SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________
FORM 10-K
_____________________
[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, 1997
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
___________________________
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)
____________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.0001 per share
(Title of Class)
________________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes ___X___ No _______
As of September 22, 1997, 49,908,447 shares of Common Stock, 5,411 shares of
Class B Common Stock, 9,562,824 shares of Class C Common Stock and 7,855,627
shares of Class A Non-voting Preferred Stock of the registrant were
outstanding. The aggregate market value of the approximately 47,450,300
shares of Common Stock held by non-affiliates as of such date (based on the
closing price per share on September 22, 1997 as reported on the NASDAQ
System) was approximately $146.8 million. The other outstanding classes do
not have a readily determinable market value.
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE>
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 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.
U.S. Health Management Corporation ("HMC") 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, sometimes referred to as "physician practice management"
or "PPM." In connection with its entry into this new line of business, HMC
has completed two acquisitions and is pursuing others. HMC will provide
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.
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 above low field (above 600 gauss). The "QUAD(TM)
7000" is similar in design to the QUAD 12000 but utilizes a smaller 3,500
gauss electromagnet.
In 1990 the Company introduced the Ultimate(TM) 7000 scanner, which
was its principal product prior to the introduction of the QUAD scanners.
The QUAD and Ultimate(TM) scanners are revolutionary new MR scanning
products representing the culmination of years of total company wide effort
to design and construct the "Ultimate MR" scanner product line. These
products replaced the Company's traditional principal products, the Beta(TM)
3000 scanner (which utilizes a permanent magnet) and the Beta(TM) 3000M
scanner (which utilizes an iron core electromagnet). All of the Company's
scanners create cross-sectional images of the human body.
The QUAD 7000, utilizing a 3500 gauss iron core electromagnet, is
envisioned by the Company as an economical solution to the rising cost of
medicine. Priced at $695,000, the Company expects the QUAD 7000 to be a
success in the market, not only with first time buyers but with users who
must now replace their obsolete MRI equipment.
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 quality and clarity competitive
with high field superconductive magnets. The QUAD 12000 scanner magnet is
the highest field "open MRI" in the industry.
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.
In tandem with new product and software developments, the Company
has been strengthening and continues to strengthen its legal position for
the purpose of protecting its proprietary technology as well as other
interests. The Company does not intend to permit its competitors and
would-be competitors to capitalize, to the detriment of the Company, on its
inventions and exhaustive research and development efforts, as the Company
believes has happened in the past.
On September 2, 1992, the Company filed a patent infringement suit
against Hitachi Ltd., General Electric Company and others in the United
States District Court for the Eastern District. In April, 1995, the Company
reached a settlement with Hitachi Ltd. and related defendants. Following
the trial and appeal of the Company's claims against General Electric
Company, the decision of the United States Court of Appeals for the Federal
Circuit awarded FONAR $62 million against General Electric Company for
infringement of FONAR's Multi-Angle Oblique (MAO) patent and $35 million for
infringement of FONAR's original MRI patent (the Cancer Detection Patent).
In May 1997 General Electric Company's petition for a rehearing was denied
and in July 1997 General Electric Company paid FONAR $128.7 million
(inclusive of interest) without, however, prejudicing its right to appeal.
In August 1997, General Electric Company filed its petition for a writ of
certiorari asking the Supreme Court to hear the case. The Supreme Court
denied General Electric Company's petition in October, 1997.
In June 1995, FONAR filed patent infringement suits against Siemens
Medical Systems, Inc., Siemens, AG, Philips Electronics, NV, Philips Medical
Systems, Inc. and Philips Electronics North America Corporation. The
patents sought to be enforced by the Company against both defendants
included the Multi-Angle Oblique improvement patent (U.S. Patent No.
4,871,966 entitled "Apparatus and Method for Multiple Angle Oblique Magnetic
Resonance Imaging"). FONAR settled with the Philips companies in April 1996
and the Siemens companies in September, 1996.
In March 1996, the Company commenced a patent infringement suit
against Toshiba America Medical Systems, Inc. and Toshiba
American MRI, Inc.
The Company is optimistic about sales of its new scanner products.
At September 1, 1997, the Company's backlog of unfilled orders was $6.4
million as compared to $6.8 million at September 1, 1996. In November of
1996 the Company entered into an agreement with National Imaging Resources,
Inc., a network of medical distributors having a large national sales force,
to promote the Company's new products. To further promote product
recognition and sales, FONAR will attend the RSNA (Radiological Society of
North America) trade show in November 1997 to exhibit its products. The
RSNA is the leading trade show in the MRI industry. Approximately 25,000
radiologists, who are among the principal groups to whom the Company directs
its marketing efforts, are expected to attend to view MRI industry's most
current product developments. The Company previously attended the RSNA
trade shows in 1996 and 1995.
The Company is actively seeking to promote foreign sales, thus
enhancing America's competitive position as well as its own. Since
commencing its current foreign sales program, the Company has sold scanners
in Korea, Mexico and Poland. Based on numerous indications of interest,
meetings, sales trips abroad and negotiations, the Company is cautiously
optimistic that foreign sales will produce significant revenues.
The Company believes there are and will be significant market
opportunities abroad, particularly in Asia and Eastern Europe.
In March 1997, FONAR formed U.S. Health Management Corporation
("HMC") 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
(sometimes referred to as "physician practice management," "PPM" or
"practice management.")
HMC entered the PPM business through the consummation of two
acquisitions, effective June 30, 1997. As a result of these two
acquisitions, HMC is managing 21 facilities located principally in New York
State and Florida. HMC is presently considering other potential
acquisitions.
PRODUCTS OFFERED
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 above low field (above 600 gauss). The QUAD(TM)
7000 is similar in design to the QUAD 12000 but utilizes a smaller 3,500
gauss electromagnet. The Ultimate 7000 utilizes a 3500 gauss iron core
electromagnet.
FONAR received FDA approval to market the QUAD 7000 in April, 1995
and for the QUAD 12000 in November 1995.
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.
The increased patient space in the QUAD permits the utilization of
the Company's software for the taking of "moving scans." Those "moving
scans" or "CINE," enable the physician to observe the scanned body part
(e.g., knee, neck and elbow) in motion. The QUAD enables a full range of
motion studies that cannot be completely performed in the claustrophobic
cylindrical tubes of today's superconductive magnets.
FONAR's works-in-progress include CINE-FLEX(TM), which is a set of
specialized coils and matching fixtures that enable full-range CINEs of the
knee, shoulder, C-spine, L-spine and TMJ - an impossibility with supercon
MRIs.
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 7000, 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 7000 is used
to describe the S/N equivalency of the QUAD 7000 to 7000-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.
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.
Because of the openness of the QUAD 7000 and FONAR's coil
development and CINE, QUAD 7000 users can plan on adding the
works-in-progress CINE-FLEX(TM) option to their scanners. CINE-FLEX(TM) is
a set of specialized coils and matching fixtures that enable full-range
CINEs of the knee, shoulder, C-spine, L-spine and TMJ - an impossibility
with supercon MRIs.
The Beta 3000 initiated the Company's product line and resulted in
over 150 worldwide FONAR installations to date. The effort to achieve the
QUAD and the Ultimate product line represented a company-wide aspiration to
seize the opportunity to incorporate into the Company's product line all of
the desirable features FONAR had learned since it opened the industry in
1980. The facility of these features have been achieved in FONAR's "QUAD"
and "Ultimate" MR machines.
PRODUCT MARKETING
The principal markets for the Company's scanners are hospitals and
private scanning centers. The Company is conducting its marketing through a
national network of independent distributors represented by National Imaging
Resources, Inc. The Company's network of independent sales representatives
and distributors operates on a commission basis in the domestic market.
The Company exhibited its new products at the trade show held by
the Radiological Society of North America ("RSNA") in Chicago in November
1995 and 1996 and plans to attend the RSNA trade shows in November 1997 and
future years as well. 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 (.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 a base price of $895,000
for the QUAD 12000 and of $695,000 for the QUAD 7000 scanner. 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. Since
commencing its current foreign sales program, the Company 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.
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 regards its customer base of approximately 100 scanners
installed or in the process of being installed as a major asset. It has
been and will continue to be a significant 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 $6.6 million in fiscal 1995,
$6.1 million in fiscal 1996 and $4.6 million in fiscal 1997. The decreases
in fiscal 1996 and 1997 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.
RESEARCH AND DEVELOPMENT
During the fiscal year ended June 30, 1997, the Company incurred
expenditures of $3,928,035 ($108,809 of which was capitalized) on research
and development, as compared to $3,607,703 ($251,659 of which was
capitalized) and $3,356,120 ($281,052) of which was capitalized) incurred
during the fiscal years ended June 30, 1996 and June 30, 1995, respectively.
Research and development activities have focused, in large part, on
the development and enhancement of the Company's QUAD MR scanners and on the
continued enhancement of the Ultimate and Beta 3000 and Beta 3000M products.
The QUAD and Ultimate scanners involved significant software and hardware
development as the new products represented entirely new hardware design and
architecture requiring a complete new operating software system. Most
recently, the Company's research activity has centered on developing a
multitude of new features for the QUAD series scanners made possible by the
QUAD's high speed processing power. The Company is also investing in
developing its QUAD scanners for surgical MRI.
BACKLOG
The Company's backlog of unfilled orders at September 1, 1997 was
approximately $6.4 million, as compared to $6.8 million at September 1,
1996. Of these amounts, approximately $1.2 million and $1.3 million had
been paid to the Company as customer advances as at September 1, 1997 and
September 1, 1996, respectively. 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 2014, 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 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.
ENFORCEMENT OF PATENTS
On September 2, 1992, the Company commenced legal action to enforce
its patent rights, filing suit against Hitachi Ltd., General Electric
Company and others in the United States District Court for the Eastern
District of New York. Prior to trial in April 1995, FONAR settled with
Hitachi. On May 26, 1995 the jury rendered a verdict against General
Electric Company awarding FONAR $110,575,000 for infringement of its
multi-angle oblique patent (Apparatus and Method for Multiple Angle Oblique
MRI, 10/3/89, U.S. Patent No. 4,871,966) and Dr. Damadian's pioneer cancer
detection patent (Apparatus and Method for Detecting Cancer in Tissue,
2/5/74, U.S. Patent No. 3,789,832). On September 30, 1995, the Court
decided the parties' respective post-trial motions, awarding FONAR
$61,950,000 and an injunction (stayed pending appeal) on the multi-angle
oblique patent (U.S. Patent No. 4,871,966). Although finding that the
cancer detection patent was valid (U.S. Patent No. 3,789,832), the Court
overturned the jury's determination that General Electric Company's MRI
scanners infringed the patent. Both the Company and General Electric
Company appealed. In February 1997, the United States Court of Appeals for
the Federal Circuit affirmed the judgment against General Electric Company
for infringement of the multi-angle oblique patent. In addition, the Court
of Appeals reversed the District Court on the original MRI patent and
reinstated the jury verdict awarding FONAR $35 million. Following the Court
of Appeals' denial of its petition for a rehearing and both the Court of
Appeals' and Chief Justice Rehnquist's denial of its application for a stay,
General Electric Company paid FONAR $128.7 million (inclusive of interest)
on July 2, 1997. In August 1997 General Electric filed a petition for a
writ of certiorari to the Supreme Court. The Supreme Court denied General
Electric Company's petition on October 6, 1997. The Company is represented
by Robins, Kaplan, Miller and Ciresi, the Minneapolis based national law
firm that represented Honeywell in its lawsuit against Minolta for
infringement of Honeywell's autofocus patents.
In June 1995, the Company filed suits against Siemens Medical
Systems, Inc., Philips Electronics North America Corporation and related
parties for infringement of FONAR's multi-angle oblique patent, Dr.
Damadian's pioneer cancer detection patent and, in the case of Siemens
Medical Systems, Inc., two additional MRI patents. FONAR settled with the
Philips companies in April, 1996 and the Siemens companies in September,
1996.
In March 1996, FONAR commenced a patent infringement suit against
Toshiba American MRI, Inc. and Toshiba American Medical Systems, Inc.
The Company believes that it has achieved a significant milestone
in protecting and enforcing its proprietary rights in its lawsuit against
General Electric Company, and having pioneered the establishment and
development of the medical MRI scanning industry, the Company intends to
take the steps necessary to enforce its rights and protect its proprietary
technology against other infringers as well. (See "Litigation.")
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
superconductive magnet technology while the balance are based on
non-superconductive magnet technology. FONAR's non-superconductive MRI
scanners are competing principally with superconductive scanners. The QUAD
12000 scanner, however, utilizing a 6,000 gauss (.6 Tesla field strength)
iron core electromagnet, is the first "open" MR scanner above low field
strength (above 600 gauss).
FONAR believes that its MRI scanners have significant advantages as
compared to the superconductive scanners. These advantages include:
1. There is no fringe magnetic field. Super conductive scanners
require a more expensive shielded room than is required for the
non-superconductive scanners. The shielded room required for the
non-superconductive scanners is intended to prevent interference from
external radio frequencies.
2. They do not require costly coolants (liquid nitrogen and liquid
helium) or highly complex technology to handle them.
3. They are more open, quiet and in the case of the QUAD scanners
allow for faster throughput of patients.
4. They require smaller space to install.
5. Their annual operating costs are lower.
6. Their set-up and disconnect time for a Mobile
Scanner is shorter than for a mobile superconductive
scanner.
7. They can scan the trauma victim, the cardiac arrest patient,
the respirator-supported patient, and premature and newborn babies. This is
not possible with superconductive 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; Elscint Ltd; 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.
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.
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. These systems have
comprised one of the most rapidly growing modalities during recent years due
to an increasing number of procedures for established applications, as well
as the expansion of ultrasound into new applications. 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 approval to market the Ultimate Magnetic Resonance
Imaging Scanner as a Class II device. The Company received FDA approval to
market the QUAD 7000 in April 1995 and for the QUAD 12000 in November 1995.
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.
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.
U.S. HEALTH MANAGEMENT CORPORATION
(PHYSICIAN PRACTICE MANAGEMENT BUSINESS)
U.S. Health Management Corporation ("HMC") 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 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. This business is sometimes referred to as "physician
practice management," "PPM" or "practice management." Revenues are earned
not from the performance of medical services, but through providing
management, administrative, equipment, personnel and other resources
required by the medical provider.
HMC became actively engaged in the PPM business through two
acquisitions which were consummated effective June 30, 1997. The acquired
companies in both cases were actively engaged in the business of managing
medical providers. With the exception of one multi-specialty practice, all
of the medical providers are diagnostic imaging centers, principally MRI
scanning centers.
