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, 1999
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)
(516) 694-2929
(Registrant's telephone number, including area code)
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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)
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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 10, 1999, 54,804,957 shares of Common Stock, 5,211 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 52,238,644 shares
of Common Stock held by non-affiliates as of such date (based on the closing
price per share on September 10, 1999 as reported on the NASDAQ System) was
approximately $57 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 (516) 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 and maintained its
"open" design ever since.
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. In connection with its entry into this new line
of business, HMCA has completed five acquisitions. 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 20 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 principal products are its new "QUAD" series of MRI
scanners. 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. 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 quality and clarity competitive with high field
superconductive magnets. The QUAD 12000 scanner magnet is the highest field
"open MRI" in the industry.
The Company also produces the "QUAD(TM) 7000," a MR scanner which is
similar in design to the QUAD 12000 but utilizes a smaller 3,500 gauss
electromagnet. The less expensive QUAD 7000 offers an economical solution to
the rising cost of medicine.
In addition, the Company's current "works in progress" include the "OR
360"(TM) (an operating room scanner), the "Open Sky MRI"(TM), with its breast
scanning capabilities (similar to the OR 360, the scanner room is inside the
magnet) and the "Stand-Up MRI"(TM), a scanner which will allow patients to be
scanned while standing or sitting. (See "Works in Progress".)
As a result of these new products and other research and development, the
Company is positioning itself to dramatically increase sales and improve its
competitive position in the marketplace.
Following two and a half years of intense research and development
activity to develop and consolidate the features on its new QUAD scanners the
Company has begun to turn its attentions from predominately research and
development to predominantly sales.
The Company intends to increase its sales force and is seeking
experienced medical equipment salesmen and distributors worldwide. Among other
things the Company also intends to expand its WEB site to a full-scale
interactive sales desk for reaching new customers and assisting existing
customers.
The Company will also continue to actively seek to promote foreign sales.
The Company believes there are and will be significant market opportunities
abroad, particularly in Asia and Eastern Europe.
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 entered the physician and diagnostic management services business
through the consummation of two acquisitions, effective June 30, 1997. As a
result of these two acquisitions, three additional acquisitions and the
opening of new facilities, HMCA currently is managing 25 diagnostic imaging
centers and 12 primary care and specialty medical practices located
principally in New York State and Florida.
PRODUCTS
The Company's principal products are its new "QUAD(TM)" series of MRI
scanners. 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. The QUAD(TM) 7000 is similar in design to the
QUAD 12000 but utilizes a smaller 3,500 gauss electromagnet.
In addition to the patient comfort, increased throughput and new
applications (such as MRI directed surgery and MRI mammography) 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 made 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. Equipped
with up to four beds, the user is able to prep one or more "on deck" patients
while another patient is being scanned, thereby increasing throughput and
reducing scan prices. The starshaped open design of the QUAD will also make
possible a host of new applications, particularly MRI mammography and MRI
directed surgery (Interventional MRI).
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 mammography 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 7000 and
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's state-of-the-art electronics package features five computer
processors performing parallel processing. Its speed is demonstrated by its
ability to scan and reconstruct images simultaneously and its ability to
reconstruct a 256x256 image in 0.7 seconds, the fastest of any MRI scanner on
the market.
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 extremely 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, 1280x1280-pixel, 20-up, high-resolution image monitor
with features such as electronic magnifying glass and real-time, continuous
zoom and pan.
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.
The Company's majority-owned subsidiary, Medical SNI, manufactures and
markets teleradiology equipment. Such equipment, through the use of computer
hardware and software, permits MRI images to be transmitted by telephone
lines, enabling a physician to view the results of an MRI scan (immediately,
if necessary) without the necessity of being present at the site of the scan
or receiving film.
During fiscal 1999, sales of the Company's QUAD scanners accounted for
approximately 7% of the Company's total revenues and 40% of its medical
equipment segment revenues, as compared to 15% of total revenues and 53% of
medical equipment revenues during fiscal 1998. There were no sales of Ultimate
or Beta scanners in fiscal 1998 and only one sale of a Beta scanner (1% of
total revenues and 6.6% of medical equipment segment revenues) in fiscal 1999.
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
The Company's current "works in progress" center around the development
of the OR 360(TM) scanner, the Open Sky MRI(TM) scanner, with its breast
scanning capabilities and the Stand-Up MRI(TM) scanner. All of these products
seek to bring to the public scanners 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.
In addition there is a need for a treatment modality that can deal
effectively with the diseased tissue once it has been detected.
The OR 360(TM) has an enlarged room sized magnet in contrast to the small
bore "tunnel" MRI magnet the public is familiar with. Thus full-fledged
surgical teams may walk into the magnet and thereby perform conventional
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 his 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.
With current cancer 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 once its new OR 360 product is available
treatment agents may be administered directly to the malignant tissue through
small catheters or needles allowing much larger doses of chemotherapy, x-rays,
laser ablation, microwave, or rf 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 judge during treatment if his treatment is being effective.
The Open Sky MRI(TM), similar in design to the OR 360, includes the
floor, ceiling and sidewalls of the scanning room as part of the iron frame of
the magnet. 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
away from the magnet where not wanted. Unlike the OR 360, the Open Sky MRI is
strictly a diagnostic scanner, and does not include the software and features
that make the OR 360 suitable as an operating room.
To increase the number of patients who can be scanned, patients are
rolled into the scanner room on a special high-throughput gurney. Once the bed
is anchored in position, it allows for full horizontal, vertical and
rotational positioning for scanning any region of the body. 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 Company's Stand-Up MRI(TM) will allow patients to be scanned while
standing, sitting, bending or reclining. This will allow all parts of the
body, particularly the spine and joints, to be imaged in the weight-bearing
state. As a result, for the first time, MRI will be able to be used to show
abnormalities and injuries under full weight-bearing conditions.
A floor-recessed elevator brings the patient to the height appropriate
for the targeted image region. A custom-built adjustable bed will allow
patients to sit or lie on their backs, sides or stomachs at any angle. The
beds could even be rotated into the Trendelenburg position for MR angiography.
Full-range-of-motion studies of the joints in virtually any direction
will be possible, an especially promising feature for sports injuries. Maximal
flexion cines of the lumbar spine can be achieved under full body weight.
The Stand-Up MRI 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.
Most of the design work for the OR 360 and Open Sky MRI and the
construction of prototypes have been completed. Most of the design work for
the Stand-Up MRI is complete.
Additionally the Company has completed construction of a prototype of its
0.6 Tesla superconductive magnet to provide its customers with FONAR's
patented superconducting version of its open iron frame magnets. The Company's
design of its superconductive magnet anticipated the need to convert all of
its products to superconducting magnets. Therefore, all of its products, the
OR 360, the Open Sky MRI and the Stand-Up MRI, will be available to FONAR's
customers as either iron-frame resistive models or iron-frame superconductive
magnets depending on customer preference and pricing.
The Company is negotiating with several universities to install and
commence clinical trials of its OR 360, Open Sky MRI and Stand-Up MRI. The
Company is working with these universities to jointly secure research funding
for these products.
PRODUCT MARKETING
The principal markets for the Company's scanners are hospitals and
private scanning centers.
Following two and a half years of intense research and development
activity to develop and consolidate the features of its QUAD scanners, the
Company has begun to turn its attention from predominantly research and
development to predominantly sales.
The Company intends to increase its sales force and is seeking
experienced medical equipment sales personnel and distributors. The Company
will conduct domestic sales through its own sales personnel and independent
sales representatives and distributors. In foreign markets, the Company plans
to expand its existing network of independent distributors.
In addition, the Company plans to expand its WEB site to include an
interactive "sales desk" for reaching customers and 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 1999 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. Utilizing a 6000 gauss (0.6
Tesla field strength) iron core electromagnet, the QUAD 12000 scanner magnet
is the highest field "open MRI" in the industry.
The Company also plans to direct its marketing efforts to meeting the
increasing demand for low price MRI. To date, the increased pressure for lower
scanning prices has come largely from preferred provider organizations, health
maintenance organizations and other private sector group plans and stricter
insurance requirements, but government mandated health care reform is also
under consideration.
To meet this demand, the Company has set competitive prices for the QUAD
12000 and QUAD 7000 scanners. In addition to reducing the health care
provider's equipment cost, the QUAD scanners' improved image processing speed
and extra-bed(s) option (allowing patients to be prepped while another patent
is being scanned) would enable the provider to increase patient volume and
further reduce per scan costs.
The reduced per scan costs will enable the Company to promote the QUAD
7000 in particular for short scan procedures such as MRI mammograms. MRI
mammograms have the advantage over traditional x-rays of involving no
radiation, and an MRI breast scan can be taken in most cases through ordinary
street clothes without any painful compression.
The Company also will seek to introduce new MRI applications for the QUAD
scanners such as MRI-directed surgery and head-to-toe MRI preventive
screening.
The Company is actively seeking to promote foreign sales and has sold
scanners in various foreign countries. Based on indications of interest,
meetings, sales trips abroad and negotiations, the Company is optimistic that
foreign sales will continue to be an important source of revenue.
The Company believes there are and will be significant market
opportunities abroad, particularly in Asia and Eastern Europe.
During the fiscal year ended June 30, 1999, 3.4% of the Company's
revenues were generated by foreign sales, as compared to 4.6% and 3.7% for
fiscal 1998 and 1997 respectively. See "Note 9 to Notes to Consolidated
Financial Statements" for the percentage of foreign sales as in relation to
the Company's total revenues.
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 $4.6 million in fiscal 1997, $3.7
million in fiscal 1998 and $3.1 million in fiscal 1999. The decreases in
fiscal 1998 and 1999 were principally the result of the retirement of old
scanners.
The Company anticipates that its new line of QUAD scanners will result in
significant upgrades income in future fiscal years. The potential for upgrades
income originates in the exceptional versatility and productivity of the MRI
technology. New medical uses for the technology are constantly being
discovered. Dramatic new features can often be added to the scanner by the
implementation of little more than versatile new software packages. 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.
Service and upgrade revenues are expected to increase as sales of QUAD
scanners and the size of the customer base increases.
RESEARCH AND DEVELOPMENT
During the fiscal year ended June 30, 1999, the Company incurred
expenditures of $6,647,555 (none of which was capitalized) on research and
development, as compared to $6,506,995 (none of which was capitalized) and
$3,928,035 ($108,809) of which was capitalized) incurred during the fiscal
years ended June 30, 1998 and June 30, 1997, respectively.
Research and development activities have focused, in large part, on the
development of the Company's new OR 360(TM), Open Sky MRI(TM) and Stand-Up
MRI(TM) scanners and the continued development and enhancement of the
Company's QUAD MR scanners. The OR 360, Open Sky MRI, Stand-Up MRI and QUAD
scanners involve significant software and hardware development as the new
products represented entirely new hardware design and architecture requiring a
complete new operating software system. The Company's research activity
includes developing a multitude of new features for the QUAD series scanners
made possible by the QUAD's high speed processing power.
BACKLOG
The Company's backlog of unfilled orders at September 1, 1999 was
approximately $1.4 million, as compared to $2.8 million at September 1, 1998.
Of these amounts, approximately $0.35 million and $0.6 million had been paid
to the Company as customer advances as at September 1, 1999 and September 1,
1998, respectively. Of the backlog amounts at September 1, 1998 and September
1, 1999, none 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
There are currently numerous patents in effect which relate to the
technology and components of the MRI scanners, some of which are registered in
the name of the Company and others which are registered in the name of Dr.
Raymond V. Damadian, the President and principal stockholder of the Company.
The Company believes that these patents, which expire at various times from
1999 to 2016, and the know-how it developed, are material to its business.
Dr. Damadian has granted an exclusive world-wide license to the Company
to make, use and sell apparatus covered by certain domestic and foreign
patents relating to his MRI technology. The license continues until the
expiration of the last patent included within the licensed patent rights, but
is terminable earlier, at the option of Dr. Damadian, if he is removed from
his position as Chairman of the Board or President of the Company without his
consent, or if any stockholder or group of stockholders acting in concert
becomes the beneficial owner of Company securities having voting power equal
to or greater than the voting power of the securities held directly by him,
his executors, administrators, successors or heirs. The agreement can also be
terminated by Dr. Damadian upon the commission of an act of bankruptcy by the
Company. If Dr. Damadian is unable to serve the Company by reason of his death
or disability, the license agreement will remain in effect.
One of the patents, issued in the name of Dr. Damadian and covered by
said license, is 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.
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 42 patents issued and 34 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 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.
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%. 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 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. They require smaller space to install.
4. Their annual operating costs are lower.
5. 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.
FONAR faces competition within the MRI industry from such firms as
General Electric Company; Picker International, which is a Division of General
Electric Company PLC, of England; Philips N.V.; Toshiba Corporation, Hitachi
Corporation, Shimadzu 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 5%. 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, 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 OR 360 explicitly addresses this growing market reception of MRI
guided surgical procedures but is not yet available as a product. Fonar's
Stand-Up MRI and QUAD series magnets do also. Although not enabling a full
operating theater as the OR 360 does, the iron frame "Open" QUAD and Stand-Up
MRI 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
5%, 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 OR 360, Open Sky MRI and
Stand-Up MRI scanners will 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 OR 360 or Open Sky MRI 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
Under the Medical Device Amendments of 1976 to the Federal Food, Drug and
Cosmetic Act, all medical devices are classified by the Food and Drug
Administration (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. The
Company received approval to market its Beta 3000 and Beta 3000M scanners as
Class III devices on September 26, 1984. 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. On June 25, 1992, the Company
received FDA clearance to market the Ultimate Magnetic Resonance Imaging
Scanner as a Class II device. The Company received FDA clearance to market the
QUAD 7000 in April 1995 and for the QUAD 12000 in November 1995. The Company
anticipates that it will need FDA approvals or clearances for its OR 360, Open
Sky MRI and Stand-Up MRI scanners.
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. The Company is subject to these requirements and has received
the necessary approvals. In addition, the Company needs to obtain any
necessary approvals from the appropriate foreign governmental and other
authorities in connection with its export sales.
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.
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.
The Company obtains approvals as necessary in connection with the sales
of its products in foreign countries. In some cases, U.S. Food and Drug
Administration 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.
Commencing in fiscal 1998 export sales to most European countries and
certain other countries have required CE certification (essentially safety
requirements for electrical products). On May 25, 1999, the Company obtained
CE certification. Previously, on April 9, 1999, the Company was approved for
ISO 9001 Certification for its Quality Management System. The Quality
Management System is applicable to the design, manufacture, administration of
installation and servicing of magnetic resonance imaging scanner systems.
