABLE - RELATED PARTIES, NET
(Continued)
The Company's receivables from medical services consist of receivables from
patients and third-party payors for medical services provided by consolidated
physicians' practices and the Company's wholly owned Florida multi-specialty
practice.
Collection by the Company of its accounts receivable may be impaired by the
uncollectibility of medical fees from third party payors, particularly insurance
carriers covering automobile no-fault and workers compensation claims due to
longer payment cycles and rigorous informational requirements. Approximately
56%, 48% and 33%, respectively, of the medical practices' 2001, 2000 and 1999
net revenues 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 accounted for approximately 38%, 43% and 48%
of the consolidated net revenues for the years ended June 30, 2001, 2000 and
1999, respectively.
Unaudited Financial Information of Unconsolidated Managed Medical Practices
---------------------------------------------------------------------------
Summarized financial information related to the 24 unconsolidated medical
practices managed by the Company is not available. Substantially all of these
medical practice books and records are maintained on the cash basis, and
depreciates its assets on an accelerated tax basis and has a December 31 year
end.
During the year ended June 30, 2001, the 24 unconsolidated medical practices had
collections of approximately $21.5 million. As of June 30, 2001, the estimated
net realizable value of the medical receivables of these medical practices
approximated $9.7 million.
NOTE 6 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND CUSTOMER
ADVANCES
1) Information relating to uncompleted contracts as of June 30, 2001 and 2000
is as follows:
As of June 30,
---------------------------
2001 2000
---------- ----------
Costs incurred on uncompleted
contracts $2,248,706 $ 829,441
Estimated earnings 560,558 138,718
---------- ----------
2,809,264 968,159
Less: Billings to date 1,392,000 -
---------- ----------
$1,417,264 $ 968,159
========== ==========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 6 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND CUSTOMER
ADVANCES (Continued)
Included in the accompanying consolidated balance sheets under the following
captions:
As of June 30,
---------------------------
2001 2000
---------- ----------
Costs and estimated earnings in
excess of billings on
uncompleted contracts $1,768,856 $ 968,159
Billings in excess of costs and
estimated earnings on
uncompleted contracts 351,592 -
---------- ----------
$1,417,264 $ 968,159
========== ==========
2) Customer advances consist of the following:
As of June 30,
---------------------------
2001 2000
---------- ----------
Total advances from customers $3,064,522 $ 582,551
Less: Advances from customers
on contracts under
construction 1,392,000 -
---------- ----------
$1,672,522 $ 582,551
========== ==========
NOTE 7 - INVENTORIES
Inventories included in the accompanying consolidated balance sheets consist of:
As of June 30,
---------------------------
2001 2000
---------- ----------
Purchased parts, components and
supplies $3,049,879 $2,916,753
Work-in-process 675,496 619,416
---------- ----------
$3,725,375 $3,536,169
========== ==========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 8 - INVESTMENT IN SALES-TYPE LEASES
During the year ended June 30, 2001, the Company entered into two lease
agreements, totaling $1,895,000, with related parties for MRI scanners, which
are considered sales-type leases. The leases are payable in 120 monthly
installments of $12,356 and $11,903, respectively, including interest at 10% and
8.5% per annum. The lessees can also elect to pay lump sums of $581,544 and
$580,149, respectively, at the end of the 60-months. If the lease term is
extended beyond 60 months, the lease may elect to purchase the scanner at the
end of the second 60-month period for a purchase price of $1.
During the year ended June 30, 2001, the Company entered into a $1,050,000 lease
agreement with an outside party for an MRI scanner, which is considered
sales-type lease. The lease is payable in 75 monthly installments of $18,389
each, plus at the end of the 25-month lease, the lessee can elect to continue
the lease for an additional five years, at a monthly payment of $18,389,
including interest at 12.5% per annum, or pay a lump sum of $200,000.
During the year ended June 30, 2000, the Company entered into a $935,000 lease
agreement with a related party for an MRI scanner which is considered a
sales-type lease. The lease is payable in 120 monthly installments of $12,356,
including interest at 10% per annum. The lessee can also elect to pay a lump sum
of $581,544 at the end of 60 months. If the lease term is extended beyond 60
months, the lease may elect to purchase the scanner at the end of the second
60-month period for a purchase price of $1.
The Company's investment in sales-type lease as at June 30, 2001 and 2000 is as
follows:
As of June 30,
---------------------------
2001 2000
---------- ----------
Net minimum lease payments
receivable $5,029,225 $1,310,548
Less: Unearned income 1,343,420 380,113
---------- ----------
Net Investment in Sales-type Lease $3,685,805 $ 930,435
========== ==========
Current portion $ 310,853 $ 57,832
Non-current portion 3,374,952 872,603
---------- ----------
$3,685,805 $ 930,435
========== ==========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 8 - INVESTMENT IN SALES-TYPE LEASES (Continued)
Future minimum lease payments are as follows:
Years Ended June 30:
-------------------
2002 $ 310,853
2003 329,883
2004 366,611
2005 981,558
2006 1,417,872
279,028
----------
$3,685,805
==========
NOTE 9 - PROPERTY AND EQUIPMENT
Property and equipment, at cost, less accumulated depreciation and amortization,
at June 30, 2001 and 2000, is comprised of:
As of June 30,
---------------------------
2001 2000
---------- ----------
Diagnostic equipment under lease $ 1,263,181 $ 1,263,181
Diagnostic equipment 4,485,217 6,776,653
Research, development and 7,916,447 7,217,601
demonstration equipment 6,265,041 6,106,145
Machinery and equipment 3,222,076 3,181,390
Furniture and fixtures 2,444,947 2,364,088
Equipment under leases 3,185,611 2,572,728
Leasehold improvements ----------- -----------
28,782,520 29,431,786
Less: Accumulated depreciation 18,145,123 18,204,332
and amortization ----------- -----------
$10,637,397 $11,227,454
=========== ===========
Depreciation and amortization of property and equipment for the years ended June
30, 2001, 2000 and 1999 was $3,323,516, $3,237,384 and $3,139,585, respectively.
The equipment under lease has a net book value of $1,684,083 and $1,285,760 at
June 30, 2001 and 2000, respectively.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 10 - OTHER INTANGIBLE ASSETS
Other intangible assets, net of accumulated amortization, at June 30, 2001 and
2000 are comprised of:
As of June 30,
------------------------------
2001 2000
---------- ----------
Capitalized software development costs $2,315,744 $1,560,941
Patents and copyrights 1,125,808 1,125,808
Deferred financing costs 270,729 -
---------- ----------
3,712,281 2,686,749
Less: Accumulated amortization 1,858,775 1,650,825
---------- ----------
$1,853,506 $1,035,924
========== ==========
Capitalized computer software costs are being amortized over 5 years. Patents
costs are being amortized over 17 years. Deferred financing costs are being
amortized over the life of the related debt agreement (see Note 13).
Amortization of other intangible assets for the years ended June 30, 2001, 2000
and 1999 was $207,951, $214,391 and $292,295, respectively, of which $141,727,
$148,167 and $208,098, respectively, relate to amortization expense for software
development costs.
NOTE 11 - CAPITAL STOCK
Common Stock
------------
Cash dividends payable on the common stock shall, in all cases, be on a per
share basis, one hundred twenty percent (120%) of the cash dividend payable on
shares of Class B common stock and three hundred sixty percent (360%) of the
cash dividend payable on a share of Class C common stock. In addition, as
revised pursuant to a legal settlement agreement on April 29, 1997, a special
cash dividend shall be payable in an amount equal to 3-1/4% on first $10
million, 4-1/2% on next $20 million, and 5-1/2% on amounts in excess of $30
million of the amount of any cash awards or settlements received by the Company
in connection with the enforcement by the Company of United States Patent No.
3,789,832 (Apparatus and Method of Detecting Cancer in Tissue). Pursuant to such
dividend entitlement, the Company recorded an obligation of $2,551,146, or
approximately $.05 per share of common stock, during fiscal 1997, which was paid
during 1998 and 1999.
Class B Common Stock
--------------------
Class B common stock is convertible into shares of common stock on a one-for-one
basis. Class B common stock has 10 votes per share. During the year ended June
30, 2000, 1,000 shares of Class B common stock were converted to common stock
leaving 4,211 of such shares outstanding as of June 30, 2000 and 2001.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 11 - CAPITAL STOCK (Continued)
Class C Common Stock
--------------------
On April 3, 1995, the shareholders ratified a proposal creating a new Class C
common stock and authorized the exchange offering of three shares of Class C
common stock for each share of the Company's outstanding Class B common stock.
The Class C common stock has 25 votes per share, as compared to 10 votes per
share for the Class B common stock and one vote per share for the common stock.
The Class C common stock was offered on a three-for-one basis to the holders of
the Class B common stock. Although having greater voting power, each share of
Class C common stock has only one-third of the rights of a share of Class B
common stock to dividends and distributions. Class C common stock is convertible
into shares of common stock on a three-for-one basis. During the year ended June
30, 1996, approximately 3.2 million shares of Class B common stock were
converted to Class C common stock.
Class A Non-Voting Preferred Stock
----------------------------------
On April 3, 1995, the shareholders ratified a proposal consisting of the
creation of a new class of Class A non-voting preferred stock with special
dividend rights and the declaration of a stock dividend on the Company's common
stock consisting of one share of Class A non-voting preferred stock for every
five shares of common stock. The stock dividend was payable to holders of common
stock on October 20, 1995. Class A non-voting preferred stock issued pursuant to
such stock dividend approximates 7.8 million shares.
The Class A non-voting preferred stock is entitled to a special dividend equal
to 3-1/4% of first $10 million, 4-1/2% of next $20 million and 5-1/2% on amount
in excess of $30 million of the amount of any cash awards or settlements
received by the Company in connection with the enforcement of five of the
Company's patents in its patent lawsuits, less the revised special dividend
payable on the common stock with respect to one of the Company's patents.
Pursuant to such dividend entitlement, the Company recorded an obligation of
$5,086,695, or $.65 per share of Class A preferred stock, during fiscal 1997 and
$217,226, or $.03 per share of Class A preferred stock, during fiscal 1996.
During fiscal 1998 and 1999, these dividend obligations were paid.
The Class A non-voting preferred stock participates on an equal per share basis
with the common stock in any dividends declared and ranks equally with the
common stock on distribution rights, liquidation rights and other rights and
preferences (other than the voting rights).
The above described features essentially enable the holders of the Class A
non-voting preferred stock to share in the earnings potential of the Company on
substantially the same basis as the common stock. Accordingly, the Company has
classified the Class A non-voting preferred stock as a common stock equivalent.
Earnings per share and weighted average shares outstanding have been restated to
reflect the Class A non-voting preferred stock dividend.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 11 - CAPITAL STOCK (Continued)
Options
-------
The Company has stock option plans which provide for the awarding of incentive
and non-qualified stock options to employees, directors and consultants who may
contribute to the success of the Company. The options granted vest either
immediately or ratably over a period of time from the date of grant, typically
three or four years, at a price determined by the Board of Directors or a
committee of the Board of Directors, generally the fair value of the Company's
common stock at the date of grant. The options must be exercised within ten
years from the date of grant.