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 HMC (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 will be continued
by HMC, consists 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, HMC is consummating the purchase of an
additional MRI scanner pursuant to a contract entered into prior to the
acquisition. The scanner is a mobile unit which is intended to be provided
to a number of hospitals on a shared basis, as needed, in northern New
Jersey.
The second completed acquisition was of Raymond V. Damadian, M.D.
MR Scanning Centers Management Company ("RVDC"). Pursuant to the terms of
the transaction, HMC 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, to be continued by HMC, 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, HMC has
acquired the business of managing 21 MRI scanning centers. Seventeen of the
scanning centers are managed pursuant to management agreements, and 4 of the
centers are partnerships with RVDC as the general partner. Effective July
1, 1997, HMC entered into new management agreements with the centers.
Pursuant to the management agreements, HMC 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 8 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.
HMC GROWTH STRATEGY
In addition to acquiring existing management companies (i.e. RVDC
and the Affordable Companies), HMC is also pursuing acquisitions pursuant to
which HMC would purchase the assets of physicians' practices.
Simultaneously with the acquisition of the assets, HMC would enter into
agreements with the physicians (or a professional corporation employing the
physicians) pursuant to which HMC would lease the use of the assets and
provide management services. The professional corporation could be either
affiliated with HMC or owned by the selling physicians.
HMC intends to pursue such transactions with primary care practices
and specialists to whom primary care doctors typically refer patients. HMC
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 HMC's clients will include opening
more offices and expanding existing offices so as to enable practices to
treat more patients more efficiently.
HMC will seek to create a network of physicians to participate in
managed care. HMC 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.
HMC'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, HMC believes that it will be in an excellent position to
attract managed care contracts for its clients from employers and insurance
carriers.
MEDICAL PRACTICE MANAGEMENT SERVICES
HMC's services to the facilities it manages encompass substantially
all of the facilities' operations. These services include:
(1) Offices and Equipment. HMC provides office space and
equipment to its clients. This includes technologically sophisticated
medical equipment. HMC also provides improvements to leaseholds, assistance
in site selection and advice on improving, updating, expanding and adapting
to new technology.
(2) Personnel. HMC 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. HMC 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. HMC 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, HMC seeks to obtain favorable pricing for medical supplies,
equipment, pharmaceuticals and other inventory for its clients.
(6) Diagnostic Imaging and Ancilliary Services. With the
acquisition of RVDC, HMC 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. HMC is responsible for developing
marketing plans for its clients.
HMC provides its services pursuant to negotiated contracts with its
clients. While HMC believes it can provide the greatest value to its
clients by furnishing the full range of services appropriate to that client,
HMC would also be willing to enter into contracts providing for a more
limited spectrum of management services.
HMC MARKETING
HMC's marketing strategy is to increase the size, number and
locations of medical practices and facilities which it manages. HMC 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. HMC 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 HMC. HMC will focus on
opportunities for expanding the services clients offer and expanding into
new geographic areas. HMC will also seek to increase the patient volume of
clients.
DIAGNOSTIC IMAGING CENTERS AND OTHER ANCILLIARY SERVICES
Diagnostic imaging centers managed by HMC 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 HMC personnel and then delivered
to the referring physician.
In addition, HMC 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.
HMC 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. HMC 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, HMC
will seek to expand the imaging modalities offered at its managed centers or
to create networks with other imaging centers.
COMPETITION (HMC)
The medical practice management field is highly competitive. A
number of large hospitals have acquired medical practices and this trend may
continue. HMC expects that more competition will develop. Many competitors
have greater financial and other resources than HMC.
With respect to the diagnostic imaging centers managed by HMC, the
outpatient diagnostic imaging industry is highly competitive. Competition
focuses primarily on attracting physician referrals at the local market
level and , increasingly, referrals through relationships with managed care
organizations. HMC 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 HMC
Various States prohibit business corporations from practicing
medicine. Consequently, HMC leases space and equipment to clients and
provides clients with a range of non-medical administrative and managerial
services. HMC does not engage in the practice of medicine or establish
standards of medical practice or policies for its clients.
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.
HMC'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, HMC could be
required to modify its business practices and services in ways that could be
more costly to HMC or in ways that decrease the revenues which HMC receives
from its clients.
HMC believes that it is in compliance with applicable Federal,
State and local laws. HMC does not believe that such laws will have any
material effect on its business.
EMPLOYEES
As of July 1, 1997, the Company employed 346 persons on a full-time
basis. Of such employees, 10 were engaged in marketing and sales, 36 in
research and development, 87 in manufacturing, 46 in customer support
services, 137 in administration (including 75 on site at facilities managed
by HMC and 32 performing billing, collection and transcription services for
those facilities) and 30 professional MRI technicians on site at diagnostic
imaging centers managed by HMC.
<PAGE>
ITEM 2. PROPERTIES
The Company leases approximately 122,240 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 rental rate of
approximately $735,321, excluding utilities, taxes and other related
expenses. The terms of the various leases extend through 1998 and the
beginning of 1999, with options to renew ranging from 17 months to 10 years
on its principal facilities. Management believes that these premises are
adequate for its current needs.
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). The defendants contested the Company's claims, and
Hitachi counterclaimed, alleging infringement by the Company of two of its
patents. 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 awarding
FONAR $110,575,000 for infringement of two of its 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." Subsequent
to the verdict General Electric made motions to the Court to enter judgment
as a matter of law in its favor and against FONAR with respect to both
patents notwithstanding the jury's verdict. FONAR made a motion to the
Court for an injunction restraining General Electric Company from using the
multi-angle oblique imaging technology covered by U.S. Patent No. 4,871,966.
On September 30, 1995 the Court announced its decision. In its decision,
the Court awarded FONAR $61,950,000 in damages against General Electric for
direct infringement of U.S. Patent No. 4,871,966 (Multiple Angle Oblique
Magnetic Resonance Imaging) and granted an injunction against General
Electric prohibiting future violations of the patent. (An additional
$6,471,726 in pre-judgment interest was awarded to FONAR on November 17,
1995.) The injunction was stayed pending appeal, however, upon the posting
of a bond by General Electric. With respect to U.S. Patent No. 3,789,832
(Cancer Detection Patent), the judge agreed with the jury's finding that the
patent was valid, but disagreed with the jury finding of infringement and
determined that General Electric's MRI scanners did not infringe the patent.
The Court also rejected the jury's finding that General Electric had induced
others to infringe U.S. Patent No. 4,871,966. General Electric has appealed
the portion of the judgment upholding the jury's award of damages to FONAR
for direct infringement of U.S. Patent No. 4,871,966 and the issuance of the
injunction. FONAR has appealed the portion of the judgment overturning the
jury's findings of infringement on U.S. Patent No. 3,789,832 and
contributory infringement in respect of U.S. Patent No. 4,871,966.
In February 1997, the Court of Appeals for the Federal Circuit
affirmed the District Court's judgment against General Electric for
infringement of the Company's Multi-Angle Oblique imaging patent (U.S.
Patent No. 4,871,966) but left standing the District Court's determination
that General Electric was not liable for inducing others to infringe the
patent. With respect to the Cancer Detection Patent (U.S. Patent No.
3,789,832), the Court of Appeals reversed the District Court and reinstated
the jury verdict against General Electric awarding the Company $35 million
for infringement.
General Electric subsequently petitioned the Court of Appeals for a
rehearing, with the suggestion that the rehearing be held in banc (by all
the Circuit judges). On May 8, 1997, the Court of Appeals denied the
petition. General Electric then applied for a stay pending an appeal to the
United States Supreme Court. The application was denied by the Court of
Appeals in the first instance and then by Chief Justice Rehnquist of the
Supreme Court.
Following the denial of General Electric's petition and application
for a stay, the District Court entered a judgment based on the Court of
Appeals' decision. 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 August, 1997, General Electric filed a petition for a
writ of certiorari requesting the Supreme Court to hear the case. 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 sought injunctive relief and damages (FONAR Corporation and Dr.
Raymond V. Damadian V. Siemens Medical Systems, Inc. et al. Civil Action No.
CV 95-2469 (LJW). In its suit, 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). (Subsequently, the action was
transferred to the United States District Court for the District of
Delaware.)
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. On June 14, 1995, Siemens Medical Systems,
Inc. amended the Complaint to add Siemens AG as a plaintiff, to add Raymond
V. Damadian, M.D. MR Scanning Centers Management Company as a defendant and
to include a claim against FONAR for infringement of one of Siemens' MRI
patents. The complaint was further amended on December 14, 1995 to allege
infringement of two additional patents. (Siemens Medical Systems, Inc. and
Siemens AG, v. FONAR Corporation and Raymond V. Damadian, M.D. MR Scanning
Centers Management Company, Civil Action No. 95-261.
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 American 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.)
On March 4, 1987, Philip B. Kivitz, M.D. and Rad-Sonic Diagnostic
Medical Clinics, Inc., filed a complaint against AMD, FONAR, Raymond V.
Damadian and others in the San Francisco County Superior Court (Case Action
No. 870407) seeking $10,000,000 in compensatory damages and $10,000,000 in
punitive damages. In January 1993, the case went to trial and the jury
returned a verdict of $880,000 against AMD and $120,000 against FONAR. On
June 17, 1993, the Court granted FONAR's and AMD's motion for judgment
notwithstanding the verdict, thereby vacating the entire award against both
FONAR and AMD. The plaintiffs appealed the Court's granting of judgment
notwithstanding the verdict. On February 27, 1995, the appellate court
affirmed the lower court's judgment notwithstanding the verdict as to FONAR,
but reversed the judgment as to AMD. As a result, the trial court's
determination that the plaintiffs could not recover against FONAR was
upheld, but the jury verdict against AMD was reinstated. AMD filed a
petition for review with the California Supreme Court. AMD's petition was
denied on May 17, 1995.
On April 3, 1990, Summit, Rovins and Feldesman commenced an action
in the Supreme Court of the State of New York, County of New York against
the Company and its President, Raymond V. Damadian. The complaint alleged
unpaid fees for legal services and disbursements in the amount of
$664,371.65. The Company contested the plaintiff's claims as excessive and
improper charges for legal services, and has asserted various defenses and a
counterclaim of $100,000 for a refund of fees. The plaintiff made a motion
for summary judgment which was granted as to the existence of liability but
denied as to the amount. Dr. Damadian's cross-motion to dismiss the action
against him personally was granted. Both parties appealed the court's
decisions. On March 9, 1995, the appellate court reversed the granting of
summary judgment against FONAR. The appellate court also upheld the
dismissal of the action against Dr. Damadian personally. Immediately prior
to trial, on June 25, 1997, the parties entered into a settlement pursuant
to which the Company will pay Summit, Rovins and Feldesman $415,000.
In June 1995, a FONAR stockholder commenced an action in the
Delaware Court of Chancery against FONAR and its directors, alleging
breaches of fiduciary duties by the defendants in connection with a
recapitalization plan adopted by the stockholders of the Company on April 3,
1995 (Horace Rubenstein, Individually and on Behalf of All Others Similarly
Situated v. Raymond V. Damadian et al., C.A. No. 14378). 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. The defendants 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. As approved by the Court, the settlement increases 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 agreed to issue Warrants to purchase Common Stock to holders of
record of its Common Stock on 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.
<PAGE>
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 1994 1.91 1.22 2.00 1.25
October - December 1994 2.50 1.28 2.53 1.31
January - March 1995 2.50 1.53 2.53 1.63
April - June 1995 4.50 2.38 4.56 2.41
July - September 1995 3.84 2.56 4.00 2.63
October - December 1995 3.91 2.50 3.97 2.56
January - March 1996 2.78 2.09 2.81 2.13
April - June 1996 3.00 2.19 3.03 2.25
July - September 3 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 22 1997 3.44 2.72 3.50 2.75
On September 22, 1997, the Company had approximately 4,479
stockholders of record of the Company's Common Stock, 14 stockholders of
record of the Company's Class B Common Stock, 4 stockholders of record of
the Company's Class C Common Stock and 4,639 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 has paid no dividends to date. The Company
anticipates, however, paying certain dividends on monies it receives from
the enforcement of its patents. Except for these dividends, it is expected
that the Company will continue to retain earnings to finance the development
and expansion of its business.
<PAGE>
<TABLE>
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, 1997. The selected financial data for 1997, 1996 and 1995 reflects the
results of operations, assets and liabilities of RVDC and the assets and
liabilities of the Affordable Companies. The selected financial data for 1994 and
1993 is not consolidated with these entities. 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.
<CAPTION>
As of, or For the Period Ended June 30,
STATEMENT OF OPERATIONS 1997 1996 1995 1994** 1993**
----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Revenues $17,633,066 $13,915,725 $16,522,676 $15,387,000 $16,802,000
Cost of $13,828,574 $10,417,384 $ 6,360,134 $ 7,814,000 $ 9,608,000
revenues
Research and $ 3,928,035 $ 3,607,703 $ 3,356,120 $ 2,803,000 $ 2,181,000
Development Expenses
Net Income (loss) $56,068,771 $(11,407,444) $(7,549,625) $ (335,000) $ 238,000
Net income (loss) .95 -.22 -.17 -0.01 0.01
per common share
Weighted average 59,097,965 51,516,470 45,055,334 36,774,000 30,870,000
number of shares
outstanding *
BALANCE SHEET DATA
Working capital $64,837,573 $(1,575,857) $(4,498,911) $ (7,749,000) $(12,239,000)
(deficit)
Total $106,690,561 $28,057,384 $27,949,122 $48,418,000 $42,811,000
assets
Long-term debt and $ 4,211,269 $ 4,204,935 $ 4,274,420 $ 5,884,000 $ 9,483,000
obligations under
capital leases
Stockholders' $ 73,245,262 $11,412,629 $29,394,096 $28,333,000 $18,022,000
equity
* Adjusted for stock dividend of Class A Non-voting Preferred Stock declared in October, 1995.
** Does not reflect consolidation with RVDC or the Affordable Companies.
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS.
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, U.S. Health Management Corporation ("HMC")
in order to expand into the physician practice management business. In
connection with its entry into this new line of business, HMC completed two
acquisitions.
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, to be continued by HMC, was the management of MRI
diagnostic imaging centers in New York, Florida, Georgia and other
locations.
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
.6 Tesla field strength, the QUAD 12000 magnet is the highest field "Open
MRI" in the industry, offering non-claustrophobic MRI together with
high-field image quality for the first time. The Company expects vigorous
sales from its new products.