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.
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-speciality
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 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 scanner is a mobile unit
which being provided to a number of hospitals on a shared basis, as needed, on
a mobile route in Rockland, Orange and Putnam counties in New York.
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.
As a result of these transactions with Dr. Damadian, HMCA has acquired
the business of managing 19 MRI scanning centers. Sixteen of the scanning
centers are 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 is providing 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 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 40,000 primary care patient visits per year.
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 85,000 patient visits per year.
HMCA GROWTH STRATEGY
In addition, HMCA may also pursue acquisitions pursuant to 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.
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.
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.
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.
PHYSICIAN AND DIAGNOSTIC MANAGEMENT SERVICES
HMCA's services to the facilities it manages encompass substantially all
of the facilities' operations. 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 Ancilliary Services. HMCA can offer access to
diagnostic imaging equipment through diagnostic imaging facilities managed by
it. The Company is expanding the ancilliary services offered in its network to
include CT-scans, x-rays, ultrasound, and other ancilliary services useful to
its clients.
(7) Marketing Strategies. HMCA is responsible for developing marketing
plans for its clients.
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.
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 speciality practices as well as diagnostic
imaging facilities and other ancilliary 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.
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 ancilliary services offered in its
network to include CT scans, 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
Various States prohibit business corporations from practicing medicine.
Consequently, HMCA leases space and equipment to clients and provides clients
with a range of non-medical administrative and managerial services. HMCA does
not engage in the practice of medicine or establish standards of medical
practice or policies for its clients in any such State.
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.
HMCA's clients generate revenue from patients covered by no-fault
insurance and workers' 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 is 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, 1999, the Company employed 528 persons on a full-time and
part-time basis. Of such employees, 10 were engaged in marketing and sales, 39
in research and development, 84 in manufacturing, 48 in customer support
services, 304 in administration (including 164 on site at facilities and
offices managed by HMCA and 83 performing billing, collection and
transcription services for those facilities) and 43 professional MRI
technicians on site at diagnostic imaging centers managed by HMCA.
ITEM 2. PROPERTIES
The Company leases approximately 135,240 square feet of office and plant
space at its principal offices in Melville, New York and at one other location
in Farmingdale, New York at a current aggregate annual rental rate of
approximately $967,000, 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.
Management believes that these premises are adequate for its current needs. 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.
ITEM 3. LEGAL PROCEEDINGS
On September 2, 1992, the Company filed an action against General
Electric Company, ("General Electric"), Hitachi Ltd. ("Hitachi") and other
defendants for patent infringement in the United States District Court for the
Eastern District of New York seeking injunctive relief and damages. (FONAR
Corporation and Dr. Raymond V. Damadian v. Hitachi Ltd. et. al. Civil Action
No. 92-4196). In April, 1995, after the opening statements by counsel at the
commencement of trial, FONAR and Hitachi reached a settlement. On May 26,
1995, the jury rendered a verdict against General Electric Company for
infringement of two of FONAR's patents: United States Patent Number 3,789,832
entitled "Apparatus and Method for Detecting Cancer in Tissue" and United
States Patent Number 4,871,966 entitled "Apparatus and Method for Multiple
Angle Oblique Magnetic Resonance Imaging."
Following the post trial applications and appeals, the District Court
entered a judgment against General Electric and on July 2, 1997, General
Electric paid $128.7 million (inclusive of interest) without, however,
prejudicing its right to appeal to the Supreme Court. In October 1997, the
Supreme Court denied General Electric's petition.
On June 16, 1995, the Company filed an action against Siemens Medical
Systems, Inc., Philips Electronics North America Corporation, Philips
Electronics, N.V. and other defendants for patent infringement in the United
States District Court for the Eastern District of New York. (FONAR Corporation
and Dr. Raymond V. Damadian v. Siemens Medical Systems, Inc. et al. Civil
Action No. CV 95-2469 (LJW). FONAR alleged that four of its patents were
infringed, including U.S. Patent Nos. 3,789,832 (Apparatus and Method for
Detecting Cancer in Tissue) and 4,871,966 (Apparatus and Method for Multiple
Angle Oblique Magnetic Resonance Imaging).
Previously, in May 1995, Siemens Medical Systems, Inc. had filed a
complaint against FONAR in the United States District Court for the District
of Delaware seeking a declaratory judgment that the four patents were invalid
and unenforceable, as well as an adjudication that Siemens was not infringing
the four patents. The complaint was further amended on December 14, 1995 to
allege infringement of two additional patents.
Thereafter, on June 30, 1995, Philips Electronics North America
Corporation and Philips Electronics, N.V. filed a complaint against FONAR in
the United States District Court for the District of Delaware seeking a
declaratory judgment that FONAR's U.S. Patents Nos. 3,789,832 and 4,871,966
were invalid, unenforceable and not infringed (Philips Electronics North
America Corporation and Philips Electronics, N.V. v. FONAR Corporation, Case
No. 95-431). Separately, U.S. Philips Corporation, an affiliate of Philips
Electronics North America Corporation and Philips Electronics, N.V., commenced
an action in the United States Court for the District of Delaware alleging
infringement by FONAR of two of its patents. (U.S. Philips Corporation v.
Fonar Corporation and Raymond V. Damadian, M.D. MR Scanning Centers Management
Company, Civil Action No. 95-448.)
In April 1996, FONAR entered into an agreement with Philips Electronics
N.V., Philips Electronics North America Corporation, Philips Medical Systems
North America and U.S. Philips Corporation setting the lawsuits and claims
between them. The settlement involved a monetary payment to FONAR.
In September 1996, FONAR entered into an agreement with Siemens Medical
Systems, Inc. and its affiliates settling the lawsuits and claims between
them. The settlement agreement, which does not admit liability by either
party, includes a cross-license by Siemens and FONAR of certain patents
relating to MRI technology. FONAR received a monetary payment from Siemens and
an agreement by Siemens to pay FONAR royalties.
On March 4, 1996, the Company filed an action against Toshiba
Corporation, Toshiba America Medical Systems, Inc., Toshiba America MRI, Inc.
and others alleging infringement of four of its MRI patents. FONAR Corporation
and Dr. Raymond V. Damadian v. Toshiba Corporation, Toshiba America Medical
Systems, Inc., Toshiba America MRI, Inc. et al. (U.S. District Court, Eastern
District of New York, Civil Action No. 96-0963). Thereafter, in February 1997,
Toshiba America MRI, Inc. commenced an action against FONAR in the U.S.
District Court for the Northern District of California (Toshiba America MRI,
Inc. v. Fonar Corporation, Case No.: C97-00664 SBA ENE) alleging infringement
of certain of its patents relating to magnetic resonance imaging technology.
In May 1998 FONAR and Toshiba amicably resolved the litigation in both the New
York and California United States District Courts. Neither party admitted
liability in the settlement agreement. The parties cross-licensed each other
on the patents-in-suit, and FONAR received a monetary payment from Toshiba.
Other terms of the settlement are confidential.
On February 2, 1999, the Company filed an action against Elscint Inc.,
Elscint MR Inc., Elscint Ltd. and others in the United States District Court
for the Eastern District of New York (Civil Action No. 98-CV-0681) alleging
infringement of the Company's Multi-Angle Oblique Imaging Patent (U.S. Patent
No. 4,871,966). In February 1999 these claims and counterclaims were amicably
resolved. The settlement involved a monetary payment to the Company.
On February 2, 1999, the Company filed an action against Shimadzu
Corporation in the United States District Court for the Eastern District of
New York (Civil Action No. 98-0680) alleging infringement of the Company's
Multi-Angle Oblique Imaging Patent (U.S. Patent No. 4,871,966). In November
1998, the litigation was resolved by the parties. Shimadzu Corporation agreed
to pay royalties to the Company in exchange for Shimadzu Corporation being
granted a license under the patent.
In January 1998, the Company filed an action against Health South, Inc.,
an end-user of MRI scanners in the United States District Court for the
Eastern District of New York (Civil Action No. CV-98-0679) alleging
infringement of the Company's Multi-Angle Oblique Imaging Patent (U.S. Patent
No. 4,871,966). Health South, Inc. filed a declaratory judgment counterclaim
for non-infringement and invalidity. The case is in discovery. In addition,
Health South, Inc. filed a third party claim against a manufacturer of the
scanners seeking indemnification and contribution. The manufacturer has also
asserted non-infringement and invaliditiy claims respecting the patent.
There are certain other minor litigations to which the Company is a
party. 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 over-the-counter market under
the National Association of Securities Dealers Automated Quotation System
("NASDAQ") symbol FONR. The following table sets forth the high and low bid
and asked prices reported in NASDAQ System for the periods shown. The prices
represent quotations between dealers and do not include certain mark-ups,
mark-downs or commissions, and do not necessarily represent actual
transactions.
Fiscal Quarter
Bid Ask
High Low High Low
July - September 1996 2.63 2.13 2.72 2.19
October - December 1996 3.06 2.22 3.13 2.25
January - March 1997 4.44 2.09 4.50 2.13
April - June 1997 3.16 2.28 3.19 2.34
July - September 1997 3.87 2.72 3.94 2.75
October - December 1997 4.03 2.63 4.06 2.66
January - March 1998 3.03 2.38 3.13 2.41
April - June 1998 2.72 1.94 2.75 2.00
July - September 1998 2.47 1.25 2.50 1.31
October - December 1998 1.97 0.97 2.00 1.00
January - March 1999 1.72 1.19 1.78 1.22
April - June 1999 1.41 1.03 1.50 1.09
July - September 10 1999 1.16 0.97 1.16 0.94
On September 10, 1999, the Company had approximately 5,514 stockholders
of record of the Company's Common Stock, 13 stockholders of record of the
Company's Class B Common Stock, 4 stockholders of record of the Company's
Class C Common Stock and 4,698 stockholders of record of the Company's 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, 1999. 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.
As of, or For the Period Ended June 30,
STATEMENT OF OPERATIONS 1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ -----------
Revenues $ 36,945,044 $ 27,554,357 $ 17,633,066 $ 13,915,725 $16,552,676
Cost of $ 29,391,682 $ 23,841,844 $ 18,428,574 $ 14,417,384 $10,192,542
revenues
Research and $ 6,647,555 $ 6,506,995 $ 3,928,035 $ 3,607,703 $ 3,356,120
Development Expenses
Net Income (loss) $(14,215,763) $ (5,653,086) $ 56,068,771 $(11,407,444) $(7,549,625)
Net income (loss) $(.22) $(.09) 1.00 (.22) (.17)
per common share
Weighted average 64,071,151 61,175,986 56,097,965 51,516,470 45,055,334
number of shares
outstanding *
BALANCE SHEET DATA
Working capital $ 37,863,029 $ 54,426,483 $ 62,659,470 $ (1,575,857) $(4,498,911)
(deficit)
Total $ 97,648,168 $108,447,780 $106,690,561 $ 28,057,384 $27,949,122
assets
Long-term debt and $ 24,821,834 $ 16,003,479 $ 4,626,269 $ 4,204,935 $ 4,274,420
obligations under
capital leases
Stockholders' $ 59,303,773 $ 72,572,486 $ 73,245,262 $ 11,412,629 $29,394,096
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
AND RESULTS OF OPERATION.
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 QUAD 7000 and QUAD 12000 MRI
scanners. Having received the necessary FDA approvals for its QUAD scanners,
the Company believes it is in a position to aggressively seek new sales. The
QUAD 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. Among the Company's works-in-progress are the OR
360(TM), Open Sky MRI(TM) and Stand-Up MRI(TM), which share the fundamental
technology of the QUAD scanners and also have a field strength of 0.6 Tesla.
The Company expects vigorous sales from its new products. (See "Description of
Business - Products, Works-in-Progress and Product Marketing.")
As part of its scanner marketing program, the Company has attended the
industry's annual trade show, RSNA (Radiological Society of North America)
since 1995 and plans to do so again in November 1999. The Company believes
that it is uniquely positioned to take advantage of the rapidly expanding
"Open MRI" market, as the manufacturer of the only high-field "Open MRI" in
the industry. The Company expects marked demand for its products since image
quality increases as a direct proportion to magnetic field strength. In
addition, the Company's new scanners provide improved image quality and high
speed imaging at costs that are significantly less than the competition and
more in keeping with the medical cost reduction demands being made by our
national leaders on behalf of the public.
HMCA 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. HMCA has completed five acquisitions since it was formed in
March 1997.
The first acquisition was of a group of companies engaged in the business
of managing three diagnostic imaging centers and one multi-specialty practice
in New York State (the "Affordable Companies"). The second acquisition was of
Raymond V. Damadian, M.D. MR Scanning Centers Management Company ("RVDC"), a
company owned by FONAR's principal stockholder, President and Chairman of the
Board, Raymond V. Damadian. 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 third acquisition was the
acquisition of the business and assets of Central Health Management Co., LLC
("Central Health") a multi-specialty management service organization (MSO) in
Yonkers, New York. The fourth acquisition was the acquisition of A & A
Services, Inc. ("A & A"), an MSO managing four primary care practices in
Queens County, New York, and the fifth acquisition was the acquisition of
Dynamic Health Care Management, Inc. ("Dynamic"), an MSO managing three
multi-specialty physician practices in Nassau and Suffolk Counties in New
York.
In addition, HMCA sponsored the opening of and manages two
multi-specialty facilities. These facilities are located in Orlando, Florida
and Elmhurst, New York.
HMCA did not actively engage in business until after June 30, 1997, which
was the effective date of its acquisitions of the Affordable Companies and
RVDC. As separate businesses, the Affordable Companies had been engaged in
business since 1994 and RVDC had been engaged in business since 1990. For
financial statement presentation the results of operations, assets and
liabilities of the Company and RVDC have been consolidated for prior periods.
The Affordable Companies, Central Health, A & A and Dynamic, have been
consolidated effective as of the dates of their respective acquisitions (June
30, 1997, January 23, 1998, March 20, 1998 and August 20, 1998, respectively).
The Company has assessed and continues to assess the impact of the Year
2000 Issue (Y2K) on its financial reporting systems and operations. The Year
2000 Issue is the result of computer programs being written using two digits
(rather than four) to define the applicable year. The Company has developed a
plan to meet this issue. The Company has reviewed all in-house computer based
systems. The MIS department is on schedule for updating or replacing older
systems that are not Y2K compatible. The Company has also reviewed, tested and
has started to change its existing customer base of MRI scanners. The Company
expects that all computer based systems will be Y2K compliant in the last
quarter of 1999. Based upon preliminary information, costs of addressing these
items are currently not expected to have a material adverse impact on the
Company's financial position.