Stock option share activity and weighted average exercise prices under these
plans and grants for the years ended June 30, 2001, 2000 and 1999 were as
follows:
Number of Weighted Average
Shares Exercise Price
--------- ----------------
Outstanding, June 30, 1998 182,735 $ 4.62
Granted 205,000 1.23
Exercised - -
Forfeited - -
--------- ----------------
Outstanding, June 30, 1999 387,735 4.62
Granted 413,000 1.52
Exercised (374,000) 1.15
Forfeited - -
--------- ----------------
Outstanding, June 30, 2000 426,735 2.83
Granted 672,896 1.52
Exercised (24,000) 1.18
Forfeited - -
--------- ----------------
Outstanding, June 30, 2001 1,075,631 $ 2.05
========= ================
Exercisable at:
June 30, 1999 387,735 $ 4.62
June 30, 2000 426,735 $ 2.83
June 30, 2001 402,735 $ 2.93
The exercise price for options outstanding as of June 30, 2001 ranged from $0.75
to $5.00.
On March 10, 1997, HMCA adopted the 1997 Incentive Stock Option Plan, pursuant
to which HMCA authorized the issuance of up to 2,000,000 shares (as adjusted for
the 8,000-for-1 stock split effective December 15, 1998) of the common stock of
HMCA. Options to purchase 1,600,000 shares at an option price of $0.10 per share
(as adjusted) were granted on March 10, 1997. One half of the options granted
will not become exercisable unless and until the earlier of such time as HMCA
successfully completes a public offering of its securities, or HMCA recognizes
at least $10,000,000 in revenues for two consecutive fiscal quarters. The
remainder of the options will not become exercisable until one year thereafter.
The options will expire on March 9, 2007. No options have vested as of June 30,
2001.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 11 - CAPITAL STOCK (Continued)
Options (Continued)
-------
On December 16, 1998, HMCA adopted the 1998 Non-Statutory Stock Option Plan,
pursuant to which HMCA authorized the issuance of up to 500,000 shares of the
common stock of HMCA. Options to purchase 500,000 shares at an option price of
$1.00 per share were granted on December 16, 1998. The options granted will not
become exercisable unless and until such time as HMCA successfully completes a
public offering of its securities. The options will expire on December 15, 2008.
No options have vested as of June 30, 2001.
On December 16, 1998, HMCA adopted the 1998 Incentive Stock Option Plan,
pursuant to which HMCA authorized the issuance of up to 2,000,000 shares of the
common stock of HMCA. Options to purchase 670,000 shares at an option price of
$1.00 per share were granted on December 16, 1998. 470,000 of the options
granted will not become exercisable unless and until such time as HMCA
successfully completes a public offering of its securities, and 200,000 of the
options will not become exercisable until one year thereafter. The options will
expire on December 15, 2008. No options have vested as of June 30, 2001.
Stock option share activity and weighted average exercise prices under the HMCA
plans and grants for the three years ended June 30, 2001, 2000 and 1999 were as
follows:
Number of Weighted Average
Shares Exercise Price
--------- ----------------
Outstanding - June 30, 2000 and 1999 2,770,000 $ .48
Granted - June 30, 2001 - -
--------- ----------------
Outstanding - June 30, 2001 and 2000 2,770,000 $ .48
========= ================
Exercisable at June 30, 2001, 2000 and 1999 - $ -
========= ================
The Company accounts for its stock option plans under APB Opinion No. 25, under
which no compensation cost has been recognized. Had compensation cost for these
plans been determined consistent with FASB Statement No. 123, the Company's net
loss and loss per share would have been effected for the years ended June 30,
2001, 2000 or 1999 as follows:
2001 2000 1999
------------- ------------- ------------
Net Loss:
As reported $(15,183,862) $(10,955,987) $ 14,215,763
Proforma $(15,183,862) $(11,059,237) $ 14,256,763
Loss Per Share:
As reported $(0.22) $(0.17) $(0.22)
Proforma $(0.23) $(0.17) $(0.22)
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 11 - CAPITAL STOCK (Continued)
Options (Continued)
-------
The fair value of the options granted under all plans is estimated at $0.52,
$0.20 and $0.46, respectively, on the date of grant using the Black-Scholes
option-pricing model based on the following assumptions for the years ended June
30, 2001, 2000 and 1999:
2001 2000 1999
All Plans: ------ ------ - ------
Dividend yield 0% 0% 0%
Expected volatility 98% 33% 33%
Expected life (years) 3 3 3
The risk-free interest rates were based upon a rate with maturity equal to
expected term. U.S. Treasury instruments were utilized. The weighted average
interest rate amounted to 5.0%.
Stock Bonus Plans
-----------------
On October 1, 2000 and May 9, 1997, the Board of Directors adopted Stock Bonus
Plans. Under the terms of the Plans, 5,000,000 shares of common stock are
available for the issuance under each plan as bonus or compensation. The stock
bonuses may be awarded no later than September 30, 2010 for the 2000 Plan and
March 31, 2007 for the 1997 Plan.
During fiscal 2001, 2000 and 1999, 3,001,060, 2,148,429 and 826,359 shares,
respectively, were issued under the stock bonus plans, of which 1,636,602,
234,677 and 161,180 shares, respectively, were charged to operations as
compensation expense, 435,976, 490,000 and 463,161 shares, respectively, were
issued for professional services, 5,000, 19,332 and -0- shares, respectively,
were issued in exchange for notes, 923,482, 1,403,420 and 202,018 shares,
respectively, were issued in connection with consulting agreements, and -0-,
1000 and -0- shares, respectively, were issued upon conversion of Class B to
Class A common stock.
Warrants
--------
In connection with the convertible debenture financing completed in May of 2001
(Note 13), the Company granted to the investor and the placement agent warrants
to purchase a total of 959,501 common shares at an exercise price of $1.801 per
share. The warrants are exercisable over a five-year period. The fair value of
the warrants is estimated at $1.14 on the date of grant using the Black-Scholes
pricing model. In addition, the Company granted to the investor callable
warrants to purchase a total of 2,000,000 shares of common stock at fluctuating
prices (Note 13).
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 12 - LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASES
Long-term debt, notes payable and capital leases consist of the following:
As of June 30,
--------------------------
2001 2000
----------- -----------
Construction loan converted into a capital lease
obligation during August 1998. The obligation
requires equal monthly payments aggregating
$13,097, including interest at 13.2% per annum,
through August 2003. The obligation is
collateralized by the related equipment. $ 274,931 $ 387,580
Promissory note payable to a bank,
collateralized by $5 million certificate of
deposit, requiring monthly payments of interest
only, at a variable rate based on the bank's
prime rate (4.56% at June 30, 2001) with payment
of the entire principal due on March 20, 2003. 5,000,000 5,000,000
Note payable to the former shareholders of A&A
Services, Inc. The note calls for 16 quarterly
payments of $300,044, including interest at a
rate of 6%, commencing March 20, 1999. The note
is collateralized by all of the assets of the
acquired business and guaranteed by FONAR. 1,709,406 2,767,060
Note payable to the former shareholder of A&A
Services, Inc. The note calls for 60 equal
monthly installments of principal and interest
of $25,000, including interest at a rate of 6%
per annum, commencing April 20, 1998. The note
is collateralized by all of the assets of the
acquired business and guaranteed by FONAR. 497,199 758,788
Note payable calling for monthly payments of
$9,034, including interest at a rate of 8.875%
through July 2002. The loan is collateralized by
equipment located in Ellwood, Pennsylvania. 101,779 205,262
Note payable to the former shareholders of
Dynamic Health Care Management, Inc. The note
calls for three annual payments of principal,
including interest at a rate of 6%, commencing
August 20, 1999. The note is collateralized by
all of the assets of the acquired business and
guaranteed by FONAR. 972,824 1,877,776
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 12 - LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASES (Continued)
As of June 30,
--------------------------
2001 2000
----------- -----------
Note payable to the former shareholders of
Dynamic Health Care Management, Inc. The note
calls for monthly installments of principal and
interest of $65,417 for the first eight
installments, followed by $16,667 for the
remaining 52 installments. The installments
include interest at a rate of 7.5% per annum.
The note is collateralized by all of the assets
of the acquired business and guaranteed by
FONAR. $ 399,881 $ 564,341
Deferred payment obligation, aggregating
$5,490,000, payable to the former shareholders
of Dynamic Health Care Management, Inc. The
obligation is payable over three years,
commencing August 20, 2000, with interest at
7.5% per annum. The obligation has been
recorded, net of discount of $739,324,
representing the value of the two-year
interest-free provision of this obligation. A
$100,000 principal payment was made in November
1998. The obligation is collateralized by all of
the assets of the acquired business and
guaranteed by FONAR. 3,842,057 5,337,913
Deferred payment obligation, aggregating
$2,000,000, payable to the former shareholder of
A&A Services, Inc. The obligation is payable
over four years, commencing December 20, 2000,
with interest at 6% per annum. The obligation
has been recorded, net of a discount of
$220,000, representing interest imputed at a
rate of 6% over two years. The obligation is
collateralized by all of the assets of the
acquired business and guaranteed by FONAR. 1,277,770 2,000,000
Four promissory notes payable to the former
shareholders of Central Health Care Management
Services, LLC. Each note calls for two equal
annual installments of $11,458, plus interest at
prime rate, plus 2%, per annum (11.50% at June
30, 2000), commencing April 2000. The
obligations under each note are guaranteed by
FONAR. 18,197 68,749
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 12 - LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASES (Continued)
As of June 30,
--------------------------
2001 2000
----------- -----------
Four promissory notes payable to the former
shareholders of Central Health Care Management
Services, LLC. Each note calls for two equal
annual installments of $57,500, plus interest at
prime rate, plus 2% per annum (11.50% at June
30, 2000), commencing March 2000. The
obligations under each note are guaranteed by
FONAR. $ 127,119 $ 283,247
Capital lease requiring monthly payments of
$28,997, including interest at a rate of 9.95%
per anum through April 2004. The loan is
collateralized by the related equipment. 856,055 -
Note payable in monthly installments of $15,686,
including interest at a rate of 9.25% per anum
through February 2003. 289,697 -
Promisory note payable to a bank, collateralized
by $500,000 certificate of deposit, requiring
monthly payments of interest only, at a variable
rate based on the bank's prime rate (6.75% at
June 30, 2001) with a payment of the entire
princiapl due on July 2, 2001. 500,000 -
Capital lease requiring monthly payments of
$12,595, including interest at a rate of 9%
through October 1, 2002. The loan is
collateralized by related equipment. 112,479 247,824
Capital lease dated October 13, 1995 - $513,692,
due $11,173 per month, commencing October 1995,
including interest of 11% for 60 months. The
lease is collateralized by the related
equipment. - 183,243
Capital lease dated June 4, 1996 - $412,550, due
$8,972 per month, commencing July 1996,
including interest of 11% for 60 months. The
lease is collateralized by the related
equipment. - 174,407
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 12 - LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASES (Continued)
As of June 30,
--------------------------
2001 2000
----------- -----------
Other (including capital leases for property and
equipment) 764,755 1,112,996
----------- -----------
16,744,149 20,969,186
Less: Current maturities 6,634,863 6,224,727
----------- -----------
$10,109,286 $14,744,459
=========== ===========
The maturities of long-term debt, including debt in arrears, over the next five
years and thereafter are as follows:
Years Ended
June 30,
-----------
2002 $ 6,634,863
2003 9,518,656
2004 548,156
2005 40,900
2006 1,574
-----------
$16,744,149
===========
NOTE 13 - CONVERTIBLE DEBENTURES
Pursuant to a securities purchase agreement, dated May 24, 2001, between the
Company and an investor group, the Company issued and sold to the investor group
on that date for an aggregate purchase price of $4.5 million:
4% convertible debentures due June 30, 2002 in the aggregate principal
amount of $4.5 million, convertible into shares of the Company's common
stock at a conversion price of $2.047 per share, subject to adjustment.