As part of its scanner marketing program, the Company attended
the industry's annual trade show, RSNA (Radiological Society of North
America) in November 1995 and 1996, and plans to do so again in November
1997. 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 this product 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.
As at September 1, 1997, the Company's backlog of unfilled orders
was approximately $6.4 million, as compared to approximately $6.8 million at
September 1, 1996.
HMC 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.
HMC 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 have been consolidated for balance sheet
purposes, but not for results of operations for prior periods. In
connection with the acquisition of the Affordable Companies and related
transactions, the Company has issued 2,164,000 shares of its Common Stock
and will release from escrow an additional 576,000 shares provided certain
financial performance goals are met. The acquisition of RVDC was
consummated by the purchase of all of the outstanding shares of RVDC for
10,000 shares of the Company's Common Stock.
The Company's efforts to reduce infringement of its intellectual
property rights by competitors have produced material benefits, as reflected
in the $128.7 million recovered from General Electric Company. After
deduction of attorney's fees, the net amount of $77.2 million was collected
by the Company on July 2, 1997. The full amount of the award was recognized
for financial statement purposes in fiscal 1997 (See Financial Statements).
The Company also has commenced and settled similar patent infringement suits
against other major competitors (See "Litigation").
RESULTS OF OPERATIONS.
FISCAL 1997 COMPARED TO FISCAL 1996
Except where otherwise indicated, the results of operations reflect
the consolidation of the Company and RVDC, but not of the Affordable
Companies.
In fiscal 1997, the Company experienced net income of $56.0 million
on revenues of $17.6 million as compared to a net loss of $11.4 million on
revenues of $13.9 million for fiscal 1996. Revenues and income (losses)
attributable to RVDC were approximately $8.1 million and ($2.0 million)
respectively for fiscal 1997 and $5.7 million and ($4.8 million)
respectively for fiscal 1996. As noted above, net income for fiscal
1997 reflects the net income attributable to the award received by the
Company in its patent litigation.
As the Company has expanded its operations and productive capacity,
costs and expenses increased in fiscal 1997. Cost of revenues increased
from $10.4 million in fiscal 1996 to $13.8 million in fiscal 1997. Research
and development, selling, general and administrative expenses increased to
approximately $24.2 million for fiscal 1997 from approximately $17.2 million
for fiscal 1996. Costs of revenues and selling general and administrative
expenses attributable to RVDC were $1.9 million and $7.2 million respectively
for fiscal 1997 and $2.1 million and $6.8 million, respectively for fiscal 1996.
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 1997 the Company continued its investment in the development of its
new MRI scanners, together with software and upgrades, with an investment of
$3,928,035 in research and development ($108,809 of which was capitalized)
as compared to $3,607,703 ($251,659 of which was capitalized) in fiscal
1996. The research and development expenditure was approximately 22.3% of
revenues in 1997 and $25.9% of revenues in 1996.
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 practice management, customer service, upgrades). As a result of
this expansion, including the acquisition of RVDC, the percentage of the
Company's revenue derived from sources other than scanner sales was
approximately 70.64% for fiscal 1997 and 85.2% for fiscal 1996.
FISCAL 1996 COMPARED TO FISCAL 1995
In fiscal 1996, the Company experienced a net loss of $3.4 million
on revenues of $13.1 million as compared to a net loss of $1.8 million on
revenues of $14.1 million for fiscal 1995. Revenues and income (losses)
attributable to RVDC were $5.7 million and ($4.8 million), respectively for
fiscal 1996 and $7.8 million and ($2.0 million), respectively for fiscal 1995.
Lower revenues experienced in fiscal 1996 were the principal reason
for the operating losses experienced in fiscal 1996 (operating losses of
$15.3 million in fiscal 1996 as compared to $10.1 million in fiscal 1995).
Lower revenues reflected strong competition in the markets for both MRI
products and diagnostic imaging services, and a continued weak domestic
demand for MRI scanners in a marketplace eager to see new products that
would address both the heightened cost pressures on MRI and the patient
demand for non-claustrophobic scanners.
As at September 1, 1996, the Company's backlog of unfilled scanner
orders was approximately $6.8 million, as compared to $4.0 million at
September 1, 1995.
As the Company has expanded its operations and productive capacity
to meet and anticipate new orders, costs and expenses increased in fiscal
1996. Although cost of revenues remained relatively constant at
approximately $10.4 million in 1996 as compared to $10.2 million in fiscal
1995, research and development, selling, general and administrative expenses
increased to approximately $17.2 million for fiscal 1996 from approximately
$15.0 million for fiscal 1995. Costs of revenues and selling, general and
administrative expenses attributable to RVDC were $2.1 million and $6.8
million respectively for fiscal 1996 and $1.8 million and $6.0 million
for fiscal 1995.
In fiscal 1996 the Company invested $3,607,703 in research and
development ($251,659 of which was capitalized) as compared to $3,356,120 in
research and development ($281,052 of which was capitalized) in fiscal 1995.
The research and development expenditure was approximately 25.9% of revenues
in 1996 and 20.3% of revenues in 1995.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company's liquidity and capital
resources positions changed from the June 30, 1996 position as follows:
June 30, June 30,
1997 1996 Change
____________ ____________ __________
Working capital
(deficiency) $64,837,573 ($1,575,857) $66,413,430
The improvement in the Company's working capital position
resulted primarily from the award in its patent litigation ($77.2 million),
but cash and accounts receivable increased from fiscal 1996 to fiscal 1997
as well (to $11.9 million at June 30, 1997 from $8.5 million at June 30,
1996). The increase in current liabilities from $14.9 million to $28.5
million at June 30, 1997 was attributable principally to dividends payable
on the awards and settlements in the Company's patent litigation, accrued
compensation, taxes and legal fees.
Since June 1989, a principal objective of the Company has been
to reduce and ultimately eliminate its debt. Since the inception of the
plan, interest bearing debt was reduced from $23.1 million in fiscal 1989
(which does not include any indebtedness of RVDC) to $4.6 million on a
consolidated basis with RVDC at June 30, 1997 ($3.9 million without
consolidating RVDC). From June 30 1996 to June 30, 1997, interest-bearing
debt increased slightly, from $4.3 million to $4.6 million, reflecting
principally the financing of new equipment in connection with the expansion
of the Company's productive capacity.
As of June 30, 1997, 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, U.S. Health Management Corporation, to develop and
expand its PPM (physician practice management) 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 offers its products for sale or lease to customers.
Cash flows from leasing transactions are derived under the terms of the
underlying agreements. Over the long term, the Company expects enhanced
cash flows and increased revenues from such transactions while in the short
term, such transactions impair cash flow. In order to mitigate the short
term effect on cash flow, the Company previously had borrowed money secured
by the leases and the underlying equipment. Such debt comprises
substantially all of the remaining long-term debt in the accompanying
financial statements.
In addition to leasing products to customers, 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.
Since 1990 the Company has restructured various long-term loans and
notes. The significant changes included extended maturity dates, and the
addition of unpaid interest to the note and loan balances.
Capital expenditures for each of fiscal 1997 and 1996 approximated
$1.75 million and $1.76 million, respectively, and substantially consisted
of capitalized computer software costs in connection with the development of
scanner products, patent costs, copyright costs 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, the QUAD scanners and is reemphasizing MRI
Scanner sales. In addition, the Company is seeking to enhance revenue by
entering into the PPM (physician practice management) business through its
new subsidiary, U.S. Health Management Corporation ("HMC").
Cost containment programs continue in force notwithstanding an
increase in costs and expenses resulting from increased manufacturing
activity and marketing of its MRI scanners. 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 $3.7 million for the year ended
June 30, 1996 and $2.5 million for the year ended June 30, 1997
(transactions between the Company and RVDC 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, 1997
approximates $64.8 million, as compared to a working capital deficiency of
$1.6 million as of June 30, 1996.
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 more permanent financing alternatives which may
become available as the success of the previously described programs
accelerates.
<PAGE>
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-4
At June 30, 1997 AND 1996
CONSOLIDATED STATEMENTS OF OPERATIONS F-5
For the Three Years Ended June 30,
1997, 1996 and 1995
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY For the Three Years F-6 to F-14
Ended June 30, 1997, 1996 and 1995
CONSOLIDATED STATEMENTS OF CASH FLOWS F-15; F-16
For the Three Years Ended June 30, 1997,
1996 and 1995
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-17 to F-70
SELECTED FINANCIAL DATA (*)
For the Five Years Ended June 30, 1997
(*) 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
<PAGE>
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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the consolidated
results of their operations and cash flows for each of the years in the
three-year period ended June 30, 1997, in conformity with generally accepted
accounting principles.
During each of the years in the three-year period ended June 30, 1997, a
significant portion of the Company's revenues was from related parties (see Note
18).
/S/ TABB, CONIGLIARO & McGANN, P.C.
TABB, CONIGLIARO & McGANN, P.C.
New York, New York
October 13, 1997
F-2
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
------
June 30,
---------------------------
1997 1996
------------ -----------
CURRENT ASSETS
Cash and cash equivalents $ 5,861,500 $ 3,861,167
Receivable from litigation award 77,223,460 -
Accounts receivable, net 6,000,063 4,599,576
Costs and estimated earnings in
excess of billings on uncompleted
contracts 818,865 336,455
Inventories 3,440,509 3,629,244
Prepaid expenses and other current
assets 409,673 905,271
------------ -----------
TOTAL CURRENT ASSETS 93,754,070 13,331,713
ASSET HELD FOR RESALE - 450,000
PROPERTY AND EQUIPMENT - Net 6,068,675 3,720,090
ADVANCES AND NOTES TO AFFILIATES AND
RELATED PARTIES, Net of discounts
and allowance for doubtful accounts
of $3,750,000 and $1,250,000 at June 30,
1997 and 1996, respectively 1,928,625 5,109,857
LONG-TERM ACCOUNTS RECEIVABLE, Net of
allowance for doubtful accounts of
$2,490,018 and $1,990,018 at June
30, 1997 and 1996, respectively 253,534 624,174
NOTES RECEIVABLE, Net of allowance for
doubtful accounts of $865,964 and
$708,411 at June 30, 1997 and 1996,
respectively 107,384 157,553
CAPITALIZED SOFTWARE DEVELOPMENT COSTS,
Net of accumulated amortization of
$7,465,409 and $6,872,193 at June 30,
1997 and 1996, respectively 771,517 1,255,924
OTHER INTANGIBLE ASSETS, Net 3,569,151 3,204,155
OTHER ASSETS 237,605 203,918
------------ -----------
TOTAL ASSETS $106,690,561 $28,057,384
============ ===========
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
June 30,
---------------------------
1997 1996
------------ -----------
CURRENT LIABILITIES
Notes payable $ 415,000 $ 100,000
Current maturities of long-term debt
and capital lease obligations 2,387,508 2,958,064
Accounts payable 2,837,421 2,148,160
Other current liabilities 13,687,599 8,305,508
Dividends payable 7,637,841 217,226
Customer advances 764,402 933,604
Billings in excess of costs and
estimated earnings on uncompleted
contracts 192,932 170,008
Income taxes payable 100,000 75,000
Deferred income taxes 3,071,897 -
------------ -----------
TOTAL CURRENT LIABILITIES 31,094,600 14,907,570
------------ -----------
DEFERRED INCOME TAXES - NON-CURRENT 221,897 -
LONG-TERM DEBT AND CAPITAL LEASE
OBLIGATIONS, Less current maturities
(Notes 2, 11 and 15) 1,823,761 1,246,871
OTHER LIABILITIES 100,941 59,023
------------ -----------
2,146,599 1,305,894
------------ -----------
MINORITY INTEREST 204,100 431,291
------------ -----------
COMMITMENTS AND CONTINGENCIES (Notes 3,
9, 11 and 15)
STOCKHOLDERS' EQUITY
Common stock - $.0001 par value;
issued - 49,133,422 and 42,871,751
shares at June 30, 1997 and 1996 4,913 4,287
Class B common stock (10 votes per
share) - $.0001 par value; issued
and outstanding - 5,411 shares at
June 30, 1997 and 1996 - -
Class C common stock (25 votes per
share) - $.0001 par value;
9,562,824 issued and
outstanding at June 30, 1997 and
1996 956 956
Class A non-voting preferred stock -
$.0001 par value; issued and
outstanding - 7,855,627 shares at
June 30, 1997 and 1996 785 785
Preferred stock - $.001 par value;
issued and outstanding - none - -
Paid-in capital in excess of par
value 90,640,637 75,985,245
Accumulated deficit (13,991,988) (62,422,918)
Notes receivable from stockholders (1,918,596) (1,760,281)
Unearned compensation (1,096,000) -
Treasury stock - 108,864 shares of
common stock at June 30, 1997 and
1996 (395,445) (395,445)
------------ -----------
TOTAL STOCKHOLDERS' EQUITY 73,245,262 11,412,629
------------ -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $106,690,561 $28,057,384
============ ===========
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
REVENUES
Product sales - net $ 5,177,346 $ 2,060,888 $ 2,383,309
Service and repair fees
- net 2,686,048 3,927,383 4,533,653
Related parties -
service and repair
fees - net 1,828,086 1,972,304 1,831,258
Related parties -
scanning and
management fees - net 7,941,586 5,955,150 7,804,456
----------- ----------- -----------
TOTAL REVENUES - Net 17,633,066 13,915,725 16,552,676
----------- ----------- -----------
COST OF REVENUES
Product sales 8,277,945 4,818,952 5,509,147
Service and repair fees 2,202,120 2,451,708 2,256,036
Related parties - service
and repair fees 1,535,981 1,054,652 759,771
Related parties -
scanning and management
fees - net 1,812,528 2,092,072 1,667,588
----------- ----------- -----------
TOTAL COST OF REVENUES 13,828,574 10,417,384 10,192,542
----------- ----------- -----------
GROSS PROFIT 3,804,492 3,498,341 6,360,134
----------- ----------- -----------
EXPENSES
Research and development
expenses 3,928,035 3,607,703 3,356,120
Selling and marketing
expenses 2,369,652 2,069,045 1,497,825
General and
administrative expenses 17,873,396 11,517,538 10,166,435
Provision for bad debt 3,608,062 1,226,014 116,514
Compensatory element of
stock issuances 407.052 355,327 1,363,194
----------- ----------- -----------
28,186,197 18,775,627 16,500,088
----------- ----------- -----------
LOSS FROM OPERATIONS (24,381,705) (15,277,286) (10,139,954)
INTEREST EXPENSE (311,900) (609,071) (1,226,777)
INTEREST INCOME 385,500 310,489 293,137
OTHER INCOME, principally
gain on litigation awards 83,099,685 4,007,576 3,322,201
----------- ------------ -----------
INCOME (LOSS) BEFORE
PROVISION FOR TAXES AND
MINORITY INTEREST 58,791,580 (11,568,292) (7,751,393)
PROVISION FOR INCOME TAXES 2,950,000 19,965 145,558
----------- ------------ -----------
INCOME (LOSS) BEFORE
MINORITY INTEREST 55,841,580 (11,588,257) (7,896,951)
MINORITY INTEREST IN NET
LOSS OF SUBSIDIARY AND
PARTNERSHIP 227,191 180,813 347,326
----------- ------------ -----------