RESULTS OF OPERATIONS. FISCAL 1999 COMPARED TO FISCAL 1998
In fiscal 1999, the Company experienced a net loss of $14.2 million on
revenues of $36.9 million as compared to net loss of $5.7 million on revenues
of $27.6 million for fiscal 1998.
Revenues attributable to the Company's physician and diagnostic
management services segment (HMCA) increased to $31.3 million in fiscal 1999
from $21.1 million in fiscal 1998. Operating income of $3.1 million was
recognized from the Company's physician and diagnostic management services in
fiscal 1999, as compared to an operating income of $2.7 million in fiscal
1998.
Revenues attributable to the Company's medical equipment segment declined
to $6.5 million in fiscal 1999 from $7.8 million in fiscal 1998, reflecting
lower sales volume in fiscal 1999. Results of operations for the medical
equipment segment improved, however, from a loss of $20.3 million in fiscal
1998 to a loss of $18.7 million in fiscal 1999.
As a result, the Company's consolidated operating loss improved to a loss
of $15.6 million for fiscal 1999 from a loss of $17.6 million for fiscal 1998,
a further improvement from the operating loss of $24.4 million for fiscal
1997.
Other income of $8.6 million (principally the net proceeds from the
Company's patent enforcement lawsuits) and investment income of $3.7 million
were recognized by the Company in fiscal 1998 as compared to other income of
approximately $1.0 million (principally the net proceeds from the Company's
patent enforcement lawsuits) and investment income of $2.1 million in fiscal
1999.
Costs of revenues and expenses increased from $45.1 million in fiscal
1998 to $52.6 million in fiscal 1999, reflecting principally 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 to $21.8 million in fiscal 1999 from $13.7 million in
fiscal 1998. Research and development expenses increased to $6.6 million in
fiscal 1999 as compared to $6.5 million in fiscal 1998.
Overall, costs of revenues and expenses for the Company's medical
equipment segment, however, declined to $25.1 million in fiscal 1999 from
$28.1 million in fiscal 1998 reflecting, most significantly, reductions in
costs of product sales ($4.9 million in fiscal 1999 as compared to $7.8
million in fiscal 1998) and in general and administrative expenses ($7.7
million in fiscal 1999 as compared to $7.5 million in fiscal 1998) and costs
of revenue ($8.5 million in fiscal 1999 as compared to $11.4 million in fiscal
1998).
Revenues generated by sales of QUAD MRI scanners were $4.1 million (15%
of total revenues) in fiscal 1998 and $2.6 million (7% of total revenues) in
fiscal 1999. Revenues attributable to sales of the Company's Ultimate scanners
during the same period were $0.00.
Sales of Beta scanners were $0.00 in fiscal 1998 and $430,000
(approximately 1% of total revenues) in fiscal 1999.
Sales to affiliated parties represented approximately 0.4% ($150,000) of
the Company's revenues in fiscal 1999, as compared to 0.3% ($100,000) of the
Company's revenues in fiscal 1998.
Gross profit margins on product sales to unrelated parties were negative
(98%) in fiscal 1998 and negative (49%) in fiscal 1999. This reflected the
losses on sales of the Company's QUAD scanners. The Company's strategy is to
attempt to hold down the price of its QUAD scanners and to increase
profitability by reducing manufacturing costs and increasing volume. The
effectiveness of this strategy will not be discernible until higher sales
volume for the Company's QUAD scanners is achieved.
To reduce the cost of manufacturing its QUAD scanners, the Company
expanded its manufacturing capacity in fiscal 1999 and 1998 by acquiring
approximately $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 to
approximately $6.5 million in fiscal 1999 from approximately $7.8 million in
fiscal 1998. These trends reflected a decline in service revenue from $2.5
million in fiscal 1998 to $2.3 million in fiscal 1999 and a decrease in
product sales in fiscal 1999 ($3.4 million) from fiscal 1998 ($3.9 million).
The decline in service revenue reflects the retirement of old scanners by the
Company's customers. The Company does not expect the decline in revenue to
continue. The Company is enthusiastic about the future of its FONAR 360
product line and Stand-Up MRI scanners (See Works in Progress) 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.
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 1999 the
Company continued its investment in the development of its new MRI scanners,
together with software and upgrades, with an investment of $6,647,555 in
research and development (none of which was capitalized) as compared to
$6,506,995 (none of which was capitalized) in fiscal 1998. The research and
development expenditure was approximately 102% of revenues attributable to the
Company's medical equipment segment (and 18% of total revenues) in 1999 and
$83.3% of medical equipment segment revenues in 1998 (and 23.6% of total
revenues).
The Company has continued its efforts to increase scanner sales in
foreign countries as well as domestically. Based on sales to date, further
indications of interest, meetings, sales trips abroad and negotiations, the
Company is optimistic that foreign sales will continue to prove a significant
source of revenue.
The Company continued to benefit as a result of programs set in motion in
fiscal 1989; namely strict cost containment initiatives and expanding the
corporate business into a greater number of profitable enterprises within and
related to the MRI and medical industries (e.g., physician and diagnostic
management services, customer service, upgrades). As a result of this
expansion, the percentage of the Company's revenue derived from sources other
than scanner sales was approximately 90.9% for fiscal 1999 and 85.7% for
fiscal 1998.
During the fiscal year ended June 30, 1999, the Company realized income
of approximately $1.0 million from the settlement of various legal disputes
(essentially its patent infringement actions) as compared to approximately
$8.6 million in fiscal 1998.
RESULTS OF OPERATIONS. FISCAL 1998 COMPARED TO FISCAL 1997
In fiscal 1998, the Company experienced a net loss of $5.7 million on
revenues of $27.6 million as compared to net income of $56.1 million on
revenues of $17.6 million for fiscal 1997. As a result of HMCA's acquisitions,
revenues attributable to the Company's physician and diagnostic management
services segment (HMCA) increased dramatically, to $21.1 million in fiscal
1998 from $9.8 million in fiscal 1997. Operating income of $2.7 million was
recognized from the Company's physician and diagnostic management services in
fiscal 1998, as compared to a loss of $71,769 in fiscal 1997. Revenues
attributable to the Company's medical equipment segment declined to $7.8
million in fiscal 1998 from $9.5 million, reflecting lower sales volume in
fiscal 1998. Results of operations for the medical equipment segment improved,
however, from a loss of $24.3 million in fiscal 1997 to a loss of $20.3
million in fiscal 1998. Other income of $8.6 million (principally the net
proceeds from the Company's patent enforcement lawsuits) and investment income
of $3.7 million were recognized by the Company in fiscal 1998 as compared to
other income of $83.1 million (principally the net proceeds from the Company's
patent enforcement lawsuits) and investment income of $385,500 in fiscal 1997.
Costs of revenues and expenses increased from $42 million in fiscal 1997
to $45.1 million in fiscal 1998, reflecting the expansion of the Company's
physician and diagnostic management services operations and an increase in
research and development in the medical equipment segment. Costs of revenue
and expenses for the Company's physician and diagnostic management services
increased to $17.0 million in fiscal 1998 from $9.1 million in fiscal 1997.
Research and development expenses increased to $6.5 million in fiscal 1998 as
compared to $3.9 million in fiscal 1997.
Overall, costs of revenues and expenses for the Company's medical
equipment segment, however, declined to $28.1 million in fiscal 1998 from
$34.4 million in fiscal 1997 reflecting, most significantly, reductions in
general and administrative expenses ($7.5 million in fiscal 1998 as compared
to $11.8 million in fiscal 1997) and costs of revenue ($11.4 million in fiscal
1998 as compared to $12.3 million in fiscal 1997).
Net income for the Company for fiscal 1997 reflects the net income
attributable to the award received by the Company in its patent litigation.
Revenues generated by sales of QUAD MRI scanners were $4.8 million
(approximately 27% of total revenues) in fiscal 1997 and $4.1 million (15% of
total revenues) in fiscal 1998. Revenues attributable to sales of the
Company's Ultimate scanners during the same period were $0.00.
Sales of Beta scanners were $0.00 in fiscal 1997 and 1998.
Sales to affiliated parties represented approximately 0.3% ($0.1 million)
of the Company's revenues in fiscal 1998, as compared to approximately 4%
($0.7 million) in fiscal 1997.
Gross profit margins on product sales to unrelated parties were negative
(60%) in fiscal 1997 and negative (98%) in fiscal 1998. 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 1998 by acquiring approximately
$1.4 million 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 to
approximately $7.8 million in fiscal 1998 from approximately $9.5 million in
fiscal 1997. These trends reflected a decline in service revenue from $2.7
million in fiscal 1997 to $2.5 million in fiscal 1998 and a decrease in
product sales in fiscal 1998 ($3.9 million) from fiscal 1997 ($5.2 million).
In fiscal 1998 the Company continued its investment in the development of
its new MRI scanners, together with software and upgrades, with an investment
of $6,506,995 in research and development (none of which was capitalized) as
compared to $3,928,035 ($108,809 of which was capitalized) in fiscal 1997. The
research and development expenditure was approximately 83.3% of revenues
attributable to the Company's medical equipment segment (and 23.6% of total
revenues) in 1998 and $41.2% of medical equipment segment revenues in 1997
(and 22.3% of total revenues).
During the fiscal year ended June 30, 1998, the Company realized income
of approximately $8.6 million from the settlement of various legal disputes
(essentially its patent infringement actions) as compared to approximately
$83.1 million in fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents declined from $41.8 million at June 30, 1998 to
$15.2 million at June 30, 1999. Principal uses of cash during fiscal 1999
included acquisitions in the amount of $2.7 million, capital expenditures of
$4.8 million, payment of special dividends to shareholders of $3.9 million,
repayment of indebtedness and capital lease obligations in the amount of $2.1
million, purchase of treasury stock of $197,000 and $12.4 million to fund the
losses for the fiscal year.
Marketable securities approximated $20.2 million as of June 30, 1999 as
compared to $20.3 million as of June 30, 1998. During fiscal 1999, the Company
realized a loss of approximately $153,930 on sales of equity securities. From
June 30, 1998 to June 30, 1999 the Company reduced its investments in equity
securities from approximately $11 million to $100,000 and increased its
investments in U.S. government obligations from approximately $6.7 million to
$11.0 million and in corporate and government agency bonds from approximately
$2.6 million to $9.3 million. This has had the intended effect of reducing the
volatility of the Company's investment portfolio.
Cash used in operating activities for fiscal 1999 approximated
$12,421,000. Cash used in operating activities was attributable substantially
to the funding of the net loss for fiscal 1999.
Cash used in investing activities for fiscal 1999 approximated
$7,553,000. The principal uses of cash in investing activities during fiscal
1999 consisted of cash used in connection with the acquisitions by HMCA of
Dynamic Health Care Services Management, Inc. and Central Health Care Services
Management Company, LLC of approximately $2,652,000 and expenditures for
property and equipment of approximately $4,775,000.
Cash used in financing activities for fiscal 1999 approximated
$6,603,000. The principal uses of cash in financing activities during fiscal
1999 consisted of dividend distributions to stockholders and holders of
minority interests approximating $4,308,000 and repayment of principal on
long-term debt of approximately $2,098,000.
Total liabilities increased since June 30, 1998 by approximately $2.5
million to approximately $38.3 million at June 30, 1999. The increase in
liabilities from June 30, 1998 was attributable to approximately $9.4 million
in new long-term debt incurred in connection with the acquisition of Dynamic
Health Care Management, Inc. and Central Health Care Services Management
Company, LLC, reduced by approximately $2.1 million of payments of principal
on long-term debt and a net reduction of other liabilities of approximately
$4.8 million.
As at June 30, 1999, the Company's past due obligations consisted of
approximately $1.4 million in past due taxes (various state taxes), and
approximately $6,000 in other past due indebtedness. The Company is seeking to
enter into payment plans with taxing authorities with respect to past due
taxes and to restructure its other past due indebtedness.
As of June 30, 1999, the Company had no unused credit facilities with
banks or financial institutions.
The Company's business plan currently includes an aggressive program for
manufacturing and selling its new line of QUAD scanners which are achieving
success in the marketplace. In addition the Company plans, through its
subsidiary, Health Management Corporation of America, to develop and expand
its physician and diagnostic management services) business (See "Description
of Business").
The Company believes its present financial resources are sufficient to
achieve the sales, service and production levels necessary to support its
operations.
The Company has developed and begun to implement a new program to finance
a portion of the purchase price of its scanners through a newly formed
subsidiary, Fonar Acceptance Corporation, and to assist the customer in
obtaining the remaining portion of its financing through an independent source
or sources. The new program is intended to increase the overall profitability
of the Company by assisting in the sale of scanners and participating in the
profits derived from financing those sales.
Advances and notes to affiliates and related parties increased by
approximately $100,000 from June 30, 1998 to June 30, 1999. As these are
long-term assets, they tend to reduce the Company's liquidity.
There were no past due receivables and lease payments from affiliates as
at June 30, 1999 and June 30, 1998.
Capital expenditures for each of fiscal 1999 and 1998 approximated $5.5
million and $4.2 million, respectively, and substantially consisted of office
and production equipment.
The Company's business plan initiated in September 1989, had as its
objective the enhancement and stabilization of revenue streams through the
generation of additional income from its installed base of scanners and
leasing programs. In addition, the Company instituted strict cost containment
programs. While continuing to focus on new sources of income, the Company now
has commenced aggressive sales and manufacturing of its new generation of Open
MRI scanners and is reemphasizing MRI Scanner sales. In addition, the Company
is enhancing its revenue by entering into the physician and diagnostic
management services business through its new subsidiary, HMCA.
Cost containment programs continue in force notwithstanding an increase
in costs and expenses resulting from increased manufacturing activity and
marketing of its MRI scanners and the expansion of HMCA's physician and
diagnostic management services business. These programs, which include
increasing the portion of manufacturing conducted on the Company's premises,
have enabled the Company to achieve significantly lower manufacturing costs
than would have otherwise been experienced in the production of its QUAD
scanners. This has enabled the Company to pass on to customers a much needed
reduction in the sales price of MRI scanners.
The Company'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 $2.5 million for the year ended June
30, 1998 and $2.3 million for the year ended June 30, 1999 (transactions
between the Company and its subsidiaries are eliminated in the consolidation).
The Company will continue to aggressively develop and market upgrades and
enhancements for previously installed scanners.
The Company's working capital surplus as of June 30, 1999 approximates
$37.9 million, as compared to a working capital surplus of $54.4 million as of
June 30, 1998.