Purchase warrants to purchase an aggregate of 959,501 shares of the
Company's common stock at an initial exercise price of $1.801 per share,
subject to adjustment; and
Callable warrants to purchase an aggregate of 2,000,000 shares of the
Company's common stock at a fluctuating exercise price which will vary
depending on the market price for the Company's common stock.
In connection with the issuance of the debentures, the Company paid a placement
fee in the amount of $157,500. In addition, the Company issued 300,000 purchase
warrants to the placement agent.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 13 - CONVERTIBLE DEBENTURES (Continued)
The debentures are convertible at the option of the holder at a price of $2.047
per share. If the holders decide not to convert, the debenture is payable in ten
monthly installments of $450,000 commencing October 1, 2001. At the option of
the Company, the principal installments can be either in cash or shares of the
Company's' common stock, valued at the lesser of: a) 90% of the average of the
four lowest closing bid prices during the preceding month, or b) the average of
the four lowest closing bid prices during the preceding calendar month, less
$0.125.
The purchase warrants cover 959,501 shares of common stock and have an exercise
price of $1.801 per share, subject to adjustment. The exercise period extends to
May 24, 2006.
The callable warrants cover 2,000,000 shares of common stock and have a variable
exercise price. Subject to a maximum price of $6.00 per share and a minimum
price of $2.00 per share, which is subject to adjustment, pursuant to the terms
of the warrants, the exercise price will be equal to the average closing bid
price of the Company's common stock for the full calendar month preceding the
date of exercise. The exercise period extends to May 24, 2004.
The Company has the option of redeeming up to 200,000 callable warrants per
month at a price of $0.01 per underlying warrant share, if the average closing
bid price of its common stock is greater than 115% of the warrant price in
effect for five consecutive trading days in any calendar month.
The debentures and warrants provide for proportionate adjustments in the event
of stock splits, stock dividends and reverse stock splits. In addition, the
conversion and exercise prices will be reduced, with certain specified
exceptions, if the Company issues shares at lower prices, then the debenture
conversion or warrant exercise prices, or less than market price for its common
stock.
The terms of the registration rights agreement with the investor requires the
Company to register approximately two times the number of shares necessary to
repay the debentures in common stock at the lower of the market price, as
computed under the agreement, or the conversion price, plus the number of shares
underlying the warrants.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 14 - INCOME TAXES
Components of the provision (benefit) for income taxes are as follows:
2001 2000 1999
-------- -------- ---------
Current:
Federal $ - $ - $ -
State and local 39,996 43,677 203,876
-------- -------- ---------
39,996 43,677 203,876
-------- -------- ---------
Deferred:
Federal - - (659,794)
State and local - - (134,000)
-------- -------- ---------
- - (793,794)
-------- -------- ---------
Totals $ 39,996 $ 43,677 $(589,918)
======== ======== =========
A reconciliation of the federal statutory income tax rate to the Company's
effective tax rate as reported is as follows:
2001 2000 1999
------- ------- -------
Taxes at federal statutory
Rate (34.0)% (34.0)% (34.0)%
State and local income
taxes, net of federal
benefit 0.3 0.4 0.3
Permanent differences 0.7 1.1 0.8
Unutilized net operating
losses and tax credits 33.3 32.9 28.9
------- ------- -------
Effective income tax rate 0.3 % 0.4% (4.0)%
======= ======= =======
As of June 30, 2001, the Company has net operating loss carryforwards of
approximately $52,392,000 that will be available to offset future taxable income
at various dates through June 2020. Additionally, for federal income tax
purposes, the Company has research and development tax credit carryforwards
aggregating $2,142,081, which are accounted for under the flow-through method.
The tax credit carryforwards expire as follows:
June 30:
-------
2006 $ 101,334
2007 258,200
2008 172,207
2016 70,145
2017 402,590
2018 432,195
2019 378,193
2020 327,217
----------
$2,142,081
==========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 14 - INCOME TAXES (Continued)
In addition, for New York State income tax purposes, the Company has tax credit
carryforwards aggregating $1,070,000, which are accounted for under the
flow-through method. The tax credit carryforwards expire during the years 2007
to 2016.
Significant components, tax effected, of the Company's deferred tax assets and
liabilities at June 30, 2001 and 2000 are as follows:
2001 2000
----------- -----------
Deferred tax assets:
Allowance for doubtful accounts $ 1,045,768 $ 1,022,807
Non-deductible accruals 772,072 621,067
Net operating carryforwards 20,675,405 9,896,000
Tax credits 3,211,726 3,136,906
Inventory capitalization for
tax purposes 84,000 84,000
----------- -----------
25,788,970 14,760,780
Valuation allowance (24,393,453) (13,924,203)
----------- -----------
Net deferred tax assets 1,395,517 836,577
----------- -----------
Deferred tax liabilities:
Fixed assets and depreciation 974,462 661,019
Capitalized software costs 421,055 175,558
----------- -----------
Gross deferred tax liabilities 1,395,517 836,577
----------- -----------
Net deferred tax liabilities $ - $ -
=========== ===========
The net change in the valuation allowance for deferred tax assets increased by
approximately $10,469,000.
NOTE 15 - OTHER CURRENT LIABILITIES
Included in other current liabilities are the following:
2001 2000
---------- ----------
Unearned revenue on service contracts $ 906,602 $ 775,032
Accrued bonuses 397,012 729,546
Accrued payroll taxes 250,475 282,158
Accrued interest 140,309 259,224
Accrued salaries and commissions 1,019,146 870,663
Accrued professional fees 224,882 653,102
Litigation judgements 268,091 2,440,037
Excise and sales taxes 2,655,678 1,847,805
Other 568,562 1,109,362
---------- ----------
$6,430,757 $8,966,929
========== ==========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 16 - COMMITMENTS AND CONTINGENCIES
Leases
------
The Company rents its operating facilities and certain equipment pursuant to
operating lease agreements expiring at various dates through February 2009. The
leases for certain facilities contain escalation clauses relating to increases
in real property taxes as well as certain maintenance costs.
Future minimum lease commitments consisted of the following at June 30, 2001:
Facilities
Year Ended and
June 30, Equipment Capital
---------- ----------- -----------
2002 $ 2,949,273 $ 730,801
2003 2,628,258 591,688
2004 2,383,492 312,611
2005 1,563,482 18,432
2006 1,505,441 -
Thereafter 5,143,688 -
----------- -----------
Total minimum obligations $16,173,634 1,653,532
===========
Less: Amount representing
interest (222,163)
-----------
Present value of net minimum
lease obligations $ 1,431,369
===========
Rent expense for operating leases approximated $3,307,000, $3,235,000 and
$3,266,000 for the three years ended June 30, 2001, 2000 and 1999, respectively.
Litigation
----------
On April 27, 2000, Beal Bank, S.S.B. filed a motion for summary judgement
against Melville Magnetic Resonance Imaging, P.C. ("Melville Magnetic") and the
Company in a litigation in the New York Supreme Court, Suffolk County. The
summary judgement motion sought recovery of the principal, plus accrued interest
on a promissory note executed by Melville Magnetic and guaranteed by the
Company. The court subsequently granted Beal Bank's motion and entered judgement
against Melville Magnetic and the Company in the amount of $1.4 million. On
February 5, 2001, the Company paid the judgement in full in order to stop the
accrual of interest. On February 6, 2001, Melville Magnetic and the Company
filed an appeal from the judgement. The Company has charged back Melville
Magnetic $754,000 related to this payment. Such amount is included in notes
receivable as of June 30, 2001. Included in accrued liabilities at June 30, 2000
was $650,000 related to this judgement. No additional charge to earnings was
necessary for the year ended June 30, 2001.
During the quarter ended March 31, 2001, the Company settled its Kivitz
judgement litigation for a payment of $1.225 million. The full amount of the
judgement was accrued for as of June 30, 2000. No additional charge to earnings
was necessary for the year ended June 30, 2001.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 16 - COMMITMENTS AND CONTINGENCIES (Continued)
License Agreement and Self-Insurance
------------------------------------
The Company has license agreements with two separate companies, which require
the Company to pay a royalty on the Company's future sales of certain NMR
imaging apparatus. Royalty expense charged to operations for the years ended
June 30, 2001, 2000 and 1999 approximated $33,000, $36,000 and $50,000,
respectively.
The Company is self-insured with respect to product liability. During the fiscal
years ended June 30, 2001, 2000 and 1999, no material claims arose.
In July 2000, the Company entered into a license agreement, pursuant to which it
licensed certain of its intellectual assets on a non-exclusive basis.
Remuneration payable to the Company under this agreement is $11.7 million, of
which $9.0 million was received in September of 2000 and $2.7 million in January
of 2001. The license fee of $11.7 million is being recognized as income ratably
over the five-year period ending June 30, 2005.
Employment Agreements
---------------------
On March 20, 1998, a consolidated affiliate of HMCA entered into two employment
agreements with the former owners of A&A. Each agreement provides for a base
annual salary of $150,000 for the first five years and $315,000 per annum for
each year thereafter and shall be increased by 5% per annum up to a minimum base
salary of $500,000 per annum. Additionally, each agreement provides for a bonus
commencing in the sixth year of the contract, contingent upon meeting certain
thresholds of net income. The employment agreements expire fifteen years from
March 20, 1998.
On August 20, 1998, a wholly-owned subsidiary of HMCA entered into two
employment agreements with the former owners of Dynamic. Each agreement provides
for base compensation of $150,000 during the first year with annual cost of
living increases for the first five years. Each agreement also provides for an
increase in base compensation of $100,000 per annum commencing in the sixth
year. In addition, the agreements provide for bonus compensation contingent upon
pretax earnings of Dynamic. The employment agreements expire ten years from
August 20, 1998.
Minimum annual payments, excluding bonuses, incentives and cost of living
increases under these contracts are as follows:
Years Ended
June 30,
-----------
2002 $ 600,000
2003 683,000
2004 1,097,000
2005 1,190,000
2006 1,220,000
Thereafter 2,613,000
----------
$7,403,000
==========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 16 - COMMITMENTS AND CONTINGENCIES (Continued)
Employee Benefit Plans
----------------------
The Company has a non-contributory 401(k) plan (the "Plan"). The Plan covers all
non-union employees who are at least 21 years of age with no minimum service
requirements. There were no employer contributions to the Plan for the years
ended June 30, 2001, 2000 and 1999.
The shareholders of the Company approved the 2000 Employee Stock Purchase Plan
("ESPP") at the Company's annual shareholders' meeting in April 2000. The ESPP
provides for eligible employees to acquire common stock of the Company at a
discount, not to exceed 15%. The Plan has not been put into effect as of June
30, 2001.