NET INCOME (LOSS) $56,068,771 $(11,407,444) $(7,549,625)
=========== ============ ===========
NET INCOME (LOSS) PER SHARE $0.95 $(0.22) $(0.17)
===== ====== ======
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 59,097,965 51,516,470 45,055,334
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 1997
Class A
Common Stock
Per Share -----------------------
Amount Shares Amount
--------- ----------- ---------
Balance - June 30, 1996 $ - 42,871,751 $ 4,287
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 settlememt
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 Dioagnostics, Inc. 2.06 1,764,000 176
Net Change in notes receivable from
stockholders - -
Stock divident adjustment - -
Dividend - preferred stock - -
NET INCOME - -
---------- --------
Balance - JUNE 30, 1997 49,133,422 $ 4,913
========== ========
Class B
Common Stock
----------------------
Shares Amount
----------- --------
Balance - June 30, 1996 5,411 -
Shares issued as follows:
Stock bonus to employees (measured at
the average quoted market price on
the award dates) - -
Under incentive stock option plan - -
Shares issued under non-statutory plans - -
Issuance of stock in settlememt
of liabilities - -
Issuance of stock under stock bonus
plans - -
Issuance of stock under consulting
contracts - -
Issuance of stock for acquisition of
Affordable Dioagnostics, Inc. - -
Net Change in notes receivable from
stockholders - -
Stock divident adjustment - -
Dividend - preferred stock - -
NET INCOME - -
---------- --------
Balance - JUNE 30, 1997 5,411 -
========== ========
F-6
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 1997
(continued) Class C Common Stock
---------------------
Shares Amount
--------- --------
Balance - June 30, 1996 9,562,824 956
Shares issued as follows:
Stock bonus to employees (measured at
the average quoted market price on
the award dates) - -
Under incentive stock option plan - -
Shares issued under non-statutory plans - -
Issuance of stock in settlememt
of liabilities - -
Issuance of stock under stock bonus
plans - -
Issuance of stock under consulting
contracts - -
Issuance of stock for acquisition of
Affordable Dioagnostics, Inc. - -
Net Change in notes receivable from
stockholders - -
Stock divident adjustment - -
Dividend - preferred stock - -
NET INCOME - -
---------- --------
Balance - JUNE 30, 1997 9,562,824 956
========== ========
Class A Non-Voting Paid-in
Preferred Stock Capital in
------------------- Excess of
Shares Amount Par Value
--------- ------ -----------
Balance - June 30, 1996 7,855,627 785 $75,985,245
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 settlememt
of liabilities - - 1,444,464
Issuance of stock under stock bonus
plans - - 2,375,296
Issuance of stock under consulting
contracts - - 1,095,960
Issuance of stock for acquisition of
Affordable Dioagnostics, Inc. - - 3,630,136
Net Change in notes receivable from
stockholders - - -
Stock divident adjustment - - -
Dividend - preferred stock - - -
NET INCOME - - -
---------- ------- -----------
Balance - JUNE 30, 1997 7,855,627 785 $90,640,637
========== ======= ===========
See accompanying notes to consolidated financial statements
F-7
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 1997
(Continued) Treasury Stock
Unearned ---------------------
Compensation Shares Amount
------------ --------- ----------
Balance - June 30, 1996 - 108,864 $(395,445)
Shares issued as follows:
Stock bonus to employees (measured at
the average quoted market price on
the award dates) - - -
Under incentive stock option plan - - -
Shares issued under non-statutory plans - - -
Issuance of stock in settlememt
of liabilities - - -
Issuance of stock under stock bonus
plans - - -
Issuance of stock under consulting
contracts (1,096,000) - -
Issuance of stock for acquisition of
Affordable Dioagnostics, Inc. - - -
Net Change in notes receivable from
stockholders - - -
Stock divident adjustment - - -
Dividend - preferred stock - - -
NET INCOME - - -
----------- ---------- ----------
Balance - JUNE 30, 1997 (1,096,000) 108,864 $(395,445)
=========== ========== ==========
Notes
Receivable
from Accumulated
Stockholders Deficit
------------ -------------
Balance - June 30, 1996 $(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) - -
Under incentive stock option plan - -
Shares issued under non-statutory plans - -
Issuance of stock in settlememt
of liabilities - -
Issuance of stock under stock bonus
plans - -
Issuance of stock under consulting
contracts - -
Issuance of stock for acquisition of
Affordable Dioagnostics, Inc. - -
Net Change in notes receivable from
stockholders (158,315) -
Stock divident adjustment - -
Dividend - preferred stock - (7,637,841)
NET INCOME - 56,068,771
------------ -------------
Balance - JUNE 30, 1997 $(1,918,596) $(13,991,988)
============ =============
See accompanying notes to consolidated financial statements
F-8
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 1996
Class A
Common Stock
Per Share ----------------------
Amount Shares Amount
--------- ---------- --------
Balance - June 30, 1995 $ - 38,229,448 $ 3,822
Shares issued as follows:
Stock bonus to employees (measured at
the average quoted market price on
the award dates) 2.67 157,341 16
Under incentive stock option plan 2.66 82,125 8
Shares issued under non-statutory plans 2.69 3,100,000 310
Issuance of stock in settlememt
of liabilities 2.73 802,400 80
Issuance of stock 2.08 500,000 50
Conversion from class B to class C - - -
Conversion from class B to class A 437 1
Net charge in notes receivable
from stockholders - - -
Stock dividend adjustment -
Class A non-voting preferred - - -
Dividend - preferred stock - - -
NET LOSS - - -
---------- --------
Balance - JUNE 30, 1996 42,871,751 $ 4,287
========== ========
Class B
Common Stock
----------------------
Shares Amount
----------- --------
Balance - June 30, 1995 3,193,456 $ 319
Shares issued as follows:
Stock bonus to employees (measured at
the average quoted market price on
the award dates) - -
Under incentive stock option plan - -
Shares issued under non-statutory plans - -
Issuance of stock in settlememt
of liabilities - -
Issuance of stock - -
Conversion from class B to class C (3,187,608) (318)
Conversion from class B to class A (437) (1)
Net charge in notes receivable
from stockholders - -
Stock dividend adjustment -
Class A non-voting preferred - -
Dividend - preferred stock - -
NET LOSS - -
----------- --------
Balance - JUNE 30, 1996 5,411 $ -
=========== ========
See accompanying notes to consolidated financial statements
F-9
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 1996
(continued) Class C
Common Stock
----------------------
Shares Amount
--------- ----------
Balance - June 30, 1995 - $ -
Shares issued as follows:
Stock bonus to employees (measured at
the average quoted market price on
the award dates) - -
Under incentive stock option plan - -
Shares issued under non-statutory plans - -
Issuance of stock in settlememt
of liabilities - -
Issuance of stock - -
Conversion from class B to class C 9,562,824 956
Conversion from class B to class A - -
Net charge in notes receivable
from stockholders - -
Stock dividend adjustment -
Class A non-voting preferred - -
Dividend - preferred stock - -
NET LOSS - -
---------- ----------
Balance - JUNE 30, 1996 9,562,824 $ 956
========== ==========
Class A
Non-Voting Paid-in
Preferred Stock Capital in
------------------- Excess of
Shares Amount Par Value
--------- ------ -----------
Balance - June 30, 1995 7,624,117 762 $63,779,202
Shares issued as follows:
Stock bonus to employees (measured at
the average quoted market price on
the award dates) - - 420,187
Under incentive stock option plan - - 218,780
Shares issued under non-statutory plans - - 8,337,190
Issuance of stock in settlememt
of liabilities - - 2,190,892
Issuance of stock - - 1,039,655
Conversion from class B to class C - - (638)
Conversion from class B to class A - - -
Net charge in notes receivable
from stockholders - - -
Stock dividend adjustment -
Class A non-voting preferred 231,510 23 (23)
Dividend - preferred stock - - -
NET LOSS - - -
---------- -------- -----------
Balance - JUNE 30, 1996 7,855,627 $ 785 $75,985,245
========== ======== ===========
See accompanying notes to consolidated financial statements
F-10
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 1996
(Continued) Treasury Stock
-----------------------
Shares Amount
--------- -----------
Balance - June 30, 1995 108,864 $ (395,445)
Shares issued as follows:
Stock bonus to employees (measured at
the average quoted market price on
the award dates) - -
Under incentive stock option plan - -
Shares issued under non-statutory plans - -
Issuance of stock in settlememt
of liabilities - -
Issuance of stock - -
Conversion from class B to class C - -
Conversion from class B to class A - -
Net charge in notes receivable
from stockholders - -
Stock dividend adjustment -
Class A non-voting preferred - -
Dividend - preferred stock - -
NET LOSS - -
--------- -----------
Balance - JUNE 30, 1996 108,864 $ (395,445)
========= ===========
Notes
Receivable
from Accumulated
Stockholders Deficit
------------ -------------
Balance - June 30, 1995 $(1,897,047) $(50,798,248)
Shares issued as follows:
Stock bonus to employees (measured at
the average quoted market price on
the award dates) - -
Under incentive stock option plan - -
Shares issued under non-statutory plans - -
Issuance of stock in settlememt
of liabilities - -
Issuance of stock - -
Conversion from class B to class C - -
Conversion from class B to class A - -
Net charge in notes receivable
from stockholders 136,766 -
Stock dividend adjustment -
Class A non-voting preferred - -
Dividend - preferred stock - (217,226)
NET LOSS - (11,407,444)
------------ -------------
Balance - JUNE 30, 1996 $(1,760,281) $(62,422,918)
============ =============
See accompanying notes to consolidated financial statements
F-11
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 1995
Class A
Common Stock
Per Share -----------------------
Amount Shares Amount
--------- ---------- ----------
Balance - June 30, 1994 $ - 31,235,773 $ 3,123
Shares issued as follows:
Stock bonus to employees and directors
(measured at the average quoted
market price on the award dates) 2.89 480,650 48
Under incentive stock option plan 2.43 413,375 41
Shares issued under non-statutory plans 1.42 1,752,695 175
Issuance of stock in settlement of
liabilities 2.00 1,398,550 138
Issuance of stock 2.13 2,947,305 296
Net change in notes receivable from
stockholders - - -
Conversion from Class B to Class A - 1,100 1
Stock dividend - Class A non-voting
preferred - - -
NET LOSS - -
----------- ----------
Balance - JUNE 30, 1995 38,229,448 $ 3,822
=========== ==========
Class B
Common Stock
------------------------
Shares Amount
------------ ----------
Balance - June 30, 1994 3,194,556 $ 320
Shares issued as follows:
Stock bonus to employees and directors
(measured at the average quoted
market price on the award dates) - -
Under incentive stock option plan - -
Shares issued under non-statutory plans - -
Issuance of stock in settlement of
liabilities - -
Issuance of stock - -
Net change in notes receivable from
stockholders - -
Conversion from Class B to Class A (1,100) (1)
Stock dividend - Class A non-voting
preferred - -
NET LOSS - -
------------ ----------
Balance - JUNE 30, 1995 3,193,456 $ 319
============ ==========
See accompanying notes to consolidated financial statements
F-12
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 1995
(Continued) Class C
Common Stock
-------------------------
Shares Amount
---------- -----------
Balance - June 30, 1994 - $ -
Shares issued as follows:
Stock bonus to employees and directors
(measured at the average quoted
market price on the award dates) - -
Under incentive stock option plan - -
Shares issued under non-statutory plans - -
Issuance of stock in settlement of
liabilities - -
Issuance of stock - -
Net change in notes receivable from
stockholders - -
Conversion from Class B to Class A - -
Stock dividend - Class A non-voting
preferred - -
NET LOSS - -
---------- -----------
Balance - JUNE 30, 1995 - $ -
========== ===========
Class A
Non-Voting Paid-in
Preferred Stock Capital in
----------------------- Excess of
Shares Amount Par Value
--------- ---------- -----------
Balance - June 30, 1994 - $ - $49,817,538
Shares issued as follows:
Stock bonus to employees (measured
at the average quoted market
price on the award dates) - - 1,387,052
Under incentive stock option plan - - 1,004,224
Shares issued under non-statutory
plans - - 2,490,667
Issuance of stock in settlement of
liabilities - - 2,794,953
Issuance of stock - - 6,285,530
Net change in notes receivable from
stockholders - - -
Conversion from Class B to Class A - - -
Stock dividend - Class A non-voting
preferred 7,624,117 762 (762)
NET LOSS - - -
--------- ---------- -----------
Balance - JUNE 30, 1995 7,624,117 $ 762 $63,779,202
========= ========== ===========
See accompanying notes to consolidated financial statements
F-13
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 1995
(Continued)
Treasury Stock
------------------------
Shares Amount
---------- -----------
Balance - June 30, 1994 108,864 $ (395,445)
Shares issued as follows:
Stock bonus to employees (measured
at the average quoted market
price on the award dates) - -
Under incentive stock option plan - -
Shares issued under non-statutory
plans - -
Issuance of stock in settlement of
liabilities - -
Issuance of stock - -
Net change in notes receivable from
stockholders - -
Conversion from Class B to Class A - -
Stock dividend - Class A non-voting preferred - -
NET LOSS - -
---------- -----------
Balance - JUNE 30, 1995 108,864 $ (395,445)
========== ===========
Notes
Receivable
from Accumulated
Stockholders Deficit
------------ -------------
Balance - June 30, 1994 $ (751,561) $(43,248,623)
Shares issued as follows:
Stock bonus to employees (measured
at the average quoted market
price on the award dates) - -
Under incentive stock option plan (994,469) -
Shares issued under non-statutory plans
Issuance of stock in settlement of - -
liabilities - -
Issuance of stock - -
Net change in notes receivable from
stockholders (151,017) -
Conversion from Class B to Class A - -
Stock dividend - Class A non-voting
preferred - -
NET LOSS - (7,549,625)
------------ -------------
Balance - JUNE 30, 1995 $(1,897,047) $(50,798,248)
============ =============
See accompanying notes to consolidated financial statements
F-14
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30,
---------------------------------------
1997 1996 1995
------------ ------------ -----------
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income (loss) $ 56,068,771 $(11,407,444) $(7,549,625)
Adjustments to reconcile
net income (loss) to net
cash (used in) provided
by operating activities:
Minority interest in
net loss of
subsidiary and
partnership (227,191) (180,813) (360,420)
Depreciation and
amortization 2,023,465 2,636,556 2,681,975
Writedown of assets
held for resale - 148,062 -
Provision for losses on
accounts and notes
receivable and
accounts receivable
from affiliates 3,608,027 1,226,014 116,514
Compensatory element of
stock issuances 407,052 355,327 1,363,194
Stock issued in
settlement of current
liabilities 1,444,522 1,257,909 2,424,587
(Gain) loss on
settlement of various
legal disputes and
other claims (74,857,260) - 15,724
Provision for deferred
income taxes 2,850,000 - -
Loss on disposal of
fixed assets - - 184,883
(Increase) decrease in
operating assets,
net:
Accounts and notes
receivable (891,793) 297,973 1,277,413
Costs and estimated
earnings in
excess of
billings on
uncompleted
contracts (482,410) 12,537 (62,119)
Inventories 638,735 (916,898) 731,342
Assets held for
resale - - 10,000
Prepaid expenses
and other current
assets 515,504 (207,608) 1,203,690
Other assets (33,687) (12,049) 710
Receivables and
advances to
affiliates and (2,566,464)
related parties 681,232 (132,117)
Increase (decrease)
in operating
liabilities, net:
Accounts payable (1,305,728)
and income taxes (320,501) 84,588
Other current (177,412)
liabilities 5,028,639 (1,361,848) (371,150)
Customer advances (169,202) 640,117
Billings in excess
of costs and
estimated
earnings on
uncompleted 11,102
contracts 22,924 158,906 (102,257)
Other liabilities 39,982 (39,998) -----------
----------- -----------
NET CASH USED IN
OPERATING (2,464,041)
ACTIVITIES (3,653,191) (7,440,786) -----------
----------- -----------
See accompanying notes to consolidated financial statements.