The change in the Company's working capital position resulted primarily
from its investments in new equipment ($5.5 million), the cash portions of the
purchase prices for its acquisitions ($2.7 million) and its overall operating
losses, notwithstanding a decrease in its current liabilities of $4.3 million
($17.8 million as at June 30, 1999 as compared to $22.1 million as at June 30,
1998.
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.
STOCKHOLDER LITIGATION.
In June 1995, one of the Company's stockholders commenced an action in
the Delaware Court of Chancery against FONAR and its directors, alleging
breaches of fiduciary duties by the defendants for adopting the
recapitalization plan (Horace Rubenstein, Individually and on Behalf of All
Others Similarly Situated v. Raymond V. Damadian et al.) The action was
brought derivatively, on behalf of FONAR and as a class action on behalf of
the public holders of FONAR's Common Stock. FONAR and its directors answered
the complaint and vigorously denied any wrongdoing or liability.
The parties reached a settlement agreement, which was approved by the
Court of Chancery on April 29, 1997. The settlement was revised and approved
by the Court on March 2, 1998. The settlement increased the dividends payable
on the Company's Common Stock and Class A Non-voting Preferred Stock from the
proceeds of its patent litigation.
The three percent (3%) dividend originally payable on the Common Stock of
any awards collected by the Company on its Cancer Detection Patent (U.S.
Patent No. 3,789,832) was increased to 3 1/4% of the first $10 million
collected, 4 1/2% of the next $20 million collected and 5 1/2% of any
additional amounts collected of any such cash award. The 3% dividend
originally payable on the Class A Non-voting Preferred Stock of any awards on
the other four patents asserted in the litigation against General Electric
Company and Hitachi Ltd., including the Company's Multi-Angle Oblique Imaging
Patent, was similarly increased and extended to any patent litigation seeking
to enforce those patents commenced prior to November 29, 1997.
In addition, the Company issued 2,231,689.6 shares of Fonar Common Stock
to holders of record of its Common Stock as of October 20, 1995 (the record
date for determining the stockholders entitled to receive the Class A
Non-voting Preferred Stock). The settlement agreement further provided that
there would be no further recapitalizations increasing Dr. Damadian's voting
control for a period of 5 years without the consent of a majority of the
holders of the Company's Common Stock, and Dr. Damadian agreed to share with
the holders of the Common Stock any "control premium" he might receive in
connection with the sale by him of Class B or Class C Common Stock during a
five year period.
The dividends were paid according to a schedule of installments set forth
in the settlement agreement, as revised. These first installments (comprising
one-half of the total) were paid in May 1998 and the second, third and fourth
installments (each comprising one-sixth of the total) were paid in September
1998, December 1998 and March 1999, respectively.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to equity price risks on the marketable equity
securities included in its portfolio of investments. As at June 30, 1999,
equity securities and mutual funds composed of equity securities had a fair
value of $99,500.
The Company's investments in equity securities consist of common stock
traded in the major United States security markets. Approximately 100% of the
Company's investment in equity securities is composed of United States based
companies. The Company's portfolio of common stock is not concentrated in any
particular industry. Common stock prices are sensitive to changes in interest
rates and economic changes. The Company anticipates the future fair value of
its investment in common stock will closely follow the movement of the major
United States security markets.
The Company also invests in fixed rate instruments. None of the fixed
rate instruments in which the Company invests extend beyond June 30, 2005.
Below is a tabular presentation of the maturity profile of the fixed rate
instruments held by the Company at June 30, 1999.
INTEREST RATE SENSITIVITY
PRINCIPAL AMOUNT BY EXPECTED MATURITY
WEIGHTED AVERAGE INTEREST RATE
Date Investments in Fixed Rate Weighted Average
Instruments Interest Rate
6/30/00 $8,198,935 5.0%
6/30/01 5,100,000 5.1%
6/30/02 2,320,000 5.1%
6/30/03 3,207,000 6.0%
6/30/04 1,547,000 5.9%
6/30/05 100,000 6.6%
Total: $20,472,935
Fair Value
at 6/30/99: $20,098,198
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
Page No.
-------
INDEPENDENT AUDITORS' REPORT F-2
CONSOLIDATED BALANCE SHEETS F-3 - F-5
At June 30, 1999 AND 1998
CONSOLIDATED STATEMENTS OF OPERATIONS F-6
For the Three Years Ended June 30, 1999, 1998 and 1997
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY F-7 - F-12
For the Three Years Ended June 30, 1999, 1998 and 1997
CONSOLIDATED STATEMENTS OF CASH FLOWS F-13 - F-14
For the Three Years Ended June 30, 1999, 1998 and 1997
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-15 - F-59
SELECTED FINANCIAL DATA (*)
For the Five Years Ended June 30, 1999
(*) Included in Part II, Item 6 of the Form.
Information required by other schedules called for under Regulation S-X is
either not applicable or is included in the consolidated financial statements
or notes thereto.
F-1
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, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended June 30, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of FONAR Corporation and Subsidiaries at June 30, 1999 and 1998, and the
consolidated results of their operations and cash flows for each of the years
in the three-year period ended June 30, 1999, in conformity with generally
accepted accounting principles.
During each of the years in the three-year period ended June 30, 1999, a
significant portion of the Company's revenues was from related parties (see
Notes 2, 3, 5 and 19).
TABB, CONIGLIARO & McGANN, P.C.
New York, New York
September 24, 1999
F-2
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
--------
June 30,
-----------------------------
1999 1998
Current Assets ------------ ------------
Cash and cash equivalents $ 15,175,804 $ 41,751,704
Marketable securities 20,197,698 20,251,832
Accounts receivable, net 13,936,734 9,877,347
Costs and estimated earnings in
excess of billings on
uncompleted contracts 1,463,450 833,615
Inventories 4,237,778 3,513,622
Prepaid expenses and other current assets 701,433 285,965
------------ ------------
Total Current Assets 55,712,897 76,514,085
Restricted Cash 5,000,000 5,000,000
Property and Equipment - Net 11,442,493 9,102,239
Advances and Notes to Related Parties,
Net of discounts and allowance for
doubtful accounts of $904,000 at June 30,
1999 and 1998 1,434,689 1,350,114
Notes Receivable, Net of allowance for
doubtful accounts of $477,456 at June
30, 1999 and 1998 24,796 65,751
Excess of Cost Over Net Assets of
Businesses acquired, Net of accumulated
amortization of $1,498,166 and $272,224 at
June 30, 1999 and 1998, respectively 22,875,683 14,745,555
Other Intangible Assets, Net 888,992 1,161,601
Other Assets 268,618 508,435
------------ ------------
Total Assets $ 97,648,168 $108,447,780
============ ============
See accompanying notes to consolidated financial statements.
F-3
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
June 30,
-----------------------------
1999 1998
------------ ------------
CURRENT LIABILITIES
Current portion of debt and capital leases $4,474,293 $2,443,326
Accounts payable 2,401,926 2,029,552
Other current liabilities 9,920,991 11,256,159
Dividends payable - 3,909,366
Customer advances 95,518 669,731
Billings in excess of costs and estimated
earnings on uncompleted contracts - 31,032
Income taxes payable 957,140 954,642
Deferred income taxes - 793,794
------------ ------------
TOTAL CURRENT LIABILITIES 17,849,868 22,087,602
------------ ------------
LONG-TERM DEBT AND CAPITAL LEASES, Less
current maturities 20,347,541 13,560,153
OTHER LIABILITIES 131,629 113,663
------------ ------------
20,479,170 13,673,816
------------ ------------
MINORITY INTEREST 15,357 113,876
------------ ------------
COMMITMENTS, CONTINGENCIES AND OTHER
MATTERS (Notes 1, 2, 3, 5, 10, 11,
12, 14, 17 and 19)
See accompanying notes to consolidated financial statements.
F-4
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
(Continued)
June 30,
-----------------------------
1999 1998
------------ ------------
STOCKHOLDERS' EQUITY
Common stock - $.0001 par value; authorized
- 60,000,000 shares; issued and
outstanding - 53,793,042 and 52,954,465
shares at June 30, 1999 and 1998,
respectively $ 5,378 $ 5,294
Class B common stock (10 votes per share) -
$.0001 par value; authorized - 4,000,000
shares; issued and outstanding - 5,211
and 5,411 shares at June 30, 1999 and 1998,
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, 1999 and 1998 956 956
Class A non-voting preferred stock - $.0001
par value; authorized - 8,000,000 shares;
issued and outstanding - 7,836,286 shares
at June 30, 1999 and 1998 784 784
Preferred stock - $.001 par value;
authorized - 10,000,000 shares; issued
and outstanding - none - -
Paid-in capital in excess of par value 95,385,863 94,502,717
Accumulated other comprehensive income (203,106) (42,296)
Accumulated deficit (33,860,837) (19,645,074)
Notes receivable from stockholders (1,226,148) (1,854,450)
Unearned compensation (206,878) -
Treasury stock - 205,864 and 108,864 shares
of common stock at June 30, 1999 and 1998,
respectively (592,239) (395,445)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 59,303,773 72,572,486
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 97,648,168 $108,447,780
============ ============
See accompanying notes to consolidated financial statements.
F-5
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
REVENUES
Product sales - net $ 3,380,467 $ 3,937,726 $ 5,177,346
Service and repair fees - net 2,301,488 2,520,637 2,686,048
Management and other fees -
related parties - net 31,263,089 21,095,994 9,769,672
----------- ----------- -----------
TOTAL REVENUES - Net 36,945,044 27,554,357 17,633,066
----------- ----------- -----------
COSTS AND EXPENSES
Costs related to product sales 4,931,803 7,800,569 8,277,945
Costs related to service and
repair fees 2,697,695 2,373,808 2,202,120
Costs related to management and
other fees - related parties 21,762,184 13,667,467 7,948,509
Research and development 6,647,555 6,506,995 3,928,035
Selling, general and administrative 14,383,842 12,489,539 15,643,048
Provision for bad debts 628,836 929,786 3,608,062
Compensatory element of stock
issuances 275,242 1,108,362 407,052
Amortization of excess of cost over
net assets of businesses acquired 1,225,942 272,224 -
----------- ----------- -----------
TOTAL COSTS AND EXPENSES 52,553,099 45,148,750 42,014,771
----------- ----------- -----------
LOSS FROM OPERATIONS (15,608,055) (17,594,393) (24,381,705)
Interest expense (2,051,290) (728,327) (311,900)
Investment income 2,110,780 3,708,938 385,500
Other income, principally gain on
litigation awards 1,043,119 8,610,035 83,099,685
Minority interests in (income)
loss of partnerships (300,235) (146,890) 227,191
----------- ----------- -----------
(LOSS) INCOME BEFORE PROVISION FOR
TAXES (14,805,681) (6,150,637) 59,018,771
PROVISION (BENEFIT) FOR INCOME TAXES (589,918) (497,551) 2,950,000
----------- ----------- -----------
NET (LOSS) INCOME $ (14,215,763) $(5,653,086) $56,068,771
=========== =========== ===========
BASIC AND DILUTED NET (LOSS) INCOME
PER SHARE $(.22) $(.09) $1.00
===== ===== =====
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 64,071,151 61,175,986 56,097,965
========== ========== ==========
See accompanying notes to consolidated financial statements.
F-6
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 1999
Class A
Non- Paid-in Notes
Per Class A Common Stock Class C Voting Capital in Treasury Receivable
Share -------------------- Common Preferred Excess of Stock from
Amount Shares Amount Stock Stock Par Value Amount Stockholders
------ ---------- -------- -------- --------- ----------- ---------- ------------
Balance - June 30, 1998 $ - 52,954,465 $ 5,294 $ 956 $ 784 $94,502,717 $ (395,445) $(1,854,450)
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 in
settlement of liabilities - 463,161 47 - - 664,609 - -
Shares returned in
cancellation of notes
receivable - (190,000) (19) - - (539,357) - 539,376
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 - - - - - - - 88,926
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) $(1,226,148)
========== ======== ======== ========= =========== ========== ============
See accompanying notes to consolidated financial statements.
F-7
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 1999
Accumulated
Other Comprehensive
Unearned Comprehensive Accumulated Income
Compensation Income Deficit Total (Loss)
------------ ------------- ------------ ----------- -------------
Balance - June 30, 1998 $ - $ (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 in
settlement of liabilities - - - 664,656
Shares returned in
cancellation of notes
receivable - - - -
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
Amortization of unearned
compensation 68,959 - - 68,959
Conversion of Class B
common stock to Class A
common stock - - - -
----------- ----------- ------------ ----------- ------------
BALANCE - JUNE 30, 1999 $ (206,878) $ (203,106) $(33,860,837) $59,303,773 $(14,376,573)
=========== =========== ============ =========== ============
See accompanying notes to consolidated financial statements.
F-8
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 1998
Class A
Non- Paid-in Notes
Per Class A Common Stock Class C Voting Capital in Treasury Receivable
Share ---------------------- Common Preferred Excess of Stock from
Amount Shares Amount Stock Stock Par Value Amount Stockholders
------ ---------- -------- --------- --------- ----------- ---------- ------------
Balance - June 30, 1997 $ - 49,133,422 $ 4,913 $ 956 $ 785 $90,640,637 $(395,445) $(1,918,596)
Net loss - - - - - - - -
Other comprehensive income,
net of tax:
Unrealized gains on
securities, net of tax - - - - - - - -
Stock issued to employees
under 1995 stock bonus
plan 2.96 400,430 40 - - 1,184,838 - -
Shares issued under 1993
incentive stock option
plan 3.00 153,170 15 - - 459,495 - -
Issuance of stock under
1986 incentive stock
option plan .37 3,125 1 - - 1,171 - -
Issuance of stock in
settlement of liabilities 2.75 236,345 23 - - 650,641 - -
Shares issued under 1997
non-statutory plan - 2,600 1 - - 19,836 - -
Issuance of stock under
consulting contracts 2.79 223,030 22 - - 622,754 - -
Additional consideration
related to acquisition
of Affordable
Diagnostics, Inc. 1.60 576,000 57 - - 923,385 - -
Issuance of stock in
substitution for
4,909,767 warrants - 2,226,343 222 - - (40) - -
Net change in notes
receivable from
stockholders - - - - - - - 64,146
Amortization of unearned
compensation - - - - - - - -
Class A preferred stock
retired - - - - (1) - - -
---------- -------- --------- --------- ----------- ---------- -----------
BALANCE - JUNE 30, 1998 52,954,465 $ 5,294 $ 956 $ 784 $94,502,717 $(395,445) $(1,854,450)
========== ======== ========= ========= =========== ========== ===========
See accompanying notes to consolidated financial statements.