Letters of Credit
-----------------
At June 30, 2001, the Company had outstanding letters of credit with a
commercial bank for $390,000 for purposes of collateralizing the Company's
obligation to a third party for the purchase of inventory.
In connection with various operating leases for its operating facilities, the
Company is required to maintain standby letters of credit with a commercial bank
of approximately $68,000 for purposes of collateralizing future lease payments
under the respective lease agreements.
NOTE 17 - OTHER INCOME (EXPENSE) AND SUPPLEMENTARY PROFIT AND LOSS DATA
Other income (expense) consists of:
For the Years Ended June 30,
--------------------------------------------
2001 2000 1999
---------- ---------- ----------
Other income $ 101,725 $ 93,425 $ 32,950
Gain on sale of subsidiary/
partnership interest 712,781 1,021,950 -
Gain on settlement of
various legal disputes and
other claims - 3,540,000 1,618,169
Gain on sale of property 150,000 - -
Litigation provision - - (650,000)
---------- ---------- ----------
$ 964,506 $4,655,375 $1,001,119
========== ========== ==========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 17 - OTHER INCOME (EXPENSE) AND SUPPLEMENTARY PROFIT AND LOSS DATA
(Continued)
In October 1999, the Company sold the stock of its subsidiary, Medical SNI.
Medical SNI, based in Haifa, Israel, designs and develops products for the
medical imaging and archiving industry. The effects of the sale include the
removal of liabilities of approximately $1 million and a pretax gain of
$1,021,950. The Company has a non-exclusive, perpetual, royalty-free worldwide
license to use and sublicense the then existing technology.
In October 2000, the Company sold its interest in the partnership of AMD
Southfield Michigan Limited Partnership for $750,000. AMD Southfield operates an
MRI Scanning Center in Michigan. The Company recognized a pre-tax gain of
$750,000.
In June 2001, HMCA sold the stock of its subsidiary, Medical Specialties, Inc.
and Diagnostic Services, Inc. for a promissory note for $50,000, resulting in a
loss of $37,000.
Advertising expense approximated $2,022,000, $2,140,000 and $2,191,000 for the
years ended June 30, 2001, 2000 and 1999, respectively. Maintenance and repair
expenses totalled approximately $905,000, $758,000 and $491,000 for the years
ended June 30, 2001, 2000 and 1999, respectively. Royalty expenses approximated
$33,000, $36,000 and $49,000 for the years ended June 30, 2001, 2000 and 1999,
respectively. Amortization of intangible assets was approximately $1,427,000,
$1,433,000 and $1,518,000 for the years ended June 30, 2001, 2000 and 1999,
respectively.
NOTE 18 - SUPPLEMENTAL CASH FLOW INFORMATION
During the years ended June 30, 2001, 2000 and 1999, the Company paid
$1,261,379, $1,596,931 and $1,768,481 for interest, respectively. During the
years ended June 30, 2001, 2000 and 1999, the Company paid $39,997, $20,144 and
$201,388 for income taxes, respectively.
During the year ended June 30, 1999, the Company acquired the assets and assumed
the liabilities of various entities. The transaction had the following non-cash
impact on the balance sheet:
Accounts receivable $1,900,000
Equipment 60,000
Intangibles 9,356,067
Accrued liabilities 1,000,000
Notes payable to sellers (9,388,572)
Equity (275,830)
----------
Net Cash Used for Acquisitions $2,651,665
==========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 18 - SUPPLEMENTAL CASH FLOW INFORMATION (Continued)
Non-Cash Transactions
---------------------
During the year ended June 30, 2001:
a) The Company issued 415,976 shares of common stock for professional services
of $625,500.
b) Property and equipment, costing $636,504, was acquired under a capital
lease obligation.
c) The Company issued 20,000 shares of its common stock, valued at $28,438, in
connection with the repayment of note payable of $115,000.
d) The Company issued 923,482 shares of its common stock, valued at $1,632,980
for consulting services.
e) The Company issued 183,924 shares of its common stock, valued at $344,839,
for research and development expenses.
f) The Company acquired equipment of $176,480 under equipment notes payable
obligations.
During the year ended June 30, 2000:
a) The Company issued 490,000 shares of common stock for professional services
of $742,372.
b) Property and equipment, costing $215,086, was acquired under a capital
lease obligation.
c) In connection with the sale of its foreign subsidiary, the Company issued a
note payable aggregating $115,000.
d) The Company issued 19,332 shares of its common stock, valued at $61,753, in
connection with the repayment of long-term debt incurred with the
acquisition of Central.
During the year ended June 30, 1999:
a) The Company issued 463,161 shares of common stock for professional services
of $664,656.
b) Property and equipment costing $741,663 was acquired under a capital lease
obligation.
c) The Company sold equipment to a related party costing $96,427 in
consideration of a note receivable aggregating $150,000.
d) The Company converted a current liability aggregating $303,000 to long-term
debt.
e) The Company issued 202,018 shares of its common stock valued at $275,830 in
connection with the acquisition of Central.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 18 - SUPPLEMENTAL CASH FLOW INFORMATION (Continued)
Non-Cash Transactions (Continued)
---------------------
f) The Company issued 202,018 shares of its common stock valued at $275,837,
pursuant to consulting contracts with the former shareholders of Central.
NOTE 19 - 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 20 - ADVANCES AND NOTES TO RELATED PARTIES
Effective December 1, 1993, Albany Magnetic Imaging Center, P.C. ("Albany
Center"), a Georgia professional corporation, of which Raymond V. Damadian is
the sole stockholder, purchased the scanner being utilized at its site from the
Company for a purchase price of $1,128,844. In June of 1997, the payment terms
for the outstanding balance of $344,766 were restructured to provide for 60
equal monthly payments (including interest at the rate of 10% per annum) of
$7,325 each, commencing July 1997. The balance due under this note as of June
30, 2001 was $96,419.
Effective December 1, 1993, RVDC assigned its purchase option under the lease to
Daytona Beach Magnetic Resonance Imaging, P.A., a Florida professional
association, of which Raymond V. Damadian is the sole shareholder, director and
president ("Daytona Beach Center") and the Daytona Beach Center exercised the
option and purchased the scanner from the Company for a purchase price of
$1,416,717. In May 1999, the payment terms for the outstanding balance of
$1,001,507 were restructured to provide for 84 equal monthly payments (including
interest at the rate of 10% per annum) of $16,626 each, commencing May 1999.
During fiscal 2001, the Company took back the scanner in satisfaction of the
outstanding indebtedness. The Daytona Beach Center then purchased a new QUAD
scanner under a sales-type lease from the Company for a purchase price of
$960,000, which is payable with interest rate of 8.5% per annum, in 59 monthly
payments of $11,903 each, commencing May 2001, and one final installment of
$850,149.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 20 - ADVANCES AND NOTES TO RELATED PARTIES (Continued)
During 1994, Melville MRI, P.C. ("Melville Center"), a New York professional
corporation, of which Raymond V. Damadian is the sole shareholder, director and
president, purchased an MRI scanner from the Company for a purchase price of
$1,011,431. Of the purchase price, $900,000 is to be paid by the assumption and
payment of the Company's indebtedness to the lender secured by the scanner,
pursuant to a note, bearing interest at 14% per annum, and providing for 60
monthly payments of $20,700 each. The remaining $111,431 of the purchase price
was to be paid concurrently with the payments to the lender. The payment terms
for the principal balance, plus accrued interest (in the aggregate amount of
$139,290), were restructured to provide for 60 equal monthly payments (including
interest at the rate of 10% per annum) of $2,959.50 each, commencing July 1998.
In fiscal 2001, the balance outstanding on the obligation was paid in full by
the Company as guarantor of the indebtedness due to the lender. This resulted in
a balance of $893,606 owing to the Company by the Melville Center. The $2,959.50
monthly payment to the Company has been increased by an additional principal
payment of $10,000 per month to be applied toward the balance due.
Canarsie MRI Associates ("Canarsie"), a joint venture partnership, of which MRI
Specialties, Inc. ("Specialties") is an owner, is a party to a service agreement
for its scanner with the Company at an annual fee of $70,000. In addition,
during fiscal 2001, Canarsie entered into an agreement to purchase a QUAD MRI
scanner from the Company, recognizing on a percentage-of-computation basis
revenue of $636,121. The agreement provides for a purchase price of $850,000,
payable as follows: (1) $400,000 downpayment (received April 2001); (2) $450,000
in 84 equal monthly installments, including interest at 6%, pursuant to a
promissory note to be executed upon acceptance of the scanner. Timothy Damadian,
the son of Raymond V. Damadian, is the sole stockholder, Director and President
of Specialties.
Pompano MRI Associates ("Pompano"), a joint venture partnership, of which
Guardian MRI, Inc. ("Guardian") is an owner, is a party to a service agreement
for its scanner with the Company at an annual fee of $70,000. In addition,
during September 2001, Pompano entered into an agreement to purchase a stand-up
MRI. The agreement calls for a purchase price of $1.4 million payable as
follows: (1) $420,000 downpayment (received during September 2001); (2) $980,000
in progress payments to be received upon acceptance on completed sub-assemblies.
The Company will account for the sale under the percentage-of-completion method.
For the year ended June 30, 2001, revenue recognized was $-0-. Timothy Damadian,
the son of Raymond V. Damadian, is a stockholder, Director and President of
Pompano.
As at June 30, 2001 and 2000, the aggregate indebtedness of Specialties and
Canarsie to the Company was $22,476 and $22,476, respectively, and the aggregate
indebtedness of Guardian and Pompano to the Company was $18,550 and $18,550,
respectively.
During fiscal 2001, the Company entered into an agreement with Tallahassee MRI,
PA, a Florida professional association, of which Raymond V. Damadian is the sole
stockholder, director and president, agreed to purchase a QUAD 12000 MRI scanner
recognizing, on a percentage-of-completion basis, revenue of $379,485. The
agreement provides for a purchase price of $975,000, to be payable upon
acceptance of completed sub-assemblies.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 20 - ADVANCES AND NOTES TO RELATED PARTIES (Continued)
During fiscal 2001, the Company entered into an agreement with Damadian MRI in
Orlando P.A., a Florida professional association, of which Raymond V. Damadian
is the sole stockholder, director and president to purchase a stand-up MRI. The
agreement calls for a purchase price of $1.350 million, payable as follows: (1)
$405,000 downpayment (received during June 2001); (2) $945,000 in progress
payments to be received upon acceptance on completed sub-assemblies. The Company
will account for the sale under the percentage-of-completion method. As of June
30, 2001, revenue recognized was $-0-.
During fiscal 2001, the Company entered into an agreement with Damadian MRI at
Islandia, P.C., a New York professional corporation, of which Raymond V.
Damadian is the sole stockholder, director and president, to purchase a stand-up
MRI recognizing, on a percentage-of-completion basis, revenue of $116,959. The
agreement calls for a purchase price of $1.350 million, payable as follows: (1)
$405,000 downpayment (received during June 2001); (2) $945,000 in progress
payments to be received upon acceptance of completed sub-assemblies.
During fiscal 2001, the Company entered into an agreement with Damadian MRI at
Elmhurst, P.C., a New York professional corporation, of which Raymond V.