F-15
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30,
--------------------------------------------
1997 1996 1995
------------ ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchases of property and
equipment, net of capital
lease obligations of
$227,665, $965,442 and
$-0- for the years
ended June 30, 1997, 1996
and 1995, respectively $ (1,249,948) $ (186,188) $ (106,480)
Cost of capitalized
software development (108,809) (505,990) (281,052)
Cost of patents and
copyright (162,297) (103,579) (1,365,273)
------------ ----------- -----------
NET CASH USED IN
INVESTING ACTIVITIES (1,521,054) (795,757) (1,752,805)
------------ ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from borrowings,
net of capital lease
obligations - - 282,346
Repayment of borrowings and
capital lease obligations (745,245) (1,034,927) (1,913,378)
Proceeds from exercise of
stock options 3,516 5,859 9,797
Repayments of notes
receivable in connection
with shares issued under
stock option and bonus
plans 7,916,307 9,726,900 8,625,641
------------ ----------- -----------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 7,174,578 8,697,832 7,004,406
------------ ----------- -----------
INCREASE IN CASH 2,000,333 461,289 2,777,560
CASH - BEGINNING OF YEAR 3,861,167 3,399,878 622,318
------------ ----------- -----------
CASH - END OF YEAR $ 5,861,500 $ 3,861,167 $ 3,399,878
============ =========== ===========
See accompanying notes to consolidated financial statements.
F-16
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 1 - DESCRIPTION OF BUSINESS
Since its incorporation in 1978, FONAR Corporation and
Subsidiaries ("the Company") has 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.
U.S. Health Management Corporation (Physician Practice
------------------------------------------------------
Management Business)
--------------------
U.S. Health Management Corporation ("HMC") 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 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. This business is sometimes referred to
as "physician practice management" ("PPM").
HMC became actively engaged in the PPM business through two
acquisitions which were consummated effective June 30, 1997.
The acquired companies in both cases were actively engaged in
the business of managing medical providers. With the exception
of one multi-specialty practice, all of the medical providers
are diagnostic imaging centers, principally MRI scanning
centers.
The first acquisition was of a group of several interrelated
entities engaged in the business of managing three diagnostic
imaging centers and one multi-specialty practice in New York
State. The transaction was effected through a merger between a
wholly-owned subsidiary of HMC 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").
F-17
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 1 - DESCRIPTION OF BUSINESS
The second completed acquisition was of Raymond V. Damadian,
M.D. MR Scanning Centers Management Company ("RVDC"). Pursuant
to the terms of the transaction, HMC 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. In connection with the acquisition of
RVDC, HMC also acquired Tallahassee Magnetic Resonance
Imaging, P.A. ("TMRI") and First Coast Magnetic Resonance
Imaging, P.A. ("First Coast"), which also are wholly-owned by
Raymond V. Damadian. The business of RVDC, to be continued by
HMC, 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, HMC has
acquired the business of managing 21 MRI scanning centers.
Seventeen of the scanning centers are managed pursuant to
management agreements, and four of the centers are
partnerships, with RVDC as the general partner. Effective July
1, 1997, HMC entered into new management agreements with each
of the centers. Pursuant to the management agreements, HMC 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 nine 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.
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/
partnership and its proportionate share in the accounts of all
joint ventures. All significant intercompany accounts and
transactions have been eliminated in consolidation.
F-18
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
----------------
The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities in the
consolidated financial statements and accompanying notes. The
most significant estimates relate to contractual and other
allowances, income taxes, contingencies and the useful lives
of equipment. In addition, healthcare industry reforms and
reimbursement practices will continue to impact the Company's
operations and the determination of contractual and other
allowance estimates. Actual results could differ from those
estimates.
Inventories
-----------
Inventories consist of purchased parts, components and
supplies, as well as work-in-process, and are stated at the
lower of cost (materials, labor and overhead determined on the
first-in, first-out method) or market.
Reclassifications
-----------------
Prior year's financial statements have been restated to
reflect the use of the pooling of interest method to account
for the business combination with RVDC (see Note 3).
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.
F-19
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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, the cost and related
accumulated depreciation are removed from the accounts and the
resulting gains or losses are reflected in the results of
operations. Expenditures for maintenance and repairs are
charged to operations. Renewals and betterments are
capitalized.
Assets held for resale are restated at the lower of the
carrying amount or fair value less costs to sell.
Assets held for resale as of June 30, 1996 represent
one MRI scanner.
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. The amortization period ranges from 3 to 5
years using the straight-line method.
F-20
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
2)Other Intangible Assets
Amortization is calculated on the straight-line basis over
periods ranging from 5 to 17 years.
Revenue Recognition
-------------------
Revenue on sales contracts for scanners is recognized under the
percentage-of-completion method. The Company manufactures its
scanners under specific contracts that provide for progress
payments. Production and installation take approximately six
months. The percentage of completion is determined by the ratio
of costs incurred to date on completed sub-assemblies to the
total estimated cost for each scanner.
Contract costs include material, direct labor and overhead.
Provisions for estimated losses on uncompleted contracts, if any,
are made in the period in which such losses are determined. The
asset, "Costs and Estimated Earnings in Excess of Billings on
Uncompleted Contracts", represents revenues recognized in excess
of amounts billed. The liability, "Billings in Excess of Costs
and Estimated Earnings on Uncompleted Contracts", represents
billings in excess of revenues recognized.
Revenue on scanner service contracts are recognized on the
straight-line method over the related contract period, usually
one year.
Revenue from sales of other items are recognized upon shipment.
Revenue under management contracts is recognized based upon
contractual agreements for management services rendered by the
Company under various long-term agreements with related medical
practices (the "PC's"), with terms ranging from 20 to 35 years
commencing July 1, 1997. The Company's agreements with the PC's
stipulate fees for services rendered, are primarily calculated on
activity based efforts at pre-determined rates per unit of
activity. All fees are re-negotiable at the anniversary of the
agreements and each year thereafter and may be renewed for
additional five-year periods at the option of either party.
F-21
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Income Taxes
------------
The Company has adopted the Financial Accounting Standards
Board Statement No. 109, "Accounting for Income Taxes" ("SFAS
109") effective July 1, 1993. SFAS 109 requires recognition of
deferred tax liabilities and assets for the expected future
tax consequences of events that have been recognized in the
financial statements or tax returns. Under this method,
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. Adoption of the statement did not have a
material effect on the accompanying financial statements.
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.
F-22
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 1995, a stock dividend of Class A non-voting preferred
stock was declared (Note 10). Earnings per share and weighted
average shares have been restated to reflect the stock
dividend.
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.
Concentration of Credit Risk
----------------------------
Financial instruments, which potentially subject the Company
to concentrations of credit risk, are primarily cash, trade
accounts receivable, notes receivable, investment in
sales-type leases and investments, advances and notes to
affiliates and related parties. Ongoing credit evaluations of
customers' financial condition are performed. The Company
generally retains title to the MRI scanners that it sells
until the scanners have been paid in full. The Company's
customers are concentrated in the industry of providing MRI
scanning services.
Various related parties (Note 3), accounted for approximately
55%, 57%, and 58% of revenues for the years ended June 30,
1997, 1996 and 1995, respectively, and 1.8% and 18% of total
assets at June 30, 1997 and 1996, respectively.
At June 30, 1997, the Company had cash deposits approximately
$5,600,000 in excess of federally insured limits.
F-23
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
New Accounting Standards
------------------------
Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of" ("SFAS No. 121") requires impairment losses be
recorded on long-lived assets used in operations when indicators
of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the
assets carrying amount. SFAS No. 121 also addresses the
accounting for long-lived assets to be disposed of. The Company
adopted SFAS No. 121 in the first quarter of 1996. No adjustments
were required.
In February 1997, Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("SFAS No. 128"), was issued which
establishes standards for computing and presenting earnings per
share. SFAS No. 128 is effective for financial statements issued
for periods ending after December 15, 1997, including interim
periods. The Company is currently evaluating the impact of
implementing this standard on earnings per share.
Fair Value of Financial Instruments
-----------------------------------
The financial statements include various estimated fair value
information at June 30, 1997, 1996 and 1995, 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.
F-24
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investment in sales-type leases and investments, advances and
notes to affiliates and related parties. The carrying amount
approximates fair value because the discounted present value
of the cash flow generated by the related parties approximates
the carrying value of the amounts due to the Company.
Long-term debt and loans payable: The carrying amounts of debt
and loans payable approximate fair value due to the length of
the maturities, the interest rates being tied to market
indices and/or due to the interest rates not being
significantly different from the current market rates
available to the Company.
All of the Company's financial instruments are held for
purposes other than trading.
Stock-Based Compensation
------------------------
In October 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("FAS No. 123").
This new standard defines a fair value based method of
accounting for an employee stock option or similar equity
instrument. This statement gives entities a choice of
recognizing related compensation expense by adopting the new
fair value method or to continue to measure compensation using
the intrinsic value approach under Accounting Principles Board
Opinion No. 25 ("APB Opinion No. 25"), the former standard. If
the former standard for measurement is elected, SFAS No. 123
requires supplemental disclosure to show the effects of using
the new measurement criteria. This statement is effective for
the Company's 1996 fiscal year. As a result of the Company's
intention to continue using the measurement prescribed by APB
Opinion No. 25, and provide the disclosure required by FAS No.
123, this pronouncement will not affect the Company's
financial position or results of operations.
F-25
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Goodwill
--------
The excess of the purchase price over the fair market value of
net assets acquired is being amortized using the straight-line
method over a 20-year period commencing July 1, 1997.
The Company periodically reviews goodwill to assess
recoverability based upon expectations of undiscounted cash
flows and operating income of each consolidated entity having
a material goodwill balance. An impairment would be recognized
in operating results, based upon the difference between each
consolidated entity's respective undiscounted cash flows and
the carrying value of the related costs in excess of net
assets acquired, if a permanent diminution in value were to
occur.
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 the Company'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.
F-26
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 3 - ACQUISITIONS (Continued)
The merger was accounted for as a purchase, under which the
purchase price was allocated to the acquired assets and
assumed liabilities based upon fair values at the date of the
merger. The excess of the purchase price over the fair value
of the net assets acquired amounted to approximately
$2,796,000 and is being amortized on a straight-line basis
over 20 years. Subject to the centers achieving certain
earning objectives within the next one year, an additional
576,000 shares may be issued to the sellers. These shares have
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 market value of the
shares upon issuance will be recorded as additional goodwill
subject to amortization over the stated period. The
accompanying consolidated financial statements include the
operations of Affordable from the date of the acquisition. The
shares issued to the Sellers as consideration pursuant to the
Agreement are subject to certain registration rights.
Concurrent with the above described transactions, HMCM entered
into consulting agreements with the shareholders of
Affordable. Under such agreements, 400,000 registered shares
of FONAR's common stock, value at $1,096,000 were issued
pursuant to one year consulting agreements with HMCM.
The business of Affordable, which will be continued by HMCM,
consists 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 CAT") 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 CAT
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,
HMCM is consummating the purchase of an additional MRI scanner
pursuant to a contract entered into prior to the acquisition.
The scanner is a mobile unit which is intended to be provided
to a number of hospitals on a shared basis, as needed, in
northern New Jersey.
F-27
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 3 - ACQUISITIONS (Continued)
RVDC Acquisition
Background
On April 7, 1989, 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, and the balance was
paid over time with interest pursuant to a promissory note.
The scanner was leased to Macon Magnetic Resonance Imaging,
P.C. ("Macon Center"), 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 MRI scanning centers ("Center") in New
York, Florida, Georgia and other locations. The Centers were
organized as individual professional corporations, owned by
Dr. Damadian. RVDC provided the necessary management and
leased or sold the scanners to the Centers, although in
certain situations, a Center would acquire the scanner
directly from FONAR. In addition to the Macon Center, the
Centers were located in Tallahassee, Florida (the "Tallahassee
Center"), Albany, Georgia (the "Albany Center"), Staten
Island, New York (the "Staten Island Center"), Deerfield
Beach, Florida (the "Deerfield Center"), Daytona Beach,
Florida (the "Daytona Beach Center"), Melville, New York (the
"Melville Center"), Astoria, New York (the "Astoria Center"),
Islandia, New York (the "Islandia Center"), Bayside, New York
(the "Bayside Center"), Elmhurst, New York (the "Elmhurst
Center"), Forest Hills, New York (the "Forest Hills Center"),
Jacksonville, Florida (the "Jacksonville Center"),
Philadelphia, Pennsylvania (the "Pennsylvania Center"), West
Palm Beach, Florida (the "West Palm Beach Center") and Coral
Gables, Florida (the "Coral Gables Center").