F-9
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 1998
Accumulated
Other Comprehensive
Unearned Comprehensive Accumulated Income
Compensation Income Deficit Total (Loss)
------------ ------------- ------------ ----------- -------------
Balance - June 30, 1997 $(1,096,000) $ - $(13,991,988) $73,245,262
Net loss - - (5,653,086) (5,653,086) $ (5,653,086)
Other comprehensive income,
net of tax:
Unrealized gains on
securities, net of tax - (42,296) - (42,296) (42,296)
Stock issued to employees
under 1995 stock bonus
plan - - - 1,184,878
Shares issued under 1993
incentive stock option
plan - - - 459,510
Issuance of stock under
1986 incentive stock
option plan - - - 1,172
Issuance of stock in
settlement of liabilities - - - 650,664
Shares issued under 1997
non-statutory plan - - - 19,837
Issuance of stock under
consulting contracts - - - 622,776
Additional consideration
related to acquisition
of Affordable
Diagnostics, Inc. - - - 923,442
Issuance of stock in
substitution for
4,909,767 warrants - - - 182
Net change in notes
receivable from
stockholders - - - 64,146
Amortization of unearned
compensation 1,096,000 - - 1,096,000
Class A preferred stock
retired - - - (1)
----------- ------------ ------------ ----------- ------------
BALANCE - JUNE 30, 1998 $ - $ (42,296) $(19,645,074) $72,572,486 $ (5,695,382)
=========== ============ ============ =========== ============
See accompanying notes to consolidated financial statements.
F-10
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 1997
Class A
Class A Class B Class C Non-Voting
Common Stock Common Stock Common Stock Preferred Stock
Per Share -------------------- -------------- ------------------ ------------------
Amount Shares Amount Shares Amount Shares Amount Shares Amount
--------- ---------- -------- ------- ------ --------- ------- --------- -------
Balance - June 30, 1996 $ - 42,871,751 $ 4,287 5,411 $ - 9,562,824 $ 956 7,855,627 $ 785
Shares issued as follows:
Stock bonus to employees (measured
at the average quoted market price
on the award dates) 2.56 159,025 16 - - - - - -
Under incentive stock option plan 2.09 259,375 26 - - - - - -
Shares issued under non-statutory plans 2.46 2,100,000 210 - - - - - -
Issuance of stock in settlement of
liabilities 2.49 579,271 58 - - - - - -
Issuance of stock under stock bonus
plans 2.38 1,000,000 100 - - - - - -
Issuance of stock under consulting
contracts 2.74 400,000 40 - - - - - -
Issuance of stock for acquisition of
Affordable Diagnostics, Inc. 2.06 1,764,000 176 - - - - - -
Net change in notes receivable from
stockholders - - - - - - - - -
Dividend - common stock .05 - - - - - - - -
Dividend - Class A preferred stock .65 - - - - - - - -
Net income - - - - - - - -
---------- -------- ------- ------ --------- ------- --------- -------
BALANCE - JUNE 30, 1997 49,133,422 $ 4,913 5,411 $ - 9,562,824 $ 956 7,855,627 $ 785
========== ======== ======= ====== ========= ======= ========= =======
See accompanying notes to consolidated financial statements.
F-11
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 1997
Paid-in Notes
Capital in Treasury Stock Receivable
Excess of --------------------- from Unearned Accumulated
Par Value Shares Amount Stockholders Compensation Deficit
----------- -------- ---------- ------------ ------------ -------------
Balance - June 30, 1996 $75,985,245 108,864 $ (395,445) $(1,760,281) $ - $(62,422,918)
Shares issued as follows:
Stock bonus to employees (measured
at the average quoted market price
on the award dates) 407,036 - - - - -
Under incentive stock option plan 543,334 - - - - -
Shares issued under non-statutory plans 5,159,166 - - - - -
Issuance of stock in settlement of
liabilities 1,444,464 - - - - -
Issuance of stock under stock bonus
plans 2,375,296 - - - - -
Issuance of stock under consulting
contracts 1,095,960 - - - (1,096,000) -
Issuance of stock for acquisition of
Affordable Diagnostics, Inc. 3,630,136 - - - - -
Net change in notes receivable from
stockholders - - - (158,315) - -
Dividend - common stock - - - - - (2,551,146)
Dividend - Class A preferred stock - - - - - (5,086,695)
Net income - - - - - 56,068,771
----------- -------- ---------- ------------ ------------ ------------
BALANCE - JUNE 30, 1997 $90,640,637 108,864 $ (395,445) $(1,918,596) $(1,096,000) $(13,991,988)
=========== ======== ========== ============ ============ =============
See accompanying notes to consolidated financial statements.
F-12
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $(14,215,763) $ (5,653,086) $ 56,068,771
Adjustments to reconcile net (loss)
income to net cash provided by
(used in) operating activities:
Minority interest in income
(loss) of partnerships 300,235 146,890 (227,191)
Depreciation and amortization 4,657,819 2,917,603 2,023,465
Gain on sale of equipment (53,573) - -
Imputed interest on deferred
payment obligations 482,716 27,000 -
Provision for bad debts 628,836 929,786 3,608,027
Compensatory element of stock
issuances 275,242 1,108,362 407,052
Stock issued in settlement of
current liabilities 664,656 639,715 1,444,522
Writedown of deferred patent
litigation costs - - 2,366,200
Deferred income taxes (793,794) (2,500,000) 2,850,000
(Increase) decrease in operating
assets, net:
Receivable from litigation
award - 77,223,460 (77,223,460)
Accounts and notes receivable (2,747,268) (3,911,903) (891,793)
Costs and estimated earnings
in excess of billings on
uncompleted contracts (629,835) (814,750) (482,410)
Inventories (724,156) (73,113) 638,735
Prepaid expenses and other
current assets (415,468) 123,708 515,504
Other assets 239,817 (270,830) (33,687)
Receivables and advances to
related parties 65,425 578,511 681,232
Increase (decrease) in
operating liabilities, net:
Accounts payable 372,374 (175,483) (320,501)
Other current liabilities 56,758 (1,998,835) 5,114,858
Customer advances (574,213) (94,671) (169,202)
Billings in excess of
costs and estimated
earnings on uncompleted
contracts (31,032) (161,900) 22,924
Other liabilities 17,966 12,722 (39,982)
Income taxes payable 2,498 802,449 -
------------ ------------ ------------
NET CASH (USED IN) PROVIDED
BY OPERATING ACTIVITIES (12,420,760) 68,855,635 (3,646,936)
------------ ------------ ------------
See accompanying notes to consolidated financial statements.
F-13
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30,
---------------------------------------
1999 1998 1997
----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in marketable securities $ (106,676) $(20,294,129) $ -
Expenditures for acquisitions (2,651,665) (4,025,000) -
Purchases of property and equipment,
net of capital lease obligations
of $741,663, $1,391,304 and
$227,665 for the years ended June
30, 1999, 1998 and 1997,
respectively (4,774,603) (2,785,795) (1,256,203)
Cost of capitalized software
development - - (108,809)
Cost of patents and copyrights (19,686) (19,114) (162,297)
----------- ------------ ------------
NET CASH USED IN INVESTING
ACTIVITIES (7,552,630) (27,124,038) (1,527,309)
----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank borrowings - 5,000,000 -
Restricted cash for collateral of
bank loan - (5,000,000) -
Repayment of borrowings and capital
lease obligations (2,097,596) (2,260,424) (745,245)
Proceeds from exercise of stock
options and warrants - 1,353 3,516
Repayments of notes receivable in
connection with shares issued
under stock option and bonus plans - 600,493 7,916,307
Dividends paid (3,909,366) (3,945,701) -
Purchase of common stock (196,794) - -
Distributions to holders of
minority interests (398,754) (237,114) -
----------- ------------ ------------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (6,602,510) (5,841,393) 7,174,578
----------- ------------ ------------
(DECREASE) INCREASE IN CASH (26,575,900) 35,890,204 2,000,333
CASH - BEGINNING OF YEAR 41,751,704 5,861,500 3,861,167
----------- ------------ ------------
CASH - END OF YEAR $15,175,804 $ 41,751,704 $ 5,861,500
=========== ============ ============
See accompanying notes to consolidated financial statements.
F-14
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
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 to be provided by the Company
include development, administration, leasing of office space,
facilities and medical equipment, provision of supplies, staffing
and supervision of non-medical personnel, legal services,
accounting, billing and collection and the development and
implementation of practice growth and marketing strategies.
HMCA entered the 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/
partnerships and its proportionate share in the accounts of all
joint ventures. All significant intercompany accounts and
transactions have been eliminated in consolidation.
F-15
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of Estimates
----------------
The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities in the consolidated financial
statements and accompanying notes. The most significant estimates
relate to contractual and other allowances, income taxes,
contingencies and the useful lives of equipment. In addition,
healthcare industry reforms and reimbursement practices will
continue to impact the Company's operations and the determination of
contractual and other allowance estimates. Actual results could
differ from those estimates.
Investment in Marketable Securities
-----------------------------------
The Company accounts for its investments using Statement of
Financial Accounting Standards No. 115, "Accounting for Certain
Investments in debt and Equity Securities" ("SFAS No. 115"). This
standard requires that certain debt and equity securities be
adjusted to market value at the end of each accounting period.
Unrealized market value gains and losses are charged to earnings if
the securities are traded for short-term profit. Otherwise, such
unrealized gains and losses are charged or credited to comprehensive
income.
Management determines the proper classifications of investments in
obligations with fixed maturities and marketable equity securities
at the time of purchase and reevaluates such designations as of each
balance sheet date. At June 30, 1999, 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.
F-16
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investments in Joint Ventures and Limited Partnerships
------------------------------------------------------
The minority interests in the equity of consolidated joint ventures
and limited partnerships, which are not material, are reflected in
the accompanying consolidated financial statements. Investments by
the Company in joint ventures and limited partnerships over which
the Company can exercise significant influence but does not control
are accounted for using the equity method.
The Company suspends recognition of its share of joint ventures
losses in entities in which it holds a minority interest when its
investment is reduced to zero. The Company does not provide for
additional losses unless, as a partner or joint venturer, the
Company has guaranteed obligations of the joint venture or limited
partnership.
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.
F-17
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Other Intangible Assets
-----------------------
1) Capitalized Software Development Costs
Certain software development costs incurred subsequent to the
establishment of the software's technological feasibility and
completion of the research and development on the product
hardware, in which it is to be used, are required to be
capitalized. Capitalization ceases when the product is
available for general release to customers, at which time
amortization of capitalized costs begins. Amortization is
calculated on the straight-line basis over 5 years.
2) Patents and Copyrights
Amortization is calculated on the straight-line basis over 17
years.
Long-Lived Assets
-----------------
The Company periodically assesses the recoverability of long-lived
assets, including property and equipment, intangibles and excess of
cost over net assets of businesses acquired, when there are
indications of potential impairment, based on estimates of
undiscounted future cash flows. The amount of impairment is
calculated by comparing anticipated discounted future cash flows
with the carrying value of the related asset. In performing this
analysis, management considers such factors as current results,
trends, and future prospects, in addition to other economic factors.
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.
F-18
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition (Continued)
-------------------
Contract costs include material, direct labor and overhead.
Provisions for estimated losses on uncompleted contracts, if any,
are made in the period in which such losses are determined. The
asset, "Costs and Estimated Earnings in Excess of Billings on
Uncompleted Contracts", represents revenues recognized in excess of
amounts billed. The liability, "Billings in Excess of Costs and
Estimated Earnings on Uncompleted Contracts", represents billings in
excess of revenues recognized.
Revenue on scanner service contracts are recognized on the
straight-line method over the related contract period, usually one
year.
Revenue from sales of other items are recognized upon shipment.
Revenue under management and lease contracts is recognized based
upon contractual agreements for management services rendered by the
Company and leases of medical equipment under various long-term
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.
Research and Development Costs
------------------------------
Research and development costs are charged to expense as incurred.
The costs of materials and equipment that are acquired or
constructed for research and development activities, and have
alternative future uses (either in research and development,
marketing or production), are classified as property and equipment
and depreciated over their estimated useful lives. Certain software
development costs are capitalized. See property and equipment and
intangible assets (capitalized software development costs) sections
of this note.
Advertising Costs
-----------------
Advertising costs are expensed as incurred.
F-19
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
------------
Deferred tax liabilities and assets are determined based on the
difference between the financial statement carrying amounts and tax
bases of assets and liabilities using enacted tax rates in effect in
the years in which the differences are expected to reverse.
Product Warranty
----------------
The Company provides currently for the estimated cost to repair or
replace products under warranty provisions in effect at the time of
installation (generally for one year).
Customer Advances
-----------------
Cash advances and progress payments received on sales orders are
reflected as customer advances until such time as revenue
recognition begins.
Per Share Data
--------------
Net income (loss) per common and common equivalent share has been
computed based on the weighted average number of common shares and
common stock equivalents outstanding during the year. No effect has
been given to options outstanding under the Company's Stock Option
Plans as no material dilutive effect would result from the exercise
of these items.
During fiscal 1998, the Company retroactively adopted Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
No. 128"), which requires companies to present basic earnings per
share and diluted earnings per share. No adjustments were required
as a result of this adoption.
Cash and Cash Equivalents
-------------------------
The Company considers all short-term highly liquid investments with
a maturity of three months or less when purchased to be cash or cash
equivalents.
At June 30, 1999, the Company had cash deposits of approximately
$19,500,000 in excess of federally insured limits.
F-20
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Restricted Cash
---------------
At June 30, 1999 and 1998, $5,000,000 of cash has been pledged as
collateral on an outstanding bank loan and has been classified as
restricted cash on the accompanying balance sheet.
Fair Value of Financial Instruments
-----------------------------------
The financial statements include various estimated fair value
information at June 30, 1999, 1998 and 1997, 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.
F-21
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock-Based Compensation
------------------------
Effective for fiscal year 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation", which permits entities to
recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123
also allows entities to continue to apply the provisions of APB
Opinion No. 25 and 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. The Company has elected to continue to apply the provisions
of APB Opinion No. 25 and provide the proforma disclosure provisions
of SFAS No. 123.
Comprehensive Income
--------------------
In November 1997, Statement of Financial Accounting Standard No.
130, "Reporting Comprehensive Income" ("SFAS No. 130"), was issued
which establishes standards for reporting and displaying
comprehensive income in a full set of financial statements. SFAS No.