Damadian is the sole stockholder, director and president, to purchase an Echo
MRI scanner recognizing, on a percentage-of-completion basis, revenue of
$399,180. The agreement calls for a purchase price of $565,000, payable upon
acceptance of completed sub-assemblies. The Company will account for the sale
under the percentage-of-completion method.
During fiscal 2001, the Company entered into an agreement with Black Bear, LLC,
a New York limited liability company, to purchase a stand-up MRI recognizing, on
a percentage-of-completion basis, revenue of $216,449. The agreement calls for a
purchase price of $1.4 million, payable as follows: (1) $280,000 downpayment
(received during April 2001); (2) $1,120,000 in progress payments to be received
upon acceptance of completed sub-assemblies.
During fiscal 2001, the Company entered into an agreement with Deerfield
Magnetic Resonance Imaging, P.A., a Florida professional association, of which
Raymond V. Damadian is the sole shareholder, director and president, to purchase
a new QUAD scanner under a sales-type lease for a purchase price of $935,000,
which is payable with interest rate of 10.0% per annum, in 120 monthly payments
of $12,356.09 each, commencing August 2000 the lessee can also elect to pay a
lump sum of $581,544 at the end of 60 months.
During fiscal 2000, the Company entered into an agreement with Damadian MRI in
Garden City, a New York professional corporation, of which Raymond V. Damadian
is the sole shareholder, director and president, to purchase a new QUAD scanner
under a sales-type lease for a purchase price of $935,000, which is payable with
interest rate of 10.0% per annum, in 120 monthly payments of $12,356.09 each,
commencing August 2000 the lessee can also elect to pay a lump sum of $581,544
at the end of 60 months.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 21 - SEGMENT AND RELATED INFORMATION
Effective July 1, 1998, the Company adopted the provisions of SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information". SFAS No.
131 establishes standards for the way public enterprises report information
about operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in interim
financial reports issued to stockholders.
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. All intersegment sales are
market-based. The Company evaluates performance based on income or loss from
operations.
Summarized financial information concerning the Company's reportable
segments is shown in the following table:
Physician
Medical Management
Equipment Services Totals
------------- ------------ ------------
Fiscal 2001:
Net revenues from external
customers $ 10,497,839 $ 35,961,462 $ 46,459,301
Intersegment net revenues $ 1,039,499 $ - $ 1,039,499
Operating (loss) income $(17,205,614) $ 990,997 $(16,214,617)
Depreciation and amortization $ 2,203,591 $ 2,509,176 $ 4,712,767
Compensatory element of stock
issuances $ 1,684,136 $ 2,360,690 $ 4,044,826
Total identifiable assets $ 45,938,960 $ 39,216,723 $ 85,155,413
Capital expenditures $ 3,039,866 $ 1,082,385 $ 4,122,251
Fiscal 2000:
Net revenues from external
customers $ 5,971,064 $ 34,022,733 $ 39,993,797
Intersegment net revenues $ 1,227,075 $ - $ 1,227,075
Operating (loss) income $(17,984,534) $ 2,477,962 $(15,506,572)
Depreciation and amortization $ 1,817,547 $ 2,638,529 $ 4,456,076
Compensatory element of stock
issuances $ 926,421 $ 1,003,285 $ 1,929,706
Total identifiable assets $ 43,045,691 $ 41,553,346 $ 84,599,037
Capital expenditures $ 2,081,551 $ 940,795 $ 3,022,346
Fiscal 1999:
Net revenues from external
customers $ 5,723,955 $ 31,263,089 $ 36,987,044
Intersegment net revenues $ 845,834 $ - $ 845,834
Operating (loss) income $(18,688,341) $ 3,122,286 $(15,566,055)
Depreciation and amortization $ 1,847,216 $ 2,810,603 $ 4,657,819
Compensatory element of stock
issuances $ 190,851 $ 84,391 $ 275,242
Total identifiable assets $ 56,310,557 $ 41,337,611 $ 97,648,168
Capital expenditures $ 4,180,447 $ 1,299,392 $ 5,479,839
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 21 - SEGMENT AND RELATED INFORMATION (Continued)
Export Sales
------------
The Company's areas of operations are principally in the United States. There
are no export sales for the year ended June 30, 2001. The Company had export
sales of medical equipment amounting to 2.8% and 3.4% of consolidated net
revenues for the years ended June 30, 2000 and 1999, respectively.
The sales were made principally to the following locations:
2001 2000 1999
------ ------ ------
Spain - 2.8% 3.2%
Saudi Arabia - - .2
------ ------ ------
- % 2.8% 3.4%
====== ====== ======
The Company does not have any material assets outside of the United States.
Concentration of Credit Risk
----------------------------
Net revenues from related parties accounted for approximately 44%, 47% and 49%
of the consolidated net revenues for the years ended June 30, 2001, 2000 and
1999, respectively.
NOTE 22 - PROFORMA INFORMATION (UNAUDITED)
The Company's consolidated financial statements for the year ended June 30, 1999
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 years ended June 30, 1999 assuming the foregoing
acquisition had occurred on June 30, 1999 (in thousands, except per share data):
1999
-----------
(Unaudited)
Revenue, net $ 37,624
Loss from operations $ (15,447)
Loss before income taxes $ (14,344)
Basic and diluted net loss
per share $(.22)
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 23 - QUARTERLY FINANCIAL DATA (UNAUDITED)
(000's omitted, except per share data)
Sept. 30, Dec. 31, March 31, June 30,
Quarter Ended: 2000 2000 2001 2001
-------------- --------- --------- --------- --------
Total Revenues - Net $ 10,111 $ 10,982 $ 13,107 $12,260
Total Costs and Expenses 14,110 14,940 15,933 17,691
Loss from Operations (3,999) (3,958) (2,826) (5,432)
Net Loss (3,907) (3,014) (2,801) (5,422)
Basic and Diluted
Net Loss Per Share $ (0.06) $ (0.04) $ (0.04) $ (0.08)
Sept. 30, Dec. 31, March 31, June 30,
Quarter Ended: 1999 1999 2000 2000
-------------- --------- --------- -------- --------
Total Revenues - Net $ 9,879 $ 9,990 $ 9,850 $10,275
Total Costs and Expenses 13,093 13,826 13,789 14,792
Loss from Operations (3,214) (3,836) (3,939) (4,518)
Net Loss (3,343) (2,664) (3,963) (986)
Basic and Diluted
Net Loss Per Share $ (0.05) $ (0.04) $ (0.06) $ (0.02)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Directors serve from the date of their election until the next annual
meeting of stockholders and until their successors are elected and qualify. With
the exception of Dr. Raymond V. Damadian, who does not receive any fees for
serving as a director, each director receives $20,000 per annum for his or her
service as a director. Officers serve at the discretion of the Board of
Directors.
The officers and directors of the Company are set forth below:
Raymond V. Damadian, M.D. 65 President, Chairman
of the Board and a Director
David B. Terry 54 Vice President and Secretary
Claudette J.V. Chan 64 Director
Robert J. Janoff 74 Director
Charles N. O'Data 65 Director
Raymond V. Damadian, M.D. has been the Chairman of the Board and President
of FONAR since its inception. Dr. Damadian was employed by the State University
of New York, Downstate Medical Center, New York, as an Associate Professor of
Biophysics from 1967 until September 1979. Dr. Damadian received an M.D. degree
in 1960 from Albert Einstein College of Medicine, New York, and a B.S. degree in
mathematics from the University of Wisconsin in 1956. In addition, Dr. Damadian
conducted post-graduate work at Harvard University, where he studied extensively
in the fields of physics, mathematics and electronics. Dr. Damadian is the
author of numerous articles and books on the nuclear magnetic resonance effect
in human tissue, which is the theoretical basis for the FONAR MRI scanners. Dr.
Damadian is a 1988 recipient of the National Medal of Technology and in 1989 was
inducted into the National Inventors Hall of Fame, for his contributions in
conceiving and developing the application of magnetic resonance technology to
medical applications including whole body scanning and diagnostic imaging. Dr.
Damadian is the President and director of HMCA.
David B. Terry is the Vice President of Administration and Secretary of the
Company. Mr. Terry has been serving as Vice President since December 1998 and as
Secretary since May, 1990. Previously, he served as Treasurer from May 1990 to
December, 1998, as Secretary from July 1978 through June 1987 and as Treasurer
from August 1981 through June 1987. From July 1978 through June 1987, he was
also a Director of the Company. Between July 1987 and January 1990, Mr. Terry
was a co-owner and actively engaged in the business of Carman-Terry Realty, a
real estate brokerage firm. In January 1990, Mr. Terry resumed his employment
with the Company. Mr. Terry is the brother-in-law of Raymond V. Damadian and
uncle of Timothy R. Damadian.
Claudette J.V. Chan has been a Director of FONAR since October 1987. Mrs. Chan
has been employed since 1992 by Raymond V. Damadian, M.D. MR Scanning Centers
Management Company as "site inspector," in which capacity she is responsible for
supervising and implementing standard procedures and policies for MRI scanning
centers. From 1989 to 1994 Mrs. Chan was employed by St. Matthew's and St.
Timothy's Neighborhood Center, Inc., as the director of volunteers in the "Meals
on Wheels" program, a program which cares for the elderly. In approximately
1983, Mrs. Chan formed the Claudette Penot Collection, a retail mail-order
business specializing in women's apparel and gifts, of which she was the
President until she stopped operating the business in approximately 1989. Mrs.
Chan practiced and taught in the field of nursing until 1973, when her son was
born. She received a bachelor of science degree in nursing from Cornell
University in 1960. Mrs. Chan is the sister of Raymond V. Damadian and aunt of
Timothy R. Damadian.
Robert J. Janoff has been a Director of FONAR since February, 1989. Mr. Janoff
has been a self-employed New York State licensed private investigator for more
than thirty-five years and was a Senior Adjustor in Empire Insurance Group for
more than 15 years until retiring from that position on July 1, 1997. Mr. Janoff
also served, from June 1985 to June 1991, as President of Action Data Management
Strategies, Ltd., a supplier of computer programs for use by insurance
companies. Mr. Janoff is a member of the Board of Directors of Harmony Heights
of Oyster Bay, New York, which is a nonprofit residential school for girls with
learning disabilities.
Charles N. O'Data has been a Director of FONAR since February, 1998. From 1968
to 1997, Mr. O'Data was the Vice President for Development for Geneva College, a
liberal arts college located in western Pennsylvania. In that capacity, he acted
as the College's chief investment officer. His responsibilities included
management of the College's endowment fund and fund raising. In July 1997, Mr.
O'Data retired from Geneva College after 36 years of service to assume a
position of National Sales Executive for SC Johnson Company's Professional
Markets Group (a unit of SC Johnson Wax), and specialized in healthcare and
education sales, a position he held until the spring of 1999. In his capacity
with SC Johnson he was responsible for sales to the nation's three largest Group
Purchasing Organizations which included some 4,000 hospitals. Mr. O'Data acts an
independent financial consultant to various entities. Mr. O'Data served on the
board of the Medical Center, Beaver, Pennsylvania (now a part of Heritage Valley
Health System), a 500 bed acute care facility, for 22 years, three as its Chair.
Mr. O'Data also served on the board of the Hospital Council of Western
Pennsylvania, a shared-services and group purchasing organization covering seven
states. He founded The Beaver County Foundation, a Community Foundation, in
1992, and serves as its President. Mr. O'Data is listed as a finance associate
in the Middle States Association, Commission on Higher Education. The commission
is the formal accrediting body for higher education in the eastern region of the
country. In this capacity he valuates the financial aspects of educational
organizations.