F-28
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 3 - ACQUISITIONS (Continued)
Acquisition of RVDC
Effective June 30, 1997, FONAR's wholly-owned subsidiary, U.S.
Health Management Corporation ("HMC"), 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. In connection with the acquisition of RVDC, HMC also
acquired the Tallahassee Center and Jacksonville Center. The
transactions have been accounted for using the pooling of
interests method of accounting. The transactions can be
rescinded by Dr. Damadian, however, if the judgement against
the General Electric Company for patent infringement (see
"Litigation") is reversed, or 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 HMC, 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 HMC and the Centers.
In addition, in connection with and immediately prior to the
acquisition of RVDC by HMC, sales agreements between FONAR and
RVDC to sell and install MRI scanners at twenty (20) future
sites were cancelled. The opportunity to establish diagnostic
imaging centers or other ancillary service facilities at these
locations will be pursued directly by HMC to the extent
appropriate after they are reviewed and coordinated with HMC's
overall business and marketing strategies.
New Agreements with HMCM
Effective July 1, 1997, immediately following the effective
date of the acqusition of RVDC by HMC, all previous management
arrangements between RVDC and the Centers were terminated and
new management agreements were entered into by the Centers and
HMC ("Management Agreements").
F-29
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 3 - ACQUISITIONS (Continued)
Pursuant to the Management Agreements, HMC 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, HMC 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, there are 17 Centers having Management
Agreements with HMC.
With respect to the scanners at 8 of the 17 Centers, the lease
or sales agreement between RVDC (or the Center in some cases)
and FONAR have been terminated. In substitution for the
previous arrangements, HMC, effective as of July 1, 1997,
entered into new scanner leases ("Scanner Leases") with the 8
Centers.
The fees to HMC under both the Management Agreements and the
Scanner Leases are on a per scan basis.
NOTE 4 - ACCOUNTS RECEIVABLE, NET
Accounts receivable, net is comprised of the following:
1997 1996
---------- ----------
Receivable from equipment
sales $2,314,133 $2,509,518
Due from affiliated
physicians 9,096,318 6,831,377
Less: Allowance for
doubtful accounts
and contractual
allowances (5,410,388) (4,741,319)
---------- ----------
$6,000,063 $4,599,576
========== ==========
The Company's receivable from affiliated physicians relates to
fees outstanding under management agreements with RVDC and
other 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.
F-30
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 4 - ACCOUNTS RECEIVABLE, NET (Continued)
Approximately 13% and 12% of the PC's 1997 and 1996 imaging
revenue was derived from the delivery of services of which the
timing of payment is substantially contingent upon the timing
of settlement of pending litigation involving the recipient of
services and third parties (Letter of Protection or "LOP-type"
accounts receivable). By its nature, the realization of a
substantial portion of these receivables is expected to extend
beyond one year from the date the service was rendered. The
Company anticipates that a material amount of its accounts
receivable will be outstanding for periods in excess of twelve
months in the future. The Company considers the aging of its
accounts receivable in determining the amount of allowance for
doubtful accounts. Credit losses associated with the
receivables are provided for in the consolidated financial
statements and have historically been within management's
expectations.
For LOP-type receivables, the Company provides for
uncollectible accounts at substantially higher rates than any
other revenue source.
NOTE 5 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND CUSTOMER
ADVANCES
1)Information relating to uncompleted contracts as of June 30,
1997 and 1996 is as follows:
As of June 30,
-----------------------
1997 1996
---------- ----------
Costs incurred on uncompleted
contracts $2,360,010 $1,124,792
Estimated earnings 429,673 371,655
---------- ----------
2,789,683 1,496,447
Less: Billings to date 2,163,750 1,330,000
---------- ----------
$ 625,933 $ 166,447
========== ==========
F-31
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 5 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND CUSTOMER
ADVANCES (Continued)
Included in the accompanying consolidated balance sheets under
the following captions:
As of June 30,
------------------------
1997 1996
---------- ----------
Costs and estimated earnings in
excess of billings on
uncompleted contracts $ 818,865 $ 336,455
Billings in excess of costs and
estimated earnings on
uncompleted contracts (192,932) (170,008)
---------- ----------
$ 625,933 $ 166,447
========== ==========
2)Customer advances consist
of the following:
As of June 30,
------------------------
1997 1997
---------- ----------
Total advances from customers $2,928,152 $2,263,604
Less: Advances from customers
on contracts under
construction 2,163,750 1,330,000
---------- ----------
$ 764,402 $ 933,604
========== ==========
NOTE 6 - INVENTORIES
Inventories included in the accompanying consolidated balance sheets consist of:
June 30,
-----------------------
1997 1996
---------- ----------
Purchased parts, components and
supplies $2,534,028 $3,321,862
Work-in-process 906,481 307,382
---------- ----------
$3,440,509 $3,629,244
========== ==========
F-32
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 7 - PROPERTY AND EQUIPMENT
Property and equipment, at cost, less accumulated depreciation
and amortization, at June 30, 1997 and 1996, is comprised of:
June 30,
-------------------------------
1997 1996
---------- ----------
Equipment under construction $ 315,000 $ -
Diagnostic equipment 1,930,454 7,029,253
Offsite research scanner 1,154,217 1,154,217
Research, development and
demonstration equipment 5,591,624 5,460,928
Machinery and equipment 8,604,424 5,319,878
Furniture and fixtures 2,698,894 2,369,483
Property under lease 1,947,633 1,512,282
Leasehold improvements 852,210 836,008
---------- ----------
23,094,456 236,804
Less: Accumulated
depreciation
and amortization 17,025,781 19,961,959
---------- ----------
$6,068,675 $3,720,090
========== ==========
Depreciation and amortization of property and equipment for the
years ended June 30, 1997, 1996 and 1995 was $1,166,951,
$1,026,091 and $987,752, respectively.
The property under lease has a net book value of $1,161,264 and
$1,195,603 at June 30, 1997 and 1996, respectively.
F-33
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 8 - INTANGIBLE ASSETS
1)Capitalized Software Development Costs
The following is a summary of software development costs capitalized
and the amortization charged to operations for the three years ended
June 30, 1997, 1996 and 1995:
For the Years Ended June 30,
-------------------------------------
1997 1996 1995
---------- ---------- ----------
Amount capitalized $ 108,809 $ 505,991 $ 281,052
========== ========== ==========
Amortization $ 593,216 $1,013,615 $1,255,012
========== ========== ==========
Capitalized computer software costs for the years ended June 30, 1997,
1996 and 1995 primarily relate to the costs of developing upgrades for
the Company's existing scanner product lines and a new line of scanner
products.
F-34
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 8 - INTANGIBLE ASSETS (Continued)
2)Other Intangible Assets
Other intangible assets, net of accumulated amortization, at June 30,
1997 and 1996 are comprised of:
June 30,
--------------------------------
1997 1996
---------- ----------
Excess of purchase price over
net assets acquired $2,796,197 $ -
Cost of acquiring technology
and license 3,422,231 3,422,231
Patents and copyrights 3,356,753 6,033,543
---------- ----------
9,575,181 9,455,774
Less: Accumulated amortization 6,006,030 6,251,619
---------- ----------
$3,569,151 $3,204,155
========== ==========
Patents, acquired at various dates are being amortized
over 17 years.
Patent and deferred legal costs related to various
patent and copyright infringement actions of
approximately $162,297, $120,473 and $1,365,275 were
capitalized during the years ended June 30, 1997, 1996
and 1995, respectively.
Deferred legal costs related to the patent infringement
lawsuit against General Electric totalling $2,839,087,
less accumulated amortization of $472,887, were offset
against the income from the litigation award recognized
during fiscal 1997 of $77,223,460.
F-35
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 8 - INTANGIBLE ASSETS (Continued)
Approximately $103,000 and $1,365,000 of the legal costs capitalized
during fiscal 1996 and 1995, respectively, related to the separate
suits, whereby, the Company was suing General Electric and Hitachi for
infringement of various patents related to the Company's MRI machines.
During fiscal years 1996 and 1995, two cases against Philips and
Hitachi were settled and approximately $17,000 and $332,000 of legal
costs relating to these cases were written-off, respectively.
Amortization of other intangible assets for the years ended June 30,
1997, 1996 and 1995 was $227,298, $219,478 and $176,276, respectively.
NOTE 9 - SIGNIFICANT CUSTOMERS AND DISTRIBUTION AGREEMENTS
The Company's machine sale revenues for the three years ended
June 30, 1997 were derived as follows:
Customers Percent of
Years Ended -------------------------- Foreign
Revenues to
June 30, Domestic Foreign Total Total Revenues
----------- -------- ------- ----- --------------
1997 7 0 7 0%
1996 9 5 10 17%
1995 5 5 14 17%
During the years ended June 30, 1997, 1996 and 1995, revenues
from related parties were 55%, 57% and 58%, respectively, of
total revenues. Not one unrelated customer accounted for more
than 10% of total revenues during fiscal years 1997, 1996 and
1995.
Distributorship Agreements
--------------------------
In order to facilitate the marketing of its products, the
Company has entered into agreements granting exclusive and
non-exclusive rights to distribute the Company's existing and
certain future products in Europe, Asia and Latin America.
F-36
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 10 - CAPITAL STOCK
The total number of shares of stock which the Company is
authorized to issue is 92,000,000 shares. The classes and
the aggregate number of shares of stock of each class are as
follows:
1)60,000,000 shares of common stock with a par value of
$.0001 per share. On April 3, 1995, shareholders
approved an increase in the authorized common shares
from 50,000,000 to 60,000,000.
2)4,000,000 shares of Class B common stock, having a par
value of $.0001 per share.
3)10,000,000 shares of Class C common stock, having a par
value of $.0001 per share (see below).
4)8,000,000 shares of Class A non-voting preferred stock,
having a par value of $.0001 per share (see below).
5)10,000,000 shares of preferred stock, having a par value
of $.001 per share.
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 during fiscal 1997.
F-37
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 10 - CAPITAL STOCK (Continued)
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, 1996, 437 shares of Class B common stock were
converted to common stock leaving 5,411 of such shares
outstanding as of June 30, 1996.
Class C Common Stock
--------------------
On April 3, 1995, the shareholders ratified a proposal
creating a new Class C common stock and authorized the
exchange offering of three shares of Class C common
stock for each share of the Company's outstanding Class
B common stock. The Class C common stock has 25 votes
per share, as compared to 10 votes per share for the
Class B common stock and one vote per share for the
common stock. The Class C common stock was offered on a
three-for-one basis to the holders of the Class B
common stock. Although having greater voting power,
each share of Class C common stock has only one-third
of the rights of a share of Class B common stock to
dividends and distributions. Class C common stock is
convertible into shares of common stock on a
three-for-one basis. During the year ended June 30,
1996, approximately 3.2 million shares of Class B
common stock were converted to Class C common stock.
Class A Non-Voting Preferred Stock
----------------------------------
On April 3, 1995, the shareholders ratified a proposal
consisting of the creation of a new class of Class A
non-voting preferred stock with special dividend rights
and the declaration of a stock dividend on the
Company's common stock consisting of one share of Class
A non-voting preferred stock for every five shares of
common stock. The stock dividend was payable to holders
of common stock on October 20, 1995. Class A non-voting
preferred stock issued pursuant to such stock dividend
approximates 7.8 million shares.
F-38
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 10 - CAPITAL STOCK (Continued)
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, discussed in Note 15, 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 during fiscal 1997 and
$217,226 during fiscal 1996.
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.
As of June 30, 1997 and 1996, the financial statements
reflect authorized Class A non-voting preferred shares
of 8,000,000 and deemed issued and outstanding shares
of 7,855,627.
F-39
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
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. The warrants are exercisable at $2.938 per
share, less the special dividend declared on the common
stock, as discussed above. The warrants are exercisable
on November 29, 1997 and expire on May 28, 2002. The
Company has commenced the process of registering the
warrants and the underlying common stock. The warrants
were valued at approximately $1,500,000 and have been
recorded as a stock dividend out of paid-in capital
for the year ended June 30, 1997.
Options
-------
The Company has seven 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-40
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 10 - CAPITAL STOCK (Continued)
The Company accounts for these 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 years ended June 30, 1997 and
1996 as indicated below:
1997 1996
---------- ----------
Net income (loss):
As reported $56,068,771 $(11,407,444)
Proforma $55,645,771 $(12,012,444)
Primary earnings per share:
As reported
Proforma $0.95 $(0.22)
$0.94 $(0.23)
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 1996
---------- ----------
All Plans:
Dividend yield 0% 0%
Expected volatility 50% 50%
Expected life (years) 2 2
The risk-free interest rates for 1997 and 1996 were based upon a rate
with maturity equal to expected term. U.S. Treasury instruments were
utilized. The weighted average interest rate in 1997 and 1996 amounted
to 6.0% and 5.9%, respectively.
F-41
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 10 - CAPITAL STOCK (Continued)
Stock option share activity and weighted average
exercise prices under these plans and grants for the
years ended June 30, 1997, 1996 and 1995 were as
follows:
Weighted
Average
Number of Exercise
Shares Price
---------- ----------
Outstanding, June 30, 1994 266,735 $ 4.40
Granted 2,140,695 1.61
Exercised (2,166,070) 1.61
Forfeited (18,000) 4.02
---------- ------
Outstanding, June 30, 1995 233,360 4.48
Granted 3,154,000 2.69
Exercised (3,182,125) 2.69
Forfeited - -
---------- ------
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
========== ======
Exercisable at:
June 30, 1995 183,485 $ 4.48
June 30, 1996 181,235 $ 4.62
June 30, 1997 181,235 $ 4.62
The exercise price for options outstanding as of June 30, 1997
ranged from $1.06 to $5.00.
Stock Bonus Plans
-----------------
On May 9, 1997, April 1, 1995, December 1, 1993, March 26, 1993 and
January 17, 1986, the Board of Directors adopted Stock Bonus Plans.