130 defines comprehensive income as changes in equity of a business
enterprise during the periods presented, except for transactions
resulting from investments by an owner and distribution to an owner.
SFAS No. 130 does not require a company to present a statement of
comprehensive income if no items are present. The Company adopted
SFAS No. 130 during fiscal 1998.
New Pronouncements
------------------
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.
Reclassifications
-----------------
Certain prior year balances have been reclassified to conform with
the current year presentation.
F-22
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
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.
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.
F-23
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 3 - ACQUISITIONS (Continued)
Acquisition of RVDC (Continued)
-------------------
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. Accordingly, all financial data for the
year ended June 30, 1997 have been restated to include the results
of 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. An advance of $50,000 was remitted to the seller at the
closing date, and $551,665 was paid during fiscal 1999.
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, 1999,
$68,959 was charged to operations related to these agreements.
F-24
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 3 - ACQUISITIONS (Continued)
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.
The deferred payment obligation of $2,000,000 is convertible into
shares of HMCA's common stock upon the effectiveness of an Initial
Public Offering ("IPO") of HMCA's securities, provided the IPO is
completed by September 20, 2000. In the event an IPO of HMCA's
securities is not completed by such date, the deferred payment
obligation of $2,000,000 is then payable over the following four
years with interest at 6.0% per annum. At such time when the
deferred payment obligation is converted into shares of HMCA's
common stock, the holders of such shares will then have certain
price protection guarantees from FONAR for a two-year period
following such conversions.
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.
F-25
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 3 - ACQUISITIONS (Continued)
A&A Services, Inc. (Continued)
------------------
Subject to the acquired business achieving certain earnings
objectives over the five-year period following the date of
acquisition, additional monies would be due to the sellers. The
contingent additional purchase price is not determinable as of June
30, 1999 and, accordingly, has not been included in the allocated
purchase price in light of the contingent nature of the arrangement.
If the earnings objectives are ultimately achieved, the additional
purchase price will be recorded as additional goodwill subject to
amortization over the stated period.
Dynamic Health Care Management, Inc.
------------------------------------
On August 20, 1998, the Company's physician 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 convertible notes
face amount of $5,490,000, payable in thirty-six monthly
installments of principal and interest, commencing two years after
the closing date.
The promissory notes are collateralized by all of the assets of the
acquired operations and are guaranteed by the Company.
A substantial portion of the convertible notes of $5,490,000 are
convertible into shares of HMCA's common stock upon the
effectiveness of an Initial Public Offering ("IPO") of HMCA's
securities, providing the IPO is consummated within two years of the
closing date.
The acquisition was accounted for as a purchase, under which the
purchase price was allocated to the acquired assets and assumed
liabilities based upon fair values at the date of the acquisition.
The excess of the purchase price over the fair value of the net
assets acquired amounted to $8,951,907 and is being amortized on a
straight-line basis over 20 years. The accompanying consolidated
financial statements include the operations of Dynamic from the date
of acquisition, August 20, 1998.
F-26
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 4 - MARKETABLE SECURITIES
The following is a summary of marketable securities at June 30, 1999
and 1998:
1 9 9 9 1 9 9 8
------------------------------------------- -------------------------------------------
Unrealized Unrealized
Holdings Holdings
Gains Fair Market Gains Fair Market
Cost (Loss) Value Cost (Loss) Value
---------- ---------- ----------- ----------- ---------- -----------
U.S. Government
Obligations $11,023,733 $ (18,302) $11,005,431 $ 6,660,360 $ 274 $ 6,660,634
Corporate and
government agency
bonds 9,277,071 (184,304) 9,092,767 2,595,960 462 2,596,422
Equity securities
including mutual
stock funds 100,000 (500) 99,500 11,037,808 (43,032) 10,994,776
----------- ---------- ----------- ----------- ---------- -----------
$20,400,804 $(203,106) $20,197,698 $20,294,128 $ (42,296) $20,251,832
=========== ========== =========== =========== ========== ===========
NOTE 5 - ACCOUNTS RECEIVABLE, NET
Accounts receivable, net is comprised of the following:
1999 1998
----------- -----------
Receivable from equipment
sales $ 1,727,535 $ 1,930,204
Receivables assigned from
related PC's 15,486,059 10,344,490
Less:
Allowance for doubtful
accounts and contrac-
tual allowances (3,276,860) (2,397,347)
----------- -----------
$13,936,734 $ 9,877,347
=========== ===========
F-27
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 5 - ACCOUNTS RECEIVABLE, NET (Continued)
The Company's customers are concentrated in the healthcare industry.
The Company's receivable assigned 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.
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. Further, payment of certain of
the no-fault receivables are substantially contingent upon the
timing of settlement of pending litigation involving the recipient
of services and third parties (Letter of Protection or "LOP-type"
accounts receivable). Approximately 33%, 25% and 15% of the PC's
1999, 1998 and 1997 net revenues were derived from no-fault and
personal injury protection claims. By their nature, the realization
of a substantial portion of these receivables is expected to extend
beyond one year from the date the service was rendered. The Company
anticipates that a material amount of its accounts receivable will
be outstanding for periods in excess of twelve months in the future.
The Company considers the aging of its accounts receivable in
determining the amount of allowance for doubtful accounts. 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.
For LOP-type receivables, the Company provides for uncollectible
accounts at substantially higher rates than any other revenue
source.
Net revenues from the related PC's accounted for approximately 85%,
77% and 55% of the consolidated net revenues for the years ended
June 30, 1999, 1998 and 1997, respectively. As of June 30, 1999, the
Company had a significant receivable balance from one insurance
company, which totalled $1,623,000.
F-28
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 6 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND CUSTOMER
ADVANCES
1) Information relating to uncompleted contracts as of June 30, 1999
and 1998 is as follows:
As of June 30,
------------------------
1999 1998
---------- ----------
Costs incurred on uncompleted
contracts $2,522,153 $2,265,343
Estimated earnings 847,047 560,898
---------- ----------
3,369,200 2,826,241
Less: Billings to date 1,905,750 2,023,658
---------- ----------
$1,463,450 $ 802,583
========== ==========
Included in the accompanying consolidated balance sheets under the
following captions:
As of June 30,
-----------------------
1999 1998
---------- ---------
Costs and estimated earnings in
excess of billings on
uncompleted contracts $1,463,450 $ 833,615
Billings in excess of costs and
estimated earnings on
uncompleted contracts - (31,032)
---------- ---------
$1,463,450 $ 802,583
========== =========
2) Customer advances consist of the following:
As of June 30,
------------------------
1999 1998
---------- ----------
Total advances from customers $2,001,268 $2,693,389
Less: Advances from customers
on contracts under
construction 1,905,750 2,023,658
---------- ----------
$ 95,518 $ 669,731
========== ==========
F-29
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 7 - INVENTORIES
Inventories included in the accompanying consolidated balance sheets
consist of:
June 30,
-------------------------
1999 1998
----------- -----------
Purchased parts, components and
supplies $ 3,677,568 $ 2,548,596
Work-in-process 560,210 965,026
----------- -----------
$ 4,237,778 $ 3,513,622
=========== ===========
NOTE 8 - PROPERTY AND EQUIPMENT
Property and equipment, at cost, less accumulated depreciation and
amortization, at June 30, 1999 and 1998, is comprised of:
June 30,
-------------------------
1999 1998
----------- -----------
Equipment under construction $ - $ 1,086,118
Diagnostic equipment under lease 1,155,039 906,304
Diagnostic equipment 7,325,433 6,560,772
Offsite research scanner - 1,154,217
Research, development and
demonstration equipment 5,671,375 6,638,985
Machinery and equipment 6,122,494 4,784,164
Furniture and fixtures 3,159,797 2,987,930
Equipment under lease 2,331,423 1,710,586
Leasehold improvements 2,151,819 2,116,171
----------- -----------
27,917,380 27,945,247
Less: Accumulated depreciation
and amortization 16,474,887 18,843,008
----------- -----------
$11,442,493 $ 9,102,239
=========== ===========
F-30
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 8 - PROPERTY AND EQUIPMENT (Continued)
Depreciation and amortization of property and equipment for the
years ended June 30, 1999, 1998 and 1997 was $3,139,585, $2,243,535
and $1,166,951, respectively.
The equipment under lease has a net book value of $2,018,490 and
$1,736,775 at June 30, 1999 and 1998, respectively.
NOTE 9 - OTHER INTANGIBLE ASSETS
Other intangible assets, net of accumulated amortization, at June
30, 1999 and 1998 are comprised of:
June 30,
-----------------------
1999 1998
---------- ----------
Capitalized software
development costs $1,199,618 $1,359,618
Patents and copyrights 1,125,808 1,125,237
---------- ----------
2,325,426 2,484,855
Less: Accumulated amortization 1,436,434 1,323,254
---------- ----------
$ 888,992 $1,161,601
========== ==========
Capitalized computer software costs are being amortized over 5
years. Patents costs are being amortized over 17 years.
Amortization of other intangible assets for the years ended June 30,
1999, 1998 and 1997 was $292,295, $401,984 and $820,514,
respectively.
F-31
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 10 - 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, 1999, 200 shares of Class B common
stock were converted to common stock leaving 5,211 of such shares
outstanding as of June 30, 1999.
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.
F-32
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 10 - CAPITAL STOCK (Continued)
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.
F-33
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 10 - CAPITAL STOCK (Continued)
Warrants
--------
As part of the settlement agreement dated April 29, 1997, the
holders of the Company's common stock as of October 20, 1995
received, as of July 29, 1997, one warrant to purchase one share of
the Company's common stock for every eight shares of common stock.
The total warrants issuable under this agreement totalled 4,909,767
and were exercisable at $2.938 per share, less the special dividend
declared on the common stock, as discussed above. The warrants were
valued at approximately $5,200,000 and were recorded as a stock
dividend out of paid-in capital for the year ended June 30, 1997. On
March 2, 1998, the Court of Chancery approved a modification of the
settlement agreement dated April 29, 1997, whereby the Company
issued 2,226,343 shares of common stock in exchange for cancellation
of the 4,909,767 warrants.
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.
F-34
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 10 - CAPITAL STOCK (Continued)
Options (Continued)
-------
Stock option share activity and weighted average exercise prices
under these plans and grants for the years ended June 30, 1999, 1998
and 1997 were as follows:
Weighted
Average
Number of Exercise
Shares Price
---------- ----------
Outstanding, June 30, 1996 195,235 $ 4.62
Granted 2,350,000 2.43
Exercised (2,359,375) 2.42
Forfeited - -
---------- ------
Outstanding, June 30, 1997 185,860 4.62
Granted 556,200 2.99
Exercised (559,325) 2.98
Forfeited - -
---------- ------
Outstanding, June 30, 1998 182,735 4.62
Granted 205,000 1.23
Exercised - -
Forfeited - -
---------- ------
Outstanding, June 30, 1999 387,735 $ 2.81
========== ======
Exercisable at:
June 30, 1997 181,235 $ 4.62
June 30, 1998 182,735 $ 4.62
June 30, 1999 - -
The exercise price for options outstanding as of June 30, 1999
ranged from $1.06 to $5.00.
F-35
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 10 - CAPITAL STOCK (Continued)
Options (Continued)
-------
On March 10, 1999, 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, 1999.
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
400,000 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, 1999.
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, 1999.
F-36
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 10 - CAPITAL STOCK (Continued)
Options (Continued)
-------
Stock option share activity and weighted average exercise prices
under these plans and grants for the year ended June 30, 1999 were
as follows:
Weighted
Average
Number of Exercise
Shares Price
---------- ----------
Outstanding, June 30, 1998 - $ -
Granted 2,770,000 .10
Exercised - -
Forfeited - -
---------- ------
Outstanding, June 30, 1999 2,770,000 $ .10
========== ======
Exercisable at June 30, 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 income and earnings per
share would have been reduced to the proforma amounts for the year
ended June 30, 1997 as indicated below:
1997
------------
Net income (loss):
As reported $ 56,068,771
Proforma $ 55,188,946
Primary earnings per share:
As reported $1.00
Proforma $0.98
F-37
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 10 - CAPITAL STOCK (Continued)
Options (Continued)
-------
The fair value of each option grant under all plans is estimated on
the date of grant using the Black-Scholes option-pricing model based
on the following assumptions:
1997
----------
All Plans:
Dividend yield 0%
Expected volatility 33%
Expected life (years) 1
The risk-free interest rates for 1997 were based upon a rate with
maturity equal to expected term. U.S. Treasury instruments were
utilized. The weighted average interest rate in 1997 amounted to
5.0% .
Stock Bonus Plans
-----------------
On May 9, 1997 and April 1, 1995, the Board of Directors adopted
Stock Bonus Plans. Under the terms of the Plans, 5,000,000 shares of
common stock were reserved for issuance and stock bonuses may be
awarded no later than May 8, 2007 for the 1997 Plan and March 31,
2005 for the 1995 Plan. During fiscal 1999, 1998 and 1997, 826,359,
849,205 and 2,138,296 shares, respectively, were issued under the
stock bonus plans, of which 161,180, 4,300 and 159,025 shares,
respectively, were charged to operations as compensation expense,
463,161, 621,875 and 579,271 shares, respectively, were issued in
settlement of liabilities, -0-, 10,600 and 1,000,000 shares,
respectively, were issued in exchange for notes, and 202,018,
223,030 and 400,000 shares were issued in connection with consulting
agreements.