ITEM 11. EXECUTIVE COMPENSATION.
With the exception of the Chief Executive Officer, the compensation of the
Company's executive officers is based on a combination of salary and bonuses
based on performance. The Chief Executive Officer's compensation consists only
of a salary which has remained constant for more than the past three fiscal
years.
The Board of Directors does not have a compensation Committee: Dr. Raymond
V. Damadian, President, Chief Executive Officer and Chairman of the Board, is
the only executive officer who is a member of the Board of Directors. Dr.
Damadian participates in the determination of executive compensation for the
Company's officers.
The Board of Directors has established an audit committee. The members of
the committee are Robert J. Janoff and Charles N. O'Data.
There is set forth in the following Summary Compensation Table the
compensation provided by the Company during fiscal 2001 to its Chief Executive
Officer. There is set forth in the following Option Grant Table and Option
Exercise Table any stock options granted and exercised by Dr. Damadian during
fiscal 2001.
I. SUMMARY COMPENSATION TABLE
Long Term Compensation
-------------------------------------
Annual Compensation Awards Payouts
----------------------------------------- ------------------ ----------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name Other All
and Annual Restricted Other
Principal Compen- Stock Options LTIP Compen-
Position Salary Bonus sation Award(s) SARs Payouts sation
2 Year ($) ($) ($) ($) (#) ($) ($)
---------- ---- ---------- ----- ------- ---------- ------- ------- -------
Raymond V. 2001 $86,799.96 - - - - - -
Damadian, 2000 $86,799.97 - - - - - -
CEO 1999 $86,799.96 - - - - - -
---------- ---- ---------- ----- ------- ---------- ------- ------- -------
II. OPTION/SAR GRANTS IN LAST FISCAL YEAR
Potential
Realizable
Value at Assumed
Annual Rates of Alternative
Stock Price to (f) and
Appreciation for (g): Grant
Individual Grants Option Term Date Value
------------------------------------------------------------ ---------------- -----------
(a) b) (c) (d) (e) (f) (g) (h)
% of Total
Options/
SARs
Options/ Granted to Excercise Grant
SARs Employees or Base Date
Granted in Fiscal Price Expiration Present
Name (#) Year ($/Sh) Date 5% ($) 10% ($) Value $
---------- -------- ---------- ---------- ---------- ------ ------- --------
Raymond V.
Damadian, 0 - - - - - -
President
& CEO
-------------------------------------------------------------------------------
III. OPTION/SAR EXERCISES AND YEAR-END VALUE TABLE
Aggregated Options/SAR Exercises in Last Fiscal Year, and FY-End Option/Sar
Value
---------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Value of
Number of Unexercised
Name Shares Acquired Value Unexercised In-the-Money
on Exercise (#) Realized Options/SARs Options/SARs
($) at FY-End (#) at FY-End ($)
Exercisable/ Exercisable/
Unexercisable Unexercisable
---------------------------------------------------------------------------
Raymond V. 0 - 0 -
Damadian,
President
and CEO
EMPLOYEE COMPENSATION PLANS
FONAR's 1993 Incentive Stock Option Plan, adopted on March 26, 1993, is
intended to qualify as an incentive stock option plan under Section 422A of the
Internal Revenue Code of 1954, as amended. The 1993 Incentive Stock Option Plan
permits the issuance of stock options covering an aggregate of 1,500,000 shares
of Common Stock of FONAR. The options have an exercise price equal to the fair
market value of the underlying stock on the date the option is granted, are
nontransferable, are exercisable for a period not exceeding ten years and expire
upon the voluntary termination of employment. The 1993 Stock Option Plan will
terminate on March 25, 2003. As of June 30, 2001, options to purchase 311,830
shares of Common Stock were available for future grant under the plan.
FONAR's 1997 Nonstatutory Stock Option Plan, adopted on May 9, 1997,
permits the issuance of stock options covering an aggregate of 5,000,000 shares
of Common Stock of FONAR. The options may be issued at such prices and upon such
terms and conditions as are determined by FONAR. The 1997 Nonstatutory Stock
Option Plan will terminate on May 8, 2007. As of June 30, 2001, options to
purchase 3,900,369 shares of Common Stock of FONAR were available for future
grant.
FONAR's 1997 Stock Bonus Plan, adopted on May 9, 1997, permits FONAR to
issue an aggregate of 5,000,000 shares of Common Stock of FONAR as a bonus or
compensation. FONAR selects the persons to whom bonus stock will be issued, the
number of shares to be awarded and such other terms and conditions as it deems
advisable. The 1997 Stock Bonus Plan will terminate on May 8, 2007. As of June
30, 2001, no shares of Common Stock of FONAR were available for future grant.
FONAR's 2000 Stock Bonus Plan, adopted on October 1, 2000, permits FONAR to
issue on aggregate of 5,000,000 shares of Common Stock of FONAR as bonus or
compensation. FONAR selects the persons to whom bonus stock will be issued, the
number of shares to be awarded and such other terms and conditions as it deems
advisable. The 2000 Stock Bonus Plan will terminate on September 30, 2010. As of
June 30, 2001, 4,012,284 shares of Common Stock of FONAR were available for
future grant.
HMCA's 1997 Incentive Stock Option Plan, adopted on March 10, 1997, is
intended to qualify as an incentive stock option plan under Section 422A of the
Internal Revenue Code of 1954, as amended. The 1997 Incentive Stock Option Plan
permits the issuance of stock options covering an aggregate of 2,000,000 shares
of Common Stock of HMCA. The options have an exercise price equal to the fair
market value of the underlying stock on the date the option is granted, are
nontransferable, are exercisable for a period not exceeding ten years and expire
upon the voluntary termination of employment. The exercisability of the options
granted to date is contingent upon the successful completion by HMCA of a public
offering of its securities or the recognition by HMCA of at least $10 million in
revenues for at least two consecutive fiscal quarters. The 1997 Stock Option
Plan will terminate on March 9, 2007. As of June 30, 2001, options to purchase
400,000 shares of HMCA Common Stock were available for future grant under the
plan.
HMCA's 1998 Incentive Stock Option Plan, adopted on December 16, 1998, is
intended to qualify as an incentive stock option plan under Section 422A of the
Internal Revenue Code of 1954, as amended. The 1998 Incentive Stock Option Plan
permits the issuance of stock options covering an aggregate of 2,000,000 shares
of Common Stock of HMCA. The options have an exercise price equal to the fair
market value of the underlying stock on the date the option is granted, are
nontransferable, are exercisable for a period not exceeding ten years and expire
upon the voluntary termination of employment. The excessability of the options
granted to date is contingent upon the successful completion by HMCA of a public
offering of its securities. The 1998 Stock Option Plan will terminate on
December 15, 2008. As of June 30, 2001, options to purchase 1,330,000 shares of
HMCA Common Stock were available for future grant under the plan.
HMCA's 1998 Nonstatutory Stock Option Plan, adopted on December 16,
1998, permits the issuance of stock options covering an aggregate of 500,000
shares of Common Stock of HMCA. The options may be issued at such prices and
upon such terms and conditions as are determined by HMCA. The exercisability of
the options granted to date is contingent upon the successful completion by HMCA
of a public offering of its securities. The 1998 Nonstatutory Stock Option Plan
will terminate on December 15, 2008. As of June 30, 2001, options to purchase
100,000 shares of Common Stock were available for future grant.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the number and percentage of shares of the
Company's securities held by each director, by each person known by the Company
to own in excess of five percent of the Company's voting securities and by all
officers and directors as a group as of September 24, 2001.
Name and Address of Shares Percent
Beneficial Owner (1) Beneficially Owned of Class
Raymond V. Damadian, M.D.
c/o FONAR Corporation
Melville, New York
Director, President
CEO, 5% + Stockholder
Common Stock 2,488,274 4.14%
Class C Stock 9,561,174 99.98%
Class A Preferred 477,328 6.09%
Claudette Chan
Director
Common Stock 2,648 *
Class A Preferred 800 *
Robert J. Janoff
Director
Common Stock 50,000 *
Class A Preferred 1,999 *
Charles N. O'Data
Director
Common Stock 700 *
All Officers and Directors
as a Group (5 persons) (2) (3)
Common Stock 2,548,220 4.24%
Class C Stock 9,561,174 99.98%
Class A Preferred 480,165 6.13%
---------------------------
* Less than one percent
1. Address provided for each beneficial owner owning more than five percent of
the voting securities of the Company.
2. Includes 101 shares of the Company's Common Stock and 19 shares of the
Company's Class A Non-voting Preferred Stock held by an officer jointly with his
wife and 192 shares of the Company's Common Stock and 38 shares of the Company's
Class A Non-voting Preferred Stock held in trust by an officer for his children.
3. Includes options to purchase 6,286 shares of Common Stock held by an officer.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Background.
On April 7, 1989, at a time when the Company lacked both the financing and
working capital to establish its own centers, Donna Damadian, the wife of
Raymond V. Damadian, M.D., Chairman and President of the Company, purchased from
FONAR a scanner for a purchase price of $1,508,000 (the price paid by FONAR's
customers for like equipment). $1.2 million was paid in cash, providing a much
needed cash infusion for the Company, and the balance was paid over time with
interest pursuant to a promissory note of even date. The scanner was leased to
Macon Magnetic Resonance Imaging, P.C., a Georgia professional corporation
wholly-owned by, and of which Dr. Damadian is, the President. Thereafter,
between 1990 and 1996, Raymond V. Damadian, M.D. MRI Scanning Centers Management
Company, a Delaware corporation of which Dr. Damadian was the sole stockholder,
director and President ("RVDC"), purchased and leased scanners from FONAR to
establish a network of professional corporations operating MRI scanning centers
("Centers"), including the Macon Center, in New York, Florida, Georgia and other
locations. Dr. Damadian was the owner, director and President of each of these
professional corporations. RVDC provided the necessary management and the
scanners to the Centers, although in certain situations, a Center would acquire
the scanner directly from FONAR.
ACQUISITION OF RVDC.
Effective June 30, 1997, FONAR's wholly-owned subsidiary, Health Management
Corporation of America ("HMCA"), formerly known as U.S. Health Management
Corporation, acquired RVDC 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 transactions can be rescinded by Dr. Damadian, however, in the event of a
change of control in FONAR or the bankruptcy of FONAR. There is no time limit on
the right to rescind. In connection with the transaction, FONAR granted RVDC a
nonexclusive royalty free license to FONAR's patents and software. These
licenses may be terminated by FONAR in the event of the bankruptcy of RVDC or a
change in control of RVDC.
In connection with and immediately prior to the sale of RVDC to HMCA,
certain leases and sales of scanners to RVDC were terminated. The scanners were
then leased directly to the Centers at which they were installed pursuant to new
scanner leases between HMCA and the Centers.
NEW AGREEMENTS WITH HMCA.
Effective July 1, 1997, immediately following the effective date of the
acquisition of RVDC by HMCA, all previous management arrangements between RVDC
and the Centers were terminated and new management agreements were entered into
by the Centers and HMCA ("Management Agreements").