Under the terms of the Plans, 5,000,000, 5,000,000, 5,000,000,
2,500,000 and 1,250,000 shares, respectively, of common stock were
reserved for issuance and stock bonuses may be awarded no later than
March 31, 2005 for the 1995 Plan, November 30, 2003 for the 1994 Plan,
March 25, 2003 for the 1993 Plan and January 16, 1996 for the 1986
Plan. An amendment to the 1986 Plan was approved by the Board of
Directors on August 26, 1986, whereby an additional 1,250,000 shares
were reserved for issuance. During fiscal 1997, 1996 and 1995, F-37
F-42
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 10 - CAPITAL STOCK (Continued)
2,138,296, 1,463,741 and 4,826,505 shares,
respectively, were issued under the stock bonus plans,
of which 159,025, 161,341 and 480,650 shares,
respectively, were charged to operations as
compensation expense, 579,271, 802,400 and 1,398,550
shares, respectively, were issued in settlement of
liabilities, 1,000,000, 500,000 and 1,947,305 shares,
respectively, were issued in exchange for notes, and
400,000 shares were issued in 1997 in connection with
consulting agreements discussed in Note 3. Compensation
expense recognized during the years ended June 30,
1997, 1996 and 1995 approximated $407,000, $355,000 and
$1,363,000, respectively. The balance due under these
notes was paid in full.
NOTE 11 - FINANCING ACTIVITIES
The following represents the Company's major financing
activities during fiscal 1997 and 1996, and data
related to outstanding indebtedness and encumbrances at
June 30, 1997 and 1996:
Notes Payable:
-------------
June 30,
--------------------------
1997 1996
---------- ----------
Construction loan with interest at
3% above prime. The loan is to
finance a contract to promote and
install a picker 1.0 HPQ system
within an MRI mobile trailer. The
contract is for a price of
$525,000. The loan is to be repaid
by monthly payments of interest
only until acceptance of the
equipment upon acceptance repayment
of the loan is to be negotiated at
mutually agreed upon term. $ 315,000 $ -
Short-term bank credit and loans,
with interest at 10.8%, secured by
certain assets of the Company. 100,000 100,000
---------- ----------
$ 415,000 $ 100,000
========== ==========
F-43
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 11 - FINANCING ACTIVITIES (Continued)
Long-term Debt:
--------------
June 30,
--------------------------
1997 1996
---------- ----------
Term note converted on November 20,
1992 from demand notes payable with
interest at a prime rate, plus 2%,
collateralized by certain research
equipment in the accompanying
financial statements. Repayment
terms were modified on March 1,
1993 requiring monthly payments of
$20,000 for 36 months and a balloon
payment of $350,000 at the end of
the term. On March 21, 1996,
repayment terms were modified again
requiring monthly payments of
$20,000 until the loan is
satisfied. $ 9,779 $ 249,779
The loan is required to be paid in
full if the Company collects monies
awarded under the G.E. judgement.
F-44
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 11 - FINANCING ACTIVITIES (Continued)
Long-term Debt: (Continued)
--------------
June 30,
-------------------------
1997 1996
---------- ----------
Note payable dated December 1988 -
$1,648,000, due $30,884 per month,
including interest at 11.1%,
through November 1993, secured by
equipment, which has been
classified as assets held for lease
(Note 7). Repayment terms were
modified during October 1991
requiring payments of $34,481,
which include interest at 16.3%,
payable through October 1996.
During March 1995, $224,657 of the
obligation was assumed by a related
party in consideration for the
reduction of a note receivable
(Note 3).
Note payable dated January 1989 -
$1,200,000 and $1,265,000 requiring
monthly payments of $29,000 and
$30,800, respectively, including
interest at 18.0% and 19.4%,
respectively. Repayment terms were
modified in August 1993 requiring
monthly payments of $20,000 for 47
months and a balloon payment of
$104,752 at the end of the term.
This represents the $ 701,201 $
701,201 consolidation of two
previously existing notes.
F-45
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 11 - FINANCING ACTIVITIES (Continued)
Long-term Debt: (Continued)
--------------
June 30,
-------------------------
1997 1996
---------- ----------
Such note is secured by scanning
machines which are the subject of
sales-type lease agreements (Note
6).
$ 104,752 $ 332,367
Note payable dated June 1990 -
$765,063, payable interest only at
12%, through July 1991 when the
entire balance is due. Repayment
terms were modified during November
1992 requiring 62 monthly payments
of $16,601 with the balance due on
December 12, 1997. Payments include
interest at a rate of 12% and is
secured by scanning equipment.
Capital lease dated March 5, 1993 -
$340,895, due $11,162 per month,
commencing April 1993, including
interest at 11% for 36 months. Such
lease is collateralized by
equipment, 392,187 465,664
which has been classified as
property under lease in the
accompanying financial statements.
F-46
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 11 - FINANCING ACTIVITIES (Continued)
Long-term Debt: (Continued)
--------------
June 30,
---------------------------
1997 1996
---------- ----------
Repayment terms were modified in
May 1995 requiring 36 monthly
payments of $5,117.
72,628 105,425
Capital lease dated October 13,
1995 - $513,692, due $11,173 per
month, commencing October 1995,
including interest of 11% for 60
months. Such lease is
collateralized by equipment, which
has been classified as property
under lease in the accompanying
financial statements.
Capital lease dated June 4, 1996 -
$412,550, due $8,972 per month,
commencing July 1996, including
interest of 11% for 60 months. Such
lease is collateralized by
equipment, which has
been classified as property under 385,637 460,461
lease in the accompanying financial 364,559 402,225
statements.
F-47
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 11 - FINANCING ACTIVITIES (Continued)
Long-term Debt: (Continued)
--------------
June 30,
------------------------------
1997 1996
---------- ----------
Other (including capital leases for
property and equipment) $1,960,379 $1,178,154
---------- ----------
Less: Current maturities 2,387,508 2,958,064
---------- ----------
$1,823,761 $1,246,871
========== ==========
The maturities of long-term debt over the next five years and thereafter
are as follows:
Years Ended
June 30,
-----------
1998 $2,387,508
1999 612,114
2000 478,230
2001 686,177
2002 47,240
----------
$4,211,269
==========
F-48
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 12 - INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS No. 109"), which requires an asset and liability approach. The
asset and liability approach requires the recognition of deferred tax
liabilities and assets for the expected future tax consequences of
temporary differences between the financial reporting basis and tax
basis of the Company's assets and liabilities.
As of June 30, 1997, the Company for federal income tax purposes, has
net operating loss carryforwards, which begin to expire in the year
1999, of approximately $62,600,000.
For federal income tax purposes, the Company has tax credits of
$1,545,000 which expire in the year 2006 and are accounted for under
the flow through method.
F-49
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 12 - INCOME TAXES (Continued)
Significant components, tax effected, of the Company's deferred tax
assets and (liabilities) at June 30, 1997 and 1996 are as follows:
1997 1996
---------- ----------
Deferred tax liabilities:
Fixed assets $ (364,728) $ (460,398)
Capitalization of
software and patents (65,417) (892,500)
---------- ----------
Deferred tax liabilities (430,145) (1,352,898)
---------- ----------
Deferred tax assets:
Net operating losses - 6,868,902
Tax credits 359,647 2,280,720
Accounts receivable 1,029,626 876,466
Inventory
capitalization
for tax purposes 57,368 69,622
Non-deductible accruals 141,761 87,445
---------- ----------
Deferred tax assets 1,588,402 10,183,155
Valuation allowance (1,158,257) (8,830,257)
---------- ----------
Net deferred tax asset $ - $ -
========== ==========
Components of the provision for income taxes are as follows:
1997 1996 1995
---------- ---------- ----------
Current:
Federal $ - $ - $ 22,867
State 100,000 19,965 122,691
---------- ---------- ----------
100,000 19,965 145,558
---------- ---------- ----------
Deferred:
Federal 2,716,000 - -
State 134,000 - -
---------- ---------- ----------
2,850,000 - -
---------- ---------- ----------
$2,950,000 $ 19,965 $ 145,558
========== ========== ==========
F-50
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 12 - INCOME TAXES (Continued)
A reconciliation of the federal statutory income tax rate to the
Company's effective tax rate as reported is as follows:
1997 1996 1995
-------- -------- --------
Taxes at federal
statutory rate 34.0% (34.0)% (34.0)%
State and local
income taxes, net
of utilization 1.1 2.0 1.9
Net operating loss
carryforwards (31.0) 34.0 34.0
Alternate minimum tax . 9 - -
Utilization of tax
credits - - -
----- ----- -----
Effective income tax
rate 5.0% .2% 1.9%
===== ===== =====
F-51
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 13 - OTHER CURRENT LIABILITIES
Included in other current liabilities are the following:
1997 1996
----------- -----------
Unearned revenue on
service contracts $ 1,399,243 $1,538,802
Accrued bonus 4,000,000 -
Accrued payroll taxes 606,883 902,686
Accrued interest 245,527 270,484
Accrued royalties 317,307 377,307
Warranty and costs 267,736 170,474
Accrued salaries and
commissions 336,225 283,722
Litigation judgement 1,325,824 1,255,872
Excise and sales taxes 1,438,930 1,461,255
Other 3,749,924 2,044,906
----------- ----------
$13,687,599 $8,305,508
=========== ==========
As of June 30, 1997 and 1996, the Company was in arrears on its state
payroll taxes aggregating $248,743 and $193,264.
F-52
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 14 - COMMITMENTS AND CONTINGENCIES
Leases
------
The Company rents its operating facilities under long-term lease
agreements expiring at various dates through July 1997. These leases
contain escalation clauses relating to increases in real property
taxes as well as certain maintenance costs.
Future minimum payments for the noncancellable facilities and capital
leases (principally milling machines) are as follows:
Year Ended
June 30, Facilities Capital
---------- ---------- -----------
1998 $ 864,596 $ 621,897
1999 502,473 443,407
2000 - 443,407
2001 - 131,780
2002 - 27,651
---------- ----------
Total minimum obligations $1,367,069 2,168,142
==========
Less: Amount representing
interest 511,360
----------
Present value of net
minimum lease
obligations $1,656,782
==========
Rent expense for operating leases totalled approximately $1,261,820,
$1,310,400 and $1,080,400 for the three years ended June 30, 1997,
1996 and 1995, respectively. Rent expense for the years ended June 30,
1997, 1996 and 1995 is as follows:
1997 1996 1995
---------- ---------- ----------
Minimum rent $1,243,820 $1,238,400 $1,021,400
Contingent rent 18,000 72,000 59,000
---------- ---------- ----------
Total $1,261,820 $1,310,400 $1,080,400
========== ========== ==========
F-53
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 14 - COMMITMENTS AND CONTINGENCIES (Continued)
Litigation
----------
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. The defendants contested
the Company's claims, and Hitachi counterclaimed, alleging
infringement by the Company of two of its patents. In April 1995,
FONAR and Hitachi settled. On May 26, 1995, the jury rendered a
verdict against General Electric awarding FONAR $110,575,000 for
infringement of two of its patents (Multi-Angle Oblique "MAO" and
Cancer Detection). On October 6, 1995, the court awarded FONAR $62
million in damages against General Electric for direct infringement on
one of its patents and granted an injunction against General Electric
prohibiting future violations of the patent. In February 1997, the
Court of Appeals affirmed the judgement against General Electric for
infringement of FONAR's MAO patent and reinstated the jury verdict
awarding FONAR $35 million with respect to the infringement of the
Cancer Detection patent.
On May 8, 1997, the Court of Appeals denied General Electric's
petition for a rehearing.
General Electric then applied for a stay pending an appeal to the
United States Supreme Court, which was denied by the Court of Appeals
in the First Instance and then again by the Supreme Court.
Following the denial of General Electric's petition and application
for a stay, the District Court entered a judgement based on the Court
of Appeals' decision. On July 2, 1997, General Electric paid $128.7
million (inclusive of interest), without, however, prejudicing its
right to appeal to the Supreme Court. After the deduction of
attorney's fees and expenses the net amount of the judgement to FONAR
was $77.2 million, which is included in other income for the fiscal
year ended June 30, 1997 in the accompanying financial statements.
In August 1997, General Electric filed a petition for a writ of
certiorari with the Supreme Court. The petition was denied in October
1997.
F-54
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 14 - COMMITMENTS AND CONTINGENCIES (Continued)
Litigation (Continued)
----------
On June 16, 1995, the Company filed an action against Siemens Medical
Systems, Inc. ("Siemens"), 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 is seeking injunctive relief and damages.
In its suit, FONAR has alleged that four of its patents were
infringed. Previously, in May 1995, Siemens had filed a complaint
against FONAR in the United States District Court for the District of
Delaware seeking a declaratory judgement that the four patents were
invalid and unenforceable, as well as an adjudication that Siemens was
not infringing on the four patents. On June 14, 1995, Siemens amended
the complaint to add Siemens AG as a plaintiff, to add Raymond V.
Damadian, M.D. MR Scanning Centers Management Company as a defendant
and to include a claim against FONAR for infringement of one of
Siemens' MRI 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 judgement that FONAR's U.S. Patents Nos.
3,789,832 and 4,871,966 are invalid, unenforceable and not infringed.
Motions have been made by the Siemens affiliates and Philips
affiliates to transfer the action commenced by FONAR in District Court
for the Eastern District of New York to the Delaware District Court
and FONAR has moved to transfer the actions commenced against it in
the Delaware District Court to the Eastern District of New York.
Subsequently, the action was transferred to U.S. District Court for
the District of Delaware. The respective parties are expected to
vigorously contest the claims against them. 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. In April 1996, the Company entered
into an agreement with Philips Electronics N.V.,
F-55
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 14 - COMMITMENTS AND CONTINGENCIES (Continued)
Litigation (Continued)
----------
Philips Electronics North America Corp., Philips Medical Systems North
American and U.S. Philips Corp. settling the lawsuits and claims
between them.
In September 1996, the Company 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 as cross-license by Siemens and the
Company of certain patents relating to MRI technology. The Company
received a monetary payment from Siemens and an agreement by Siemens
to pay the Company royalties.
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.