F-38
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 11 - LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASES
Long-term debt, notes payable and capital leases consist of
the following:
June 30,
-----------------------
1999 1998
---------- ---------
Represents a 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. $ 494,030 $ 324,266
Promissory note payable to a bank,
collateralized by $5 million certificate
of deposit, requiring monthly payments
of interest only, at a rate of 6.06% per
annum 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. 3,763,565 4,000,000
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. 1,005,180 1,237,258
F-39
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 11 - LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASES (Continued)
June 30,
-----------------------
1999 1998
---------- ---------
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. $ 290,984 $ 369,360
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. A principal payment
of $62,258 was made in November of 1998. 2,807,742 -
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. 717,327 -
F-40
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 11 - LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASES (Continued)
June 30,
-----------------------
1999 1998
---------- ---------
Deferred payment obligation, aggregating
$5,490,000, payable to the former
shareholders of Dynamic Health Care
Management, Inc. A substantial portion
will automatically be convertible into
HMCA's common stock upon an initial
public offering of HMCA's securities, if
completed by August 20, 2000. If the
offering is not completed, 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. $5,025,392 $ -
Deferred payment obligation, aggregating
$2,000,000, payable to the former
shareholder of A&A Services, Inc.,
automatically convertible into HMCA's
common stock upon an initial public
offering of HMCA's securities if
completed by September 20, 2000. If the
offering is not completed, the
obligation is payable over four years
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. 1,915,000 1,807,000
F-41
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 11 - LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASES (Continued)
June 30,
-----------------------
1999 1998
---------- ---------
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 (9.75% at June 30,
1999), commencing April 2000. The
obligations under each note are
guaranteed by FONAR. $ 91,665 $ -
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 (9.75% at June 30,
1999), commencing March 2000. The
obligations under each note are
guaranteed by FONAR. 460,000 -
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. 392,848 535,183
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. 266,942 327,940
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. 253,312 310,587
F-42
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 11 - LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASES (Continued)
June 30,
------------------------
1999 1998
----------- -----------
Capital lease obligations with maturity
dates through November 15, 2000
requiring monthly payments, aggregating
$24,750, including interest at 13.15%. $ 430,890 637,344
Other (including capital leases for
property and equipment) 1,906,957 1,454,541
----------- -----------
24,821,834 16,003,479
Less: Current maturities 4,474,293 2,443,326
----------- ------------
$20,347,541 $13,560,153
=========== ===========
The maturities of long-term debt, including debt in arrears, over
the next five years and thereafter are as follows:
Years Ended
June 30,
-----------
2000 $ 4,474,293
2001 7,469,515
2002 4,857,819
2003 7,801,825
2004 218,382
-----------
$24,821,834
===========
F-43
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 12 - INCOME TAXES
Components of the provision (benefit) for income taxes are as
follows:
1999 1998 1997
----------- ----------- -----------
Current:
Federal $ - $ 1,700,000 $ -
State 203,876 302,449 100,000
----------- ----------- -----------
203,876 2,002,449 100,000
----------- ----------- -----------
Deferred:
Federal (659,794) (2,500,000) 2,716,000
State (134,000) - 134,000
----------- ----------- -----------
(793,794) (2,500,000) 2,850,000
----------- ----------- -----------
Total $ (589,918) $ (497,551) $ 2,950,000
=========== =========== ===========
A reconciliation of the federal statutory income tax rate to the
Company's effective tax rate as reported is as follows:
1999 1998 1997
------ ------ ------
Taxes at federal statutory
rate (34.0)% (34.0)% 34.0%
State and local income taxes,
net of federal benefit .3 3.3 .4
Permanent differences .8 1.7 -
Valuation allowance changes
affecting the provision for
income taxes 28.9 20.9 (29.4)
------ ------ ------
Effective income tax rate (4.0)% (8.1)% 5.0%
====== ====== ======
As of June 30, 1999, the Company has net operating loss
carryforwards of approximately $14 million that will be available to
offset future taxable income. These carryforwards expire on June 30,
2014. Additionally, for federal income tax purposes, the Company has
tax credit carryforwards aggregating $2,075,000, which are accounted
for under the flow through method. The tax credit carryforwards of
$1,086,595, $70,145, $388,260 and $530,000 expire on June 30, 2006,
2012, 2013 and 2014, respectively.
F-44
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 12 - INCOME TAXES (Continued)
In addition, for New York State income tax purposes, the Company has
tax credit carryforwards aggregating $992,000, which are accounted
for under the flow-through method. The tax credit carryforwards
expire during the years 2005 to 2014.
Significant components, tax effected, of the Company's deferred tax
assets and liabilities at June 30, 1999 and 1998 are as follows:
1999 1998
------------ ------------
Deferred tax assets:
Allowance for doubtful accounts $ 868,094 $ 888,486
Non-deductible accruals 737,444 849,704
Net operating carryforwards 5,600,000 -
Tax credits 3,066,761 2,151,961
Inventory capitalization for
tax purposes 148,000 68,000
------------ ------------
10,420,299 3,958,151
Valuation allowance (9,221,699) (3,958,151)
------------ ------------
Net deferred tax assets 1,198,600 -
------------ ------------
Deferred tax liabilities:
Fixed assets and depreciation 1,107,776 378,221
Capitalized software costs 90,824 174,064
Difference between cash and
accrual basis for tax
reporting - 221,897
Other - 19,612
------------ ------------
Gross deferred tax liabilities 1,198,600 793,794
------------ ------------
Net deferred tax liabilities $ - $ 793,794
============ ============
The net change in the valuation allowance for deferred tax assets
increased by approximately $5,264,000.
F-45
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 13 - OTHER CURRENT LIABILITIES
Included in other current liabilities are the following:
1999 1998
----------- -----------
Unearned revenue on service
contracts $ 702,406 $ 1,283,990
Accrued bonus 1,187,742 1,410,345
Accrued payroll taxes 443,830 316,142
Accrued interest 237,270 566,890
Accrued additional purchase price - 1,000,000
Accrued salaries and commissions 955,500 631,293
Accrued professional fees 561,938 1,260,029
Litigation judgement 2,478,794 1,645,305
Excise and sales taxes 1,789,039 1,455,476
Other 1,564,472 1,686,689
----------- -----------
$ 9,920,991 $11,256,159
=========== ===========
NOTE 14 - 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.
F-46
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 14 - COMMITMENTS AND CONTINGENCIES (Continued)
Leases (Continued)
------
Future minimum lease commitments consisted of the following at June
30, 1999:
Facilities
Year Ended and
June 30, Equipment Capital
---------- ----------- -----------
2000 $ 3,133,552 $ 1,656,090
2001 2,890,290 1,042,706
2002 2,612,430 415,999
2003 2,369,199 274,152
2004 2,121,999 20,560
----------- -----------
13,127,470 3,409,507
Thereafter 3,594,430 -
----------- -----------
Total minimum obligations $16,721,900 3,409,507
===========
Less: Amount representing
interest 388,376
-----------
Present value of net minimum
lease obligations $ 3,021,131
===========
Rent expense for operating leases approximated $3,266,289,
$2,382,000 and $1,386,000 for the three years ended June 30, 1999,
1998 and 1997, respectively.
Litigation
----------
On March 4, 1996, the Company filed an action against Toshiba
Corporation, Toshiba America Medical Systems, Inc., Toshiba American
MRI, Inc. and others alleging infringement of four of its MRI
patents. Thereafter, in February 1997, Toshiba America MRI, Inc.
commenced an action against FONAR in the U.S. District Court for the
Northern District of California (Toshiba America MRI, Inc. V. FONAR
Corporation, Case No.: C97-00664 SBA ENE) alleging infringement of
certain of its patents relating to magnetic resonance imaging
technology. Both FONAR and the Toshiba companies asserted
counterclaims in the actions brought against them. In May 1998,
FONAR and Toshiba amicably resolved the litigation in both the New
York and California United States District Courts. Neither party
admitted liability in the settlement agreement. The parties
cross-licensed each other on the patents-in-suit, and FONAR received
a monetary payment from Toshiba. Other terms of the settlement are
confidential.
F-47
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 14 - COMMITMENTS AND CONTINGENCIES (Continued)
Litigation (Continued)
----------
During February 1994, a FONAR subsidiary, ("Medical SNI") (formerly
"Vonar Limited") issued shares to Long Investment, Ltd., an Israeli
company, in consideration for $700,000. Long Investment, Ltd. claims
the investment was made assuming Medical SNI would complete a
private offering. The private offering was subsequently cancelled.
Long Investment, Ltd. appealed to the District Court to appoint an
arbitrator to decide if the Company should refund the investment.
The case went to arbitration during the year and was dismissed.
Subsequently, the District Court set aside the arbitrator's
decision.
In January 1998, the Company filed an action against Health South,
Inc., an end-user of MRI scanners, in the United States District
Court of New York alleging infringement of the Company's Multi-Angle
Oblique Imaging Patent (U.S. Patent No. 4,871,966). The defendant
has filed a declaratory judgement counterclaim for non-infringement
and invalidity, although there is no specific claim for monetary
damages.
On February 2, 1998, the Company filed an action against Elscint,
Inc. Elscint MR Inc., Ltd. and others in the United States District
Court for the Eastern District of New York (Civil Action No.
98-CV-0681), alleging infringement of the Company's Multi-Angle
Oblique Imaging Patent (U.S. Patent No. 4871966). In February 1999,
these claims and counterclaims were amicably resolved. The
settlement involved a monetary payment to the Company.
On August 4, 1998, Beal Bank filed a notice of motion for summary
judgement against Melville Magnetic Resonance Imaging, P.C.
("Melville Magnetic") and the Company. The motion for summary
judgement seeks to recover $733,855, plus accrued interest of
$221,809, for payment of a bank loan executed by Melville Magnetic
and guaranteed by the Company. In April 1999, a summary judgement
was granted against Melville Magnetic and the Company, as a
guarantor on the loan. The court's decision is currently under
appeal. Included in accrued liabilities at June 30, 1999 is $650,000
related to the judgement.
On February 2, 1999, the Company filed an action against Shimadzu
Corporation in the United States District Court for the Eastern
District of New York (Civil Action No. 98-0680), alleging
infringement of the Company's Multi-Angle Oblique Imaging Patent
(U.S. Patent No. 4,871,966). In November 1998, the litigation was
resolved by the parties. Shimadzu Corporation agreed to pay a
royalty to the Company in exchange for Shimadzu Corporation being
granted a license under the patent.
F-48
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 14 - 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, 1999, 1998 and 1997
approximated $50,000, $47,000 and $-0-, respectively.
The Company is self-insured with respect to product liability.
During the fiscal years ended June 30, 1999, 1998 and 1997, no
material claims arose.
Management Contracts
--------------------
In connection with the acquisition of Affordable Diagnostics, Inc.
HMCA entered into a management agreement with the former President
of Affordable effective July 1, 1997. The agreement provides for a
base fee of $52,000 per year for a 5-year period, commencing July 1,
1997, and 60,000 shares of HMCA's common stock valued at $60,000, as
signing bonuses. In addition, an additional 240,000 shares of HMCA's
common stock are issuable to the consultant provided certain
financial hurdles are met over the 5-year term of the agreement.
HMCA entered into two management agreements with two of the former
owners of Central effective January 23, 1999. The agreements provide
for base compensation of $170,000. In addition to minimum
compensation levels, the agreements provide for expense
reimbursement, fringe benefits, non-competition clauses for five
years after termination and bonuses contingent upon Central
attaining specified levels of positive cash flow. The agreement
expires January 22, 2000 and contains a renewal option for one year
upon expiration.
Employment Agreements
---------------------
On March 20, 1998, an affiliate of HMCA entered into two employment
agreements with the former owners of A&A. The agreements provide for
a base annual salary of $300,000 for the first five years and
$630,000 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, the 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.
F-49
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 14 - COMMITMENTS AND CONTINGENCIES (Continued)
Employment Agreements
---------------------
On May 12, 1998, an affiliate of HMCA entered into an employment
agreement with an individual providing for a base annual salary of
$150,000 for the first year and $160,000 per annum in the second.
The agreement also provides for a bonus contingent upon meeting
certain thresholds of service revenue.
On August 20, 1998, an affiliate of HMCA entered into two employment
agreements with the former owners of Dynamic. The agreements provide
for base compensation of $300,000 during the first year with annual
cost of living increases for the first five years. The agreement
also provides for an increase in base compensation of $200,000 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,
-----------
2000 $ 891,167
2001 652,000
2002 652,000
2003 682,500
2004 1,096,666
Thereafter 4,445,834
-----------
$ 8,420,167
===========
F-50
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 15 - OTHER INCOME (EXPENSE) AND SUPPLEMENTARY PROFIT AND LOSS DATA
Other income consists of:
For the Years Ended June 30,
----------------------------------------
1999 1998 1997
---------- ----------- -----------
Other income (expense) $ 32,950 $ (61,382) $ (336,681)
Gain on settlement of
various legal
disputes and other
claims 1,660,169 8,671,417 83,436,366
Litigation provision (650,000) - -
---------- ---------- -----------
$1,043,119 $8,610,035 $83,099,685
========== ========== ===========
Advertising expense approximated $769,000, $651,000 and $199,000 for
the years ended June 30, 1999, 1998 and 1997, respectively.
Maintenance and repair expenses totalled approximately $491,000,
$224,000 and $312,000 for the years ended June 30, 1999, 1998 and
1997, respectively. Royalty expenses approximated $49,000, $47,000
and $-0- for the years ended June 30, 1999, 1998 and 1997,
respectively. Amortization of intangible assets was approximately
$1,518,000, $674,000 and $794,000 for the years ended June 30, 1999,
1998 and 1997, respectively.
NOTE 16 - SUPPLEMENTAL CASH FLOW INFORMATION
During the years ended June 30, 1999, 1998 and 1997, the Company
paid $1,768,481, $343,418 and $336,857 for interest, respectively.
During the years ended June 30, 1999, 1998 and 1997, the Company
paid $201,388, $1,202,449 and $861 for income taxes, respectively.
F-51
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 16 - SUPPLEMENTAL CASH FLOW INFORMATION (Continued)
During the years ended June 30, 1999, 1998 and 1997, the Company
acquired the assets and assumed the liabilities of various entities.
The transactions had the following non-cash impact on the balance
sheets:
1999 1998 1997
---------- ---------- -----------
Accounts receivable $1,900,000 $600,000 $ 1,198,000
Equipment 60,000 300,000 1,116,000
Other assets - - 20,000
Intangibles 9,356,067 12,221,442 2,796,000
Accrued liabilities 1,000,000 (1,100,000) (85,000)
Notes payable to sellers (9,388,572) (7,073,000) (315,000)
Capital lease obligation - - (524,000)
Other liabilities - - (82,000)
Deferred taxes payable - - (444,000)
Equity (275,830) (923,442) (3,680,000)
---------- ---------- ----------
Net Cash Used for
Acquisitions $2,651,665 $4,025,000 $ -
========== ========== ==========
Non-Cash Transactions
---------------------
During the year ended June 30, 1999:
a) The Company issued 463,161 shares of common stock in settlement
of current liabilities aggregating $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.
F-52
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 16 - SUPPLEMENTAL CASH FLOW INFORMATION (Continued)
Non-Cash Transactions (Continued)
---------------------
During the year ended June 30, 1999: (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.
During the year ended June 30, 1998:
a) The Company issued 236,345 shares of its common stock in
settlement of current liabilities aggregating $632,386.
b) The Company issued 576,000 shares of its common stock valued at
$923,442 as additional contingent consideration related to
acquisition of Affordable Diagnostics, Inc.
c) The Company issued 385,530 shares of its common stock to
employees in satisfaction of accrued liabilities incurred
during the fiscal year ended June 30, 1997 aggregating
$1,147,906.
d) Accrued interest aggregating $146,330 was reclassified to
long-term debt pursuant to a debt restructuring agreement.
e) Equipment costing $800,000 was reclassified from Costs and
Estimated Earnings in Excess of Billings on Uncompleted
Contracts to Property and Equipment.
f) The Company purchased $1,391,304 of machinery and equipment
under capital leases.