Pursuant to the Management Agreements, HMCA is providing comprehensive
management and administrative services and office facilities, including billing
and collection of accounts, payroll and accounts payable processing, supplies
and utilities to the Centers. Under the Management Agreements, HMCA provides
service through FONAR for the scanners at the Centers, eliminating the need for
the Centers to have separate service agreements for their scanners. In total, 15
of the Centers previously managed by RVDC and three additional Centers opened
after the acquisition, have Management Agreements with HMCA.
With respect to the scanners at 9 of the 18 Centers, the lease or sales
agreement between RVDC (or the Center in some cases) and FONAR were terminated.
In substitution for the previous arrangements, HMCA, effective as of July 1,
1997, entered into new scanner leases ("Scanner Leases") with these Centers
pursuant to which the scanners are provided to the Centers.
The fees to HMCA under both the Management Agreements and the Scanner
Leases are on a per scan basis.
During the fiscal years ended June 30, 2001 and June 30, 2000 the net
revenues received by HMCA from the Centers owned by Dr. Damadian were
approximately $14.8 million and $17.2 million respectively.
Effective December 1, 1993, one of the Centers, Albany Magnetic Resonance
Imaging, P.C. (the "Albany Center"), a Georgia professional corporation of which
Raymond V. Damadian is the sole shareholder, director and President, purchased
the scanner being utilized at its site from the Company for a purchase price of
$1,128,844, which in Fonar's opinion represented a fair market price based on
sales of like equipment by Fonar to its customers. Of the purchase price,
$574,077 was paid by the assumption and payment of the Company's indebtedness to
the lender secured by the scanner. Such indebtedness to the lender was retired
pursuant to a new equipment finance lease between the lender and the Albany
Center, guaranteed by the Company, providing for 18 monthly payments of $35,000
each. Following payment of the lease, the remaining $554,767 of the purchase
price due to the Company was required to be paid pursuant to a promissory note,
with interest at 10% per annum, over an 18 month term (17 payments of $35,000
each and one final payment of $2,454.08). In June, 1997, the payment terms for
the outstanding balance of $344,766 were restructured to provide for 60 equal
monthly payments (including interest at the rate of 10% per annum) of $7,325.27
each commencing July, 1997.
Effective December 1, 1993, Daytona Beach Magnetic Resonance Imaging, P.A.
(the "Daytona Beach Center"), a Florida professional association of which
Raymond V. Damadian is the sole shareholder, director and President, purchased
the scanner being utilized at its site from the Company for a purchase price of
$1,416,717, which in Fonar's opinion represented a fair market price based on
sales of like equipment by Fonar to its customers. Of the purchase price,
$328,044 was paid by the assumption and payment of the Company's indebtedness to
the lender secured by the scanner. Such indebtedness to the lender was retired
pursuant to a new equipment finance lease between the lender and the Daytona
Beach Center, guaranteed by the Company, providing for 18 monthly payments of
$20,000 each. The remaining $1,088,673 of the purchase price due to the Company
was required to be paid pursuant to a promissory note, with interest at 10% per
annum. In May, 1999, the payment terms for the outstanding balance of $1,001,507
were restructured to provide for 84 equal monthly payments (including interest
at the rate of 10% per annum) of $16,626.20 each commencing May 1999. During
fiscal 2001, FONAR took back the scanner in satisfaction of the outstanding
indebtedness. The Daytona Beach Center then purchased a new QUAD 12000 MRI
scanner from FONAR for a purchase price of $960,000, which is payable with
interest a rate of 8.5% per annum in 59 monthly payments of $11,902.62 each and
one final installment of $580,148.53.
On June 30, 1994, Melville MRI, P.C. (the "Melville Center"), a New York
professional corporation of which Raymond V. Damadian is the sole shareholder,
director and President, purchased the scanner being utilized at its site from
the Company for a purchase price of $1,011,431.12, which in Fonar's opinion
represented a fair market price based on sales of like equipment by Fonar to its
customers. Of the purchase price, $900,000 is to be paid by the assumption and
payment of the Company's indebtedness to the lender secured by the scanner
pursuant to a note bearing interest at 14% per annum and providing for 60
monthly payments of $20,700 each. The remaining $111,431.12 of the purchase
price was to be paid concurrently with the payments to the lender. The payment
terms for the principal balance, plus accrued interest (in the aggregate amount
of $139,290) were restructured to provide for 60 equal monthly payments
(including interest at the rate of 10% per annum) of $2,959.50 each commencing
July, 1998. In fiscal 2001, following the payment in full by FONAR, as
guarantor, of the indebtedness due to the lender, there was as a result a
balance of $893,606 then owing to FONAR by the Melville Center. The $2,959.50
monthly payment to FONAR has been increased by an additional principal amount of
$10,000 per month to be applied toward the balance due.
ACQUISITION OF THE AFFORDABLE COMPANIES.
Effective June 30, 1997, HMCA acquired a group of several interrelated
corporations, limited liability companies and a partnership engaged in managing
three diagnostic imaging centers and one multi-specialty practice in New York
State (the "Affordable Companies") pursuant to a series of transactions
concluding with a merger between a wholly-owned subsidiary of HMCA and
Affordable Diagnostics, Inc. Concurrently with the acquisition, Raymond V.
Damadian purchased three New York professional corporations to which the
Affordable Companies were providing their services under several agreements. Dr.
Damadian is the sole stockholder, director and President of these professional
corporations (the "Affordable Professional Corporations"). During the fiscal
year ended June 30, 2001, the net revenues from the Affordable Professional
Corporations were approximately $2.9 million.
ACQUISITION OF A & A SERVICES.
Effective March 20, 1998, HMCA acquired A & A Services, Inc. ("A & A
Services"), an management company managing four primary care practices in Queens
County, New York. Concurrently with the acquisition, Raymond V. Damadian
purchased the four New York professional service corporations under contract
with A & A Services (the "A & A Professional Corporations"). During the fiscal
year ended June 30, 2001, the net revenues from the A & A Professional
Corporations were $3.1 million.
ACQUISITION OF DYNAMIC HEALTH CARE MANAGEMENT
Effective August 20, 1998, HMCA acquired Dynamic Health Care Management,
Inc. ("Dynamic"), an MSO managing three physician practices in Nassau and
Suffolk Counties on Long Island, New York. Concurrently with the acquisition,
Raymond V. Damadian purchased two professional service corporations under
contract with Dynamic (the "Dynamic Professional Corporations"). During the
fiscal year ended June 30, 2001, the net revenues from the Dynamic Professional
Corporations were $8.0 million.
HMCA performs management services for Superior Medical Services, P.C.
("Superior"), a New York professional corporation of which Raymond V. Damadian
is the sole stockholder, director and President. Superior conducts
multi-specialty practices at locations in Yonkers, Elmont, Elmhurst and
Riverdale, New York. During the fiscal year ended June 30, 2001, the net
revenues from Superior were $5.1 million.
Pursuant to an agreement dated March 31, 1993, RVDC agreed to purchase the
Company's general partnership interest (approximately 92% of the partnership) in
a partnership owning and operating an MRI scanning center in Bensonhurst
(Brooklyn), New York. Robert Janoff, a director of the Company, is a limited
partner in the partnership. The partnership is also party to a service agreement
with the Company. The current annual rate is $50,000 for the one year service
contract from July 1, 2001 to July 30, 2002. The rate in effect during the prior
year was also $50,000.
Pursuant to an agreement dated September 30, 1993, AMD sold its interests
in a partnership operating an MRI scanning center in Melbourne, Florida to
Melbourne Magnetic Resonance Imaging, P.A. (the "Melbourne Facility"), for a
purchase price of $150,000. The purchase price is payable, with interest at 10%
per annum, over a period of fifteen months commencing September 1, 1995 as
follows: $13,500 per month for the first fourteen months and $1,185.60 for the
fifteenth month. The Melbourne Facility is a Florida professional corporation of
which Raymond V. Damadian is the sole stockholder, director and President. The
partnership is presently inactive.
Pursuant to an agreement dated September 30, 1993, AMD sold to Dade County
MRI, P.A. its interests in a partnership which had formerly operated an MRI
scanning center in Miami, Florida. The purchase price of $100,000 is payable,
with interest at 10% per annum,in sixty (60) equal consecutive monthly
installments of principal and interest (including interest accrued from
September 30, 1993), commencing 90 days after the scanner is placed in service.
The partnership is presently inactive. Dade County MRI, P.A. is a Florida
professional association of which Raymond V. Damadian is the sole stockholder,
director and President. This indebtedness has been written off by the Company as
uncollectable.
Pursuant to a sales agreement dated April 1, 1996, RVDC agreed to purchase
an MRI scanner with certain upgrades from the Company which RVDC then
contributed to Orlando MRI Associates, Limited Partnership (the "Orlando
Partnership"), a limited partnership. The Orlando Partnership is utilizing the
scanner at a site located in Orlando, Florida. The sales agreement provides for
a purchase price of $400,000 payable in installments as follows: (1) $40,000
down payment within thirty (30) days of execution and (2) $360,000 in 84 monthly
installments of $5,611.04 each (inclusive of interest at 8% per annum) pursuant
to a promissory note executed by RVDC upon acceptance of the scanner. The
Orlando Partnership is party to a service agreement for its scanner with the
Company at an annual fee of $50,000 for the period from April 8, 2001 through
April 7, 2002. The price in effect for the prior year was also $50,000. Timothy
Damadian, the son of Raymond V. Damadian, is a limited partner in Orlando.
Pursuant to an agreement dated March 1, 1999, Dublin Magnetic Resonance
Imaging, P.C., ("Dublin"), a Georgia professional corporation which Raymond V.
Damadian is the sole stockholder, director and President, agreed to lease a used
Fonar Beta 3000M Mobile MRI Scanner from the Company at a monthly rental of
$4,840.08 commencing on September 1, 1999 and continuing for thirty-six (36)
months. At the conclusion of the lease period Dublin will have the option to
purchase the scanner for a price of $1.00.
Pursuant to an agreement dated December 1, 1999, Damadian MRI in Garden
City, P.C. ("Garden City") a New York professional corporation of which Raymond
V. Damadian is the sole stockholder, director and President, agreed to lease a
Fonar QUAD 12000 MRI Scanner from the Company for a term of five years at a
monthly rental of $12,356.09. Upon the conclusion of the five year term, Garden
City may elect to purchase the scanner for $581,544.42 or extend the lease for
an additional five year period at the same monthly rental. If the lease term is
extended, then Garden City will have the option to purchase the scanner at the
end of the second five year period for a purchase price of $1.00. The term of
the lease commenced on June 12, 2000 upon acceptance of the scanner. Payments
are due on the twelfth of the month commencing June 12, 2000.
Pursuant to an agreement dated February 1, 2000, Deerfield Magnetic
Resonance Imaging, P.A. ("Deerfield"), a Florida professional association of
which Raymond V. Damadian is the sole stockholder, director and President,
agreed to lease a Fonar QUAD 12000 MRI Scanner from the Company for a term of
five years at a monthly rental of $12,356.09. Upon the conclusion of the five
year term, Deerfield may elect to purchase the scanner for $581,544.42 or extend
the lease for an additional five year period at the same monthly rental. If the
lease term is extended, then Deerfield will have the option to purchase the
scanner at the end of the second five year period for a purchase price of $1.00.