During the year ended June 30, 1997:
a) The Company received promissory notes of $8,074,616 in
connection with the exercise of stock options and issuance of
common stock.
b) The Company issued 579,271 shares of its common stock in
settlement of current liabilities aggregating $1,444,522.
c) The Company issued 1,764,000 shares of its common stock valued
at $3,630,312 in connection with the acquisition of Affordable
Diagnostics, Inc.
d) Pursuant to consulting contracts with shareholders of
Affordable Diagnostics, Inc., the Company issued 400,000 shares
of its common stock valued at $1,096,000.
F-53
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 17 - 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 18 - ADVANCES AND NOTES TO RELATED PARTIES
Effective December 1, 1993, Albany Magnetic Imaging Center, P.C., a
Georgia professional corporation, of which Raymond V. Damadian is
the sole stockholder ("Albany Center"), purchased the scanner being
utilized at its site from the Company for a purchase price of
$1,128,844. 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. Following payment of the lease, the remaining
$554,767 of the purchase price due to the Company is 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.
F-54
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 18 - ADVANCES AND NOTES TO RELATED PARTIES (Continued)
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. 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 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.
F-55
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 18 - ADVANCES AND NOTES TO RELATED PARTIES (Continued)
During 1994, Deerfield Magnetic Resonance Imaging P.A. ("Deerfield
Center"), a Florida professional association, of which Raymond V.
Damadian is the sole shareholder, Director and President, purchased
an MRI scanner from the Company for a purchase price of $962,185. Of
the purchase price, $311,934 is to be paid by the assumption and
payment of the Company's indebtedness to the lender secured by the
scanner. Such indebtedness is to be retired pursuant to a new
equipment finance lease between the lender and the Deerfield Center.
The remaining $454,005 of the purchase price due to the Company will
be paid pursuant to a promissory note with interest at 10% per
annum, over a 17-month term commencing January 1, 1996 as follows:
sixteen installments of $30,000 each and one installment of $7,275.
The Deerfield Center paid the remaining balance due under the note
during fiscal 1998.
Pursuant to an agreement dated September 30, 1993, Advanced Medical
Diagnostics Corporation ("AMD"), a subsidiary of the Company 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.
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. Timothy Damadian, the Treasurer of FONAR and
President of HMCA, is the sole stockholder , director and president
of Specialties.
F-56
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 18 - ADVANCES AND NOTES TO RELATED PARTIES (Continued)
Pursuant to an agreement dated January 2, 1996, Guardian MRI, Inc.
("Guardian") engaged the Company to de-install, transport and
reinstall an MRI scanner purchased for Pompano MRI Associates
("Pompano") from a third party. Timothy Damadian, the Treasurer of
FONAR and President of HMCA, is a stockholder, director and officer
of Guardian. Pompano is a joint venture partnership of which
Guardian is an owner. The agreement provides for a price of $120,000
payable in 36 monthly installments of $3,760.36 each (inclusive of
interest at 8% per annum) pursuant to a note executed and delivered
by Guardian upon the completion of the reinstallation. The agreement
also provided a six-month warranty for the scanner and a service
agreement thereafter for the periods October 1, 1996 to September
30, 1997 and October 1, 1997 to September 30, 1998, at an annual
price of $70,000. Subsequently, the service agreement was renewed
for the period October 1, 1998 through September 30, 1999 at an
annual price of $70,000.
As at June 30, 1999 and 1998, the aggregate indebtedness of
Specialties and Canarsie to the Company was $25,720 and $25,076,
respectively, and the aggregate indebtedness of Guardian and Pompano
to the Company was $29,682 and $72,058, respectively.
NOTE 19 - 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 information for 1998 and 1997
has been restated from the prior year's presentation in order to
conform to the 1999 presentation.
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.
F-57
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 19 - SEGMENT AND RELATED INFORMATION (Continued)
Summarized financial information concerning the Company's reportable segments
is shown in the following table:
Physician
Medical Management
Equipment Services Totals
------------ ------------ ------------
Fiscal 1999:
Net sales from external
customers $ 5,681,955 $ 31,263,089 $ 36,945,044
Intersegment net sales $ 845,834 - $ 845,834
Operating (loss) income $(18,730,341) $ 3,122,286 $(15,608,055)
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
Fiscal 1998:
Net sales from external
customers $ 6,458,363 $ 21,095,994 $ 27,554,357
Intersegment net sales $ 1,349,186 - $ 1,349,186
Operating (loss) income $(20,292,707) $ 2,698,314 $(17,594,393)
Depreciation and
amortization $ 1,415,783 $ 1,501,820 $ 2,917,603
Compensatory element of
stock issuances $ 12,362 $ 1,096,000 $ 1,108,362
Total identifiable assets $ 79,235,791 $ 29,211,989 $108,447,780
Capital expenditures $ 1,889,450 $ 2,287,398 $ 4,176,848
Fiscal 1997:
Net sales from external
customers $ 7,863,394 $ 9,769,672 $ 17,633,066
Intersegment net sales $ 1,670,654 - $ 1,670,654
Operating (loss) income $(24,309,936) $ (71,769) $(24,381,705)
Depreciation and
amortization $ 1,593,586 $ 429,879 $ 2,023,465
Compensatory element of
stock issuances $ 407,052 - $ 407,052
Total identifiable assets $ 96,623,863 $ 10,066,698 $106,690,561
Capital expenditures $ 1,530,145 $ 218,574 $ 1,748,719
F-58
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 19 - SEGMENT AND RELATED INFORMATION (Continued)
Export Sales
------------
The Company's areas of operations are principally in the United
States. The Company had export sales of medical equipment amounting
to 3.4%, 4.6% and 3.7% of consolidated net revenues for the years
ended June 30, 1999, 1998 and 1997, respectively.
The sales were made principally to the following locations:
1999 1998 1997
------ ------ ------
Korea - 1.8% 3.7%
Spain 3.2% - -
Saudi Arabia .2 2.8 -
------ ------ ------
3.4% 4.6% 3.7%
====== ====== ======
The Company does not have any material assets outside of the United
States.
NOTE 20 - PROFORMA INFORMATION (UNAUDITED)
The Company's consolidated financial statements for the year ended
June 30, 1997 do not include the results of operations of A&A
Services, Inc. and Dynamic, the consolidated financial statements
for the year ended June 30, 1998 do not include the results of
operations of A&A Services, Inc. for the period July 1, 1997 through
March 20, 1998 and Dynamic for the year ended June 30, 1998, and the
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, 1998 and 1997, assuming the foregoing acquisition had
occurred on June 30, 1998, 1997 and 1996 (in thousands, except per
share data):
1999 1998 1997
----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited)
Revenue, net $ 37,624 $ 36,747 $ 30,188
Loss from
operations $ (15,447) $ (16,367) $ 22,254)
Income (loss) before
income taxes $ (14,344) $ (4,777) $ 60,490
Basic and diluted
net income (loss)
per share $(.22) $(.08) $1.07
F-59
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.
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. 63 President, Chairman of the
Board and a Director
Timothy R. Damadian 35 Treasurer of FONAR; President
of HMCA
David B. Terry 52 Vice President and Secretary
Claudette J.V. Chan 62 Director
Robert J. Janoff 72 Director
Charles N. O'Data 63 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 director of
HMCA.
Timothy R. Damadian has been Treasurer of FONAR since December 1998 and
President of HMCA since its formation in March 1997. Mr. Damadian served as a
field service technician for FONAR, after graduating from Suburban Technical
School in 1982, where he studied digital computer technology. Mr. Damadian
became Director of Manufacturing in October 1989 and was promoted to Vice
President of Operations of FONAR in July 1992, in which position he served
until December, 1998. Timothy Damadian is the son of Raymond V. Damadian and
nephew of David Terry and Claudette Chan.
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. Mr. O'Data acts an independent financial consultant to various
entities, including Pittsburgh National Bank. Mr. O'Data served on the board
of the Medical Center, Beaver, a 500 bed acute care facility, for 22 years,
three as the Board Chair. He founded The Beaver County Foundation, a Community
Foundation, in 1992, and serves as its President. Mr. O'Data is a graduate of
Geneva College, where he received a B.S. degree in Economics in 1958. 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
evaluates 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 Raymond V. Damadian, 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 1999 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 1999.
I. SUMMARY COMPENSATION TABLE
| Long Term Compensation |
----------------------------------------------------
Annual Compensation | Awards | Payouts |
- -----------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) | (f) (g) | (h) | (i)
Name Other | | |
and Annual | Restricted | | All Other
Principal Compen- | Stock Options | LTIP | Compen-
Position Salary Bonus sation | Award(s) SARs | Payouts | sation
2 Year ($) ($) ($) | ($) (#) | ($) | ($)
- -----------------------------------------------------------------------------------------------------------
|
Raymond V. 1999 $86,799.96 - - | - - | - | -
Damadian, 1998 $84,218.10 - - | - - | - | -
President & 1997 $86,799.95 - - | - - | - | -
CEO | | |
II. OPTION/SAR GRANTS IN LAST FISCAL YEAR
Potential Realizable
Value at Assumed
Annual Rates of Alternative
Stock Price to (f) and
Appreciation for (g): Grant
Individual Grants Option Term Date Value
- -------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (f)
% of Total
Options/
SARs
Options/ Granted to
SARs Employees Excercise or Grant Date
Granted in Fiscal Base Price Expiration Present
Name (#) Year ($/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, amd FY-End Option/Sar
Value
(a) (b) (c) (d) (e)
Shares Value Number of Value of Unexercised
Name Acquired Realized Unexercised In-the-Money
on Exercise ($) Options/SARs Options/SARs at
(#) at FY-End (#) FY-End ($)
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 nontransferrable, 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, 1999, options to
purchase 504,830 shares of Common Stock were available for future grant under
the plan.
FONAR's 1995 Stock Bonus Plan, adopted on April 1, 1995, 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 1995 Stock Bonus Plan will terminate on March 31, 2005.
As of June 30, 1999, 0 shares of Common Stock of FONAR were available for
future grant.
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,
1999, options to purchase 4,797,400 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, 1999, 4,161,773 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 nontransferrable, 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, 1999, 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 nontransferrable, 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, 1999, 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, 1999, 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 10, 1999.
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 4.54%
Class C Stock 9,561,174 99.98%
Class A Preferred 477,328 6.09%
Claudette Chan
Director
Common Stock 6,581 *
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 (6 persons) (2)
Common Stock 2,566,313 4.68%
Class C Stock 9,561,174 99.98%
Class A Preferred 492,744 6.29%
- ---------------------------
* 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.
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. MR 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. 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
marketing, advertising, 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 year ended June 30, 1999 the net revenues from the
Centers owned by Dr. Damadian were approximately $12.5 million.
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. 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. 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.
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. 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.
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, 1999, the net revenues from the
Affordable Professional Corporations were approximately $3.7 million.
ACQUISITION OF A & A SERVICES.
Effective March 20, 1998, HMCA acquired A & A Services, Inc. ("A & A
Services"), an MSO 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, 1999, the net revenues from the A & A Professional Corporations were
$4.7 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, 1999, the net revenues from the Dynamic
Professional Corporations were $5.9 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 May 18, 1999 to May 17, 2000. The price in
effect during the prior year from May 18, 1998 to May 17, 1999 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.
From May 19, 1998 to May 18, 1999, the partnership was party to a service
agreement with the Company at a price of $53,200 per annum. 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.
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. Commencing October 8, 1996, the Orlando Partnership has been party to
a service agreement for the scanner with the Company at an annual fee of
$70,000, which fee will remain in effect for a period of five years. Timothy
Damadian, the Treasurer of FONAR and President of HMCA, is a limited partner
in Orlando.
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, 1999 through August 31, 2000. The price in effect
during the prior year from September 1, 1998 to August 31, 1999 was also
$50,000. Timothy Damadian, the Treasurer of FONAR and President of HMCA, is
the sole stockholder, director and President of Specialties.
Pursuant to an agreement dated January 2, 1996, Guardian MRI, Inc.
("Guardian") engaged the Company to deinstall, transport and reinstall an MRI
scanner purchased for Pompano MRI Associates ("Pompano") from a third party.
Timothy Damadian, the Treasurer of FONAR and President of HMCA, is a
stockholder, director and officer of Guardian. Pompano is a joint venture
partnership of which Guardian is an owner. The agreement provides for a price
of $120,000 payable in 36 monthly installments of $3,760.36 each (inclusive of
interest at 8% per annum) pursuant to a note executed and delivered by
Guardian upon the completion of the reinstallation. The agreement also
provided a six month warranty for the scanner and a service agreement
thereafter at an annual price of $70,000 for the periods October 1, 1996 to
September 30, 1997 and October 1, 1997 to September 30, 1998. Subsequently,
the service agreement was renewed for the period October 1, 1998 through
September 30, 1999 at an annual price of $70,000. In addition, the agreement
provided that the Company provide updated software, Signal Plus Surface Coils,
Whisper Gradients and a Four Post Canopy and Steel upgrade for the scanner.
As at June 30, 1999, the indebtedness of Canarsie to the Company was
$25,720 and the aggregate indebtedness of Guardian and Pompano to the Company
was $29,682.
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, 1999 and 1998.
Consolidated Statements of Operations for the Three Years Ended June 30,
1999, 1998 and 1997.
Consolidated Statements of Stockholders' Equity for the Three Years Ended
June 30, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows for the Three Years Ended June 30,
1999, 1998 and 1997.
Notes to Consolidated Financial Statements.
The following consolidated financial statement schedules are included in
Item 14 (d).
Report of Independent Certified Public Accountants on Schedules.
Information required by schedules called for under Regulation S-X is
either not applicable or is included in the consolidated financial statements
or notes thereto.
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 report to be signed
on its behalf by the undersigned, thereunto duly authorized.
FONAR CORPORATION
Dated: October 6, 1999
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 6, 1999
Raymond V. Damadian Board of Directors,
President and a
Director (Principal
Executive Officer)
/s/ Claudette J.V. Chan Director October 6, 1999
Claudette J.V. Chan
/s/ Robert J. Janoff Director October 6, 1999
Robert J. Janoff
/s/ Charles N. O'Data Director October 6, 1999
Charles N. O'Data