The term of the lease commenced on July 18, 2000 upon the acceptance of the
scanner. Lease payments are due on the first of the month, commencing August 1,
2000.
Canarsie MRI Associates ("Canarsie"), a joint venture partnership of which
MRI Specialties, Inc. ("Specialties") is an owner, is party to a service
agreement for its scanner with the Company at an annual fee of $70,000 for the
period from September 1, 2001 through August 31, 2002. The price in effect
during the prior year was also $70,000. In addition, during fiscal 2001,
Canarsie entered into an agreement to purchase a QUAD 12000 MRI scanner from
FONAR for a purchase price of $850,000. Timothy Damadian, the son of Raymond V.
Damadian, is the sole stockholder, director and President of Specialties.
Pompano MRI Associates ("Pompano"), a joint venture partnership of which
Guardian MRI, Inc. ("Guardian") is an owner, is party to a service agreement for
its scanner with the Company at an annual fee of $70,000 for the period from
October 1, 2000 through September 30, 2001. The price in effect during the prior
year was also $70,000. In addition, during fiscal 2002, Pompano entered into an
agreement to purchase a Stand-Up MRI scanner from FONAR for a purchase price of
$1,400,000. Timothy Damadian, the son of Raymond V. Damadian, is a stockholder,
director and officer of Guardian.
During fiscal 2001, Tallahassee MRI, P.A. ("Tallahassee"), a Florida
professional association of which Raymond V. Damadian is the sole stockholder,
director and President, agreed to purchase a QUAD 12000 MRI scanner from FONAR
for a purchase price of $975,000.
During fiscal 2001, Damadian MRI in Orlando, P.A. ("Orlando MRI"), a
Florida professional association of which Raymond V. Damadian is the sole
stockholder, director and President, agreed to purchase a Stand-Up MRI scanner
from FONAR for a purchase price of $1,500,000.
During fiscal 2001, Damadian MRI at Islandia, P.C. ("Islandia") a New York
professional corporation of which Raymond V. Damadian is the sole stockholder,
director and President, agreed to purchase a Stand-Up MRI scanner from FONAR for
a purchase price of $1,350,000.
During fiscal 2001, Damadian MRI at Elmhurst, P.C. ("Elmhurst"), a New York
professional corporation of which Raymond V. Damadian is the sole stockholder,
director and President, agreed to purchase an Echo MRI scanner from FONAR for a
purchase price of $565,000.
During fiscal 2001, Black Bear Management LLC, a New York limited liability
company of which TRD Services, Inc. ("TRD") is a member, agreed to purchase a
Stand-Up MRI scanner from FONAR for a purchase price of $1,400,000. Timothy
Damadian, the son of Raymond V. Damadian, is the stockholder, director and
President of TRD.
As at June 30, 2001, the indebtedness of Canarsie to the Company was
$22,476 and the aggregate indebtedness of Pompano to the Company was $18,550.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K.
a) FINANCIAL STATEMENTS AND SCHEDULES
The following consolidated financial statements are included in Part II,
Item 8.
Report of Independent Certified Public Accountants.
Consolidated Balance Sheets as at June 30, 2001 and 2000.
Consolidated Statements of Operations for the Three Years Ended June 30,
2001, 2000 and 1999.
Consolidated Statements of Stockholders' Equity for the Three Years Ended
June 30, 2001, 2000 and 1999.
Consolidated Statements of Cash Flows for the Three Years Ended June 30,
2001, 2000 and 1999.
Notes to Consolidated Financial Statements.
Schedule II Valuation and Qualifying Accounts for the Three Years Ended
June 30, 2001, 2000 and 1999 follows:
FONAR CORPORATION AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Balance Balance
Description June 30, 1998 Additions Deductions June 30, 1999
----------- ------------- --------------- ---------- -------------
Receivables from equipment sales
and service contracts $ 789,749 $ 1,000 $ 788,749
Receivables from medical
Services 1,607,598 (2) $ 3,505,295 1,172,795 3,940,098
Receivables from related PC's - (1) 628,836 628,836 -
Advance and notes to related
Parties 904,000 904,000
Notes receivable 477,456 477,456
Balance Balance
Description June 30, 1999 Additions Deductions June 30, 2000
----------- ------------- --------------- ---------- -------------
Receivables from equipment sales
and service contracts $ 788,749 $ 418 $ 788,331
Receivables from medical
Services 3,940,098 (2) $ 6,174,808 4,117,436 5,997,470
Receivables from related PC's - (1) 177,162 23,430 153,732
Advance and notes to related
Parties 904,000 904,000
Notes receivable 477,456 477,456
Balance Balance
Description June 30, 2000 Additions Deductions June 30, 2001
----------- ------------- --------------- ---------- -------------
Receivables from equipment sales
and service contracts $ 788,331 (1) $ 245,000 $ - $ 1,033,331
Receivables from medical
Services 5,997,470 (2) 10,743,680 6,441,992 10,299,158
Receivables from related PC's 153,732 (1) 387,505 2,940 538,297
Advance and notes to related
Parties 904,000 (1) 287,456 875,421 316,035
Notes receivable 477,456 (1) - 477,456 -
(1) Included in bad debt expense
(2) Reflected as a reduction of net revenue
b) REPORTS ON FORM 8-K
None.
c) EXHIBITS
3.1 Certificate of Incorporation, as amended, of the Company incorporated
herein by reference to Exhibit 3.1 to the Registrant's registration statement on
Form S-1,Commission File No. 33-13365.
3.2 Article Fourth of the Certificate of Incorporation, as amended, of the
Company incorporated by reference to Exhibit 4.1 to the Registrant's
registration statement on Form S-8, Commission File No. 33-62099.
3.3 By-Laws, as amended, of the Company incorporated herein by reference to
Exhibit 3.2 to the Registrant's registration statement on Form S-1, Commission
File No. 33-13365.
4.1 Specimen Common Stock Certificate incorporated herein by reference to
Exhibit 4.1 to the Registrant's registration statement on Form S-1, Commission
File No. 33-13365.
4.2 Specimen Class B Common Stock Certificate incorporated herein by
reference to Exhibit 4.2 to the Registrant's registration statement on Form S-1,
Commission File No. 33-13365.
10.1 License Agreement between FONAR and Raymond V. Damadian incorporated
herein by reference to Exhibit 10 (e) to Form 10-K for the fiscal year ended
June 30, 1983, Commission File No. 0-10248.
10.2 1983 Nonstatutory Stock Option Plan incorporated herein by reference
to Exhibit 10 (a) to Form 10-K for the fiscal year ended June 30, 1983,
Commission File No. 0-10248, and amendments thereto dated as of March 7, 1984
and dated August 22, 1984, incorporated herein by referenced to Exhibit 28 (a)
to Form 10-K for the year ended June 30, 1984, Commission File No. 0-10248.
10.3 1984 Incentive Stock Option Plan incorporated herein by reference to
Exhibit 28 (c) to Form 10-K for the year ended June 30, 1984, Commission File
No. 0-10248.
10.4 1986 Nonstatutory Stock Option Plan incorporated herein by reference
to Exhibit 10.7 to Form 10-K for the fiscal year ended June 30, 1986, Commission
File No. 0-10248.
10.5 1986 Stock Bonus Plan incorporated herein by reference to Exhibit 10.8
to Form 10-K for the fiscal year ended June 30, 1986, Commission File No.
0-10248.
10.6 1986 Incentive Stock Option Plan incorporated herein by reference to
Exhibit 10.9 to Form 10-K for the fiscal year ended June 30, 1986, Commission
File No. 0-10248.
10.7 Lease Agreement, dated as of August 18, 1987, between FONAR and
Reckson Associates incorporated herein by reference to Exhibit 10.26 to Form
10-K for the fiscal year ended June 30, 1987, Commission File No. 0-10248.
10.8 1993 Incentive Stock Option Plan incorporated herein by reference to
Exhibit 28.1 to the Registrant's registration statement on Form S-8, Commission
File No. 33-60154.
10.9 1993 Non-Statutory Stock Option Plan incorporated herein by reference
to Exhibit 28.2 to the Registrant's registration statement on Form S-8,
Commission File No. 33-60154.
10.10 1993 Stock Bonus Plan incorporated herein by reference to Exhibit
28.3 to the Registrant's registration statement on Form S-8, Commission File No.
33-60154.
10.11 1994 Non-Statutory Stock Option Plan incorporated herein by reference
to Exhibit 28.1 to the Registrant's registration statement on Form S-8,
Commission File No. 33-81638.
10.12 1994 Stock Bonus Plan incorporated herein by reference to Exhibit
28.2 to the Registrant's registration statement on Form S-8, Commission File No.
33-81638.
10.13 1995 Non-Statutory Stock Option Plan incorporated herein by reference
to Exhibit 28.1 to the Registrant's registration statement on Form S-8,
Commission File No. 33-62099.
10.14 1995 Stock Bonus Plan incorporated herein by reference to Exhibit
28.2 to the Registrant's registration statement on Form S-8, Commission File No.
33-62099.
10.15 1997 Non-Statutory Stock Option Plan incorporated herein by reference
to Exhibit 28.1 to the Registrant's registration statement on Form S-8,
Commission File No.: 333-27411.
10.16 1997 Stock Bonus Plan incorporated herein by reference to Exhibit
28.2 to the Registrant's registration statement on Form S-8, Commission File No:
333-27411.
10.17 Stock Purchase Agreement, dated July 31, 1997, by and between U.S.
Health Management Corporation, Raymond V. Damadian, M.D. MR Scanning Centers
Management Company and Raymond V. Damadian, incorporated herein by reference to
Exhibit 2.1 to the Registrant's Form 8-K, July 31, 1997, commission File No:
0-10248.
10.18 Merger Agreement and Supplemental Agreement dated June 17, 1997 and
Letter of Amendment dated June 27, 1997 by and among U.S. Health Management
Corporation and Affordable Diagnostics Inc. et al., incorporated herein by
reference to Exhibit 2.1 to the Registrant's 8-K, June 30, 1997, Commission File
No: 0-10248.
10.19 Stock Purchase Agreement dated March 20, 1998 by and among Health
Management Corporation of America, FONAR Corporation, Giovanni Marciano, Glenn
Muraca et al., incorporated herein by reference to Exhibit 2.1 to the
Registrant's 8-K, March 20, 1998, Commission File No: 0-10248.
10.20 Stock Purchase Agreement dated August 20, 1998 by and among Health
Management Corporation of America, FONAR Corporation, Stuart Blumberg and Steven
Jonas, incorporated herein by reference to Exhibit 2 to the Registrant's 8-K,
September 3, 1998, Commission File No. 0-10248.
21. Subsidiaries of the Registrant. See Exhibits.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this amended report to be
signed on its behalf by the undersigned, thereunto duly authorized.
FONAR CORPORATION
Dated: October 12, 2001
By: /s/ Raymond Damadian
Raymond V. Damadian, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Raymond Damadian Chairman of the October 12, 2001
Raymond V. Damadian Board of Directors,
President and a
Director (Principal
Executive Officer)
/s/ Claudette J.V. Chan Director October 12, 2001
Claudette J.V. Chan
/s/ Robert J. Janoff Director October 12, 2001
Robert J. Janoff
/s/ Charles N. O'Data Director October 12, 2001
Charles N. O'Data