F-56
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 14 - COMMITMENTS AND CONTINGENCIES (Continued)
Litigation (Continued)
----------
On March 4, 1987, Philip B. Kivitz, M.D. and Rad-Sonic Diagnostic
Medical Clinics, Inc., filed a complaint against AMD, FONAR, Raymond
V. Damadian and others in the San Francisco County Superior Court
(Case Action No. 870407). In his complaint, Dr. Kivitz had claimed
$10,000,000 in compensatory damages and $10,000,000 in punitive
damages. In January 1993, the case went to trial and the jury returned
a verdict of $880,000 against AMD and $120,000 against FONAR. On June
17, 1993, the Court granted FONAR's and AMD's motion for judgement
notwithstanding the verdict, thereby vacating the entire award against
both FONAR and AMD, and determining that Dr. Kivitz is entitled to no
recovery whatsoever. The case was appealed by the plaintiff and on
February 27, 1995, the Appellate Court affirmed the lower court's
judgement notwithstanding the verdict as to FONAR, but reversed the
judgement as to AMD. Subsequently, AMD filed a petition for review
with the California Supreme Court and was denied on May 17, 1995. As
of June 30, 1997, the verdict of $880,000, plus interest, was provided
for.
On April 3, 1990, Summit, Rovins and Feldesman commenced an action in
the Supreme Court of the State of New York, County of New York against
the Company. The complaint alleges unpaid fees for legal services and
disbursements to the amount of $664,371. The Company has answered the
complaint, asserting various defenses and a counter claim of $100,000
for a refund of fees. The plaintiff made a motion for summary
judgement which was granted as to the liability but denied as to the
amount of damages. The Company has appealed this motion and in March
1995, the Appellate Court reversed the granting of summary judgement
against FONAR. On June 25, 1997, the parties entered into a settlement
agreement, whereby the Company has agreed to pay Summit, Rovins and
Feldesman $415,000. In prior years, the Company had recorded a
provision for potential liability related to this action. No further
accrual was necessary for the year ended June 30, 1997.
F-57
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 14 - COMMITMENTS AND CONTINGENCIES (Continued)
Litigation (Continued)
----------
During February 1994, a FONAR subsidiary, ("Medical SMI" 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 SMI 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.
On June 28, 1995, Horace Rubenstein commenced an action in the
Delaware Court of Chancery against the four directors of the Company
and FONAR, as nominal defendant, challenging the recapitalization plan
approved by the stockholders at the annual meeting on April 3, 1995
(see Note 10).
The complaint alleges that the directors failed to act in the best
interests of the Company and its common stockholders in adopting the
plan, which permits Dr. Raymond V. Damadian, the founder, President
and principal stockholder of the Company, and other holders of FONAR's
Class B common stock, to exchange their shares of Class B common stock
for shares of a new Class C common stock having greater voting power.
The action was brought as a class action on behalf of the holders of
the common stock and derivatively, for the benefit of the Company, and
seeks an unspecified amount of damages and an order setting aside the
recapitalization.
F-58
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 14 - COMMITMENTS AND CONTINGENCIES (Continued)
Litigation (Continued)
----------
The defendants and the Company strongly believe that the
recapitalization, approved by the stockholders in tandem with a
proposal to distribute shares of a new class of preferred stock to the
holders of the common stock, is both fair and in the best interests of
the Company and its stockholders. The defendant answered the complaint
and a proposed settlement agreement was reached. In April 1997, the
settlement was approved by the Delaware Court of Chancery. The
settlement increases 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 agreed to issue warrants to purchase common
stock to holders of record of its common stock on October 25, 1995.
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.
As of June 30, 1997, the dividend payable has been provided for.
F-59
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 14 - COMMITMENTS AND CONTINGENCIES (Continued)
The Company also is involved in a number of smaller litigations which
aggregate approximately $3,061,000. The Company has interposed answers
in all cases, except where an answer is not yet due. The Company has
established provisions for most of the liabilities represented by
these smaller claims, and where provisions have not been established,
management believes it will prevail on the merits and intends to
vigorously contest the claims. Based on its past experience dealing
with such claims, the Company anticipates it will be able to settle
most of these smaller litigations with provisions to pay over periods
of time which are manageable for the Company.
An entity has impliedly asserted that FONAR's equipment infringes on
at least one of the entity's patents. The entity had sought royalties
in the range of 2% or 3% of the net selling price of FONAR's equipment
for licenses under their assertedly infringed patents. At July 1,
1995, the Company entered into an agreement with the entity, whereby
the Company must pay 1.2% of the Company's future sales of certain MRI
apparatus.
License Agreement and Self-Insurance
------------------------------------
The Company entered into a license agreement during 1990 with an
entity whereby the Company must pay a royalty of 1.35% on the
Company's future sales of certain NMR imaging apparatus through
January 31, 1995 in the United States and April 17, 1996 in Canada.
Royalty expense charged to operations for the years ended June 30,
1997, 1996 and 1995 approximated $-0-, $15,000 and $147,000,
respectively.
The Company is self-insured with respect to substantially all
insurable business risks except for insurance on certain equipment
pledged as collateral for long-term debt. During the fiscal years
ended June 30, 1997, 1996 and 1995, no material claims arose.
F-60
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 14 - COMMITMENTS AND CONTINGENCIES (Continued)
Management Contract
-------------------
In connection with the acquisition of Affordable Diagnostics, Inc. HMC
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 HMC's common stock valued at $60,000, as a
signing bonus. An additional 240,000 shares of HMC's common stock is
issuable to the consultants provided certain financial hurdles are met
over the 5-year term of the agreement.
NOTE 15 - OTHER INCOME (EXPENSE) AND SUPPLEMENTARY PROFIT AND LOSS DATA
Other income (expense) consists of:
For the Years Ended June 30,
-----------------------------------------
1997 1996 1995
----------- ---------- ----------
Other income
(expense) $ (336,681) $ 248,034 $ 651,251
Gain on settlement of
various legal
disputes
and other
claims
83,436,366 3,759,542 2,970,356
----------- ---------- -----------
$83,099,685 $4,007,576 $3,621,607
=========== ========== ==========
Maintenance and repair expenses totalled approximately $312,000,
$358,000 and $367,000 for the years ended June 30, 1997, 1996 and
1995, respectively. Royalty expenses approximated $-0-, $15,000 and
$147,000 for the years ended June 30, 1997, 1996 and 1995,
respectively. Amortization of intangible assets was approximately
$793,847, $1,233,000 and $1,431,000 for the years ended June 30, 1997,
1996 and 1995, respectively.
F-61
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 16 - SUPPLEMENTAL CASH FLOW INFORMATION
During the years ended June 30, 1997, 1996 and 1995, the Company paid
$336,857, $668,956 and $1,378,432 for interest, respectively. During
the years ended June 30, 1997, 1996 and 1995, the Company paid $861,
$68,552 and $12,867 for income taxes, respectively.
During the year ended June 30, 1997, the Company acquired the assets
and assumed liabilities of Affordable Diagnostics, Inc. The
transaction had the following non-cash impact on the balance sheet:
Accounts receivable $1,195,912
Equipment 1,115,825
Other assets 19,906
Intangibles 2,796,197
Accounts payable (84,762)
Notes payable (315,000)
Capital lease obligation (523,905)
Other liabilities (81,900)
Deferred taxes payable (443,790)
Equity (3,680,317)
----------
Cash acquired from acquisition $ (1,834)
==========
F-62
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 16 - SUPPLEMENTAL CASH FLOW INFORMATION (Continued)
Non-Cash Transactions
---------------------
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 410,000 shares of its
common stock valued at $1,096,000.
During the year ended June 30, 1996:
a) Common stock issued and options exercised in
exchange for notes received from stockholders
totalled $9,590,134.
b) Property and equipment with a book value of $411,347
was reclassified to inventory.
c) Receivables under a lease agreement for an MRI
scanner were acquired in exchange for common
stock valued at $351,000.
During the year ended June 30, 1995:
a) Common stock issued and options exercised in
exchange for notes receivable from
stockholders totalled $9,771,127.
F-63
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 16 - SUPPLEMENTAL CASH FLOW INFORMATION (Continued)
c) Property and equipment with a book value of
$100,926 was reclassified to inventory.
d) Notes payable and accrued interest totalling
$446,959 were repaid by the issuance of common
stock.
e) Inventory purchased for resale of $149,813 was
financed under a capital lease.
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.
F-64
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 18 - ADVANCES AND NOTES TO AFFILIATES AND 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,
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 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).
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 is to be paid by the assumption and payment of the
Company's indebtedness to the lender secured by the scanner. Such
indebtedness to the lender is to be 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 will be paid pursuant to a promissory note, with interest
at 10% per annum, over a 45 month term commencing July 1, 1994 as
follows: eleven installments of $15,000 each, thirty-three
installments of $35,000 each and one installment of $19,097.
F-65
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 18 - ADVANCES AND NOTES TO AFFILIATES AND RELATED PARTIES (Continued)
During the year ended June 30, 1992, RVDC agreed to lease one of the
Company's mobile scanners for a term of five years at a monthly lease
payment of $36,119 commencing January 1, 1992. The lease was
originally classified by the Company as a sales-type lease. Effective
June 30, 1994, RVDC assigned its purchase option under the lease to
Melville MRI, P.C., a New York professional corporation of which
Raymond V. Damadian is the sole shareholder, Director and President
("Melville Center") and the Melville Center concurrently exercised the
option and purchased the 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 is to be paid concurrently
with the payments to the lender pursuant to a note, with interest at
10% per annum, providing for 60 monthly payments of $2,367 each.
Effective July 1994, RVDC assigned its purchase option under the lease
to Deerfield Magnetic Resonance Imaging P.A., a Florida professional
association of which Raymond V. Damadian is the sole shareholder,
Director and President ("Deerfield Center") and the Deerfield Center
exercised the option and purchased the 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, guaranteed by the Company, providing for 17 monthly
payments of $30,520 and a final payment of the remaining principal
balance plus unpaid interest. 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.
F-66
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 18 - ADVANCES AND NOTES TO AFFILIATES AND RELATED PARTIES (Continued)
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 partnershp 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 an agreement dated August 3, 1993, MRI Specialties, Inc.
("Specialties") engaged the Company to deinstall, transport and
reinstall an MRI scanner purchased from a third party. Timothy
Damadian, a Vice-President of the Company, is the stockholder,
Director and President of Specialties. The agreement provides for a
price of $120,000 payable in 36 monthly installments of $3,760 each
(inclusive of interest at 8% per annum) which amount has now been paid
in full. The agreement also provided that the Company provide a Four
Post Canopy and Steel upgrade, Signal Plus Surface Coils and Whisper
Gradients for the MRI scanner. The scanner is owned by Canarsie MRI
Associates ("Canarsie"), a joint venture partnership of which
Specialties is an owner, and Canarsie is party to a service agreement
for the scanner with the Company at an annual fee of $70,000 for the
period September 1, 1996 through August 31, 1997 and September 1, 1997
through August 31, 1998.
F-67
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 18 - ADVANCES AND NOTES TO AFFILIATES AND RELATED PARTIES (Continued)
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, a Vice-President of the Company, 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 provides that the Company will
provide 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.
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, 1997, the aggregate indebtedness of Specialties and
Canarsie to the Company was $19,547 and the aggregate indebtedness of
Guardian and Pompano to the Company was $95,757.
As of June 30, 1997, the Company had entered into various service
contracts with related entities. The service contracts aggregating $ ,
are for one year terms and expire at various dates.
F-68
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 19 - SEGMENT INFORMATION
The Company operates in two industry segments manufacturing and the
servicing of medical equipment and management of physician practices,
including diagnostic imaging services.
The following table shows net revenues, operating income and other
financial information by industry segment for the years ended June 30:
1997 1996 1995
----------- ----------- -----------
Net revenues:
Medical equipment $ 9,534,048 $ 7,758,805 $ 8,659,480
Physician management
services 8,099,018 6,156,920 7,893,196
----------- ----------- -----------
Total 17,633,066 13,915,725 16,552,676
=========== =========== ===========
Income (loss) from
operations:
Medical equipment (23,318,242) (11,912,687) (10,203,377)
Physician practice
management (1,063,463) (3,364,559) 63,423
----------- ----------- -----------
Total (24,381,705) (15,277,286) (10,139,954)
=========== =========== ===========
Identifiable assets:
Medical equipment 96,623,863 24,914,610 51,480,169
Physician practice
management 10,066,698 3,142,774 3,463,408
----------- ----------- -----------
Total 106,690,561 28,057,384 54,943,577
=========== =========== ===========
Depreciation and
amortization:
Medical equipment 1,593,586 2,259,183 2,426,982
Physician practice
management 429,879 377,373 254,993
----------- ----------- -----------
Total 2,023,465 2,636,550 2,681,975
=========== =========== ===========
Capital expenditures:
Medical equipment 1,530,145 1,761,199 1,727,195
Physician practice
management 218,574 - 25,610
----------- ----------- -----------
Total 1,748,719 1,761,199 1,752,805
=========== =========== ===========
F-69
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 20 - PROFORMA INFORMATION (UNAUDITED)
The Company's consolidated financial statements for the years ended
June 30, 1997, 1996 and 1995 do not include the results of operations
of Affordable Diagnostics, Inc. The following summarizes the unaudited
proforma results of operations for the years ended June 30, 1997, 1996
and 1995, assuming the foregoing acquisition had occurred on June 30,
1997, 1996 and 1995 (in thousands, except per share data):
1997 1996 1995
------------ ----------- ------------
(Unaudited) (Unaudited) (Unaudited)
Revenue, net $ 20,668,103 $ 15,301,562 $ 16,759,239
Loss from
operations $(24,076,442) $(14,964,681) $(10,139,391)
Income (loss)
before income
taxes $ 59,026,822 $(11,255,687) $ (7,750,830)
Fully diluted
net income
(loss) per
share $0.95 $(0.22) $(0.17)
F-70
<PAGE>
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. 61 President, Chairman of
the Board and a
Director
Timothy R. Damadian 33 Vice President of
Operations
David B. Terry 50 Secretary and Treasurer
Claudette J.V. Chan 60 Director
Robert J. Janoff 70 Director
Herbert Maisel 53 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.
Timothy R. Damadian has been a Vice President of FONAR since July
1992. 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 in July 1992.
Timothy Damadian is the son of Raymond V. Damadian and nephew of David Terry
and Claudette Chan.
David B. Terry is the Secretary and Treasurer of the Company. Mr.
Terry has been serving as Secretary and Treasurer since May 1990, and
previously served 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.
Herbert Maisel has been a Director of FONAR since February, 1989.
Mr. Maisel has been the manager of Melville MRI, P.C., an MRI scanning
center located in Melville, New York, since January, 1992, and of Damadian
MRI in Garden City, P.C., an MRI scanning center located in Garden City, New
York since April, 1995. Mr. Maisel was also manager of Damadian MRI in
Islandia, P.C. from December, 1993 to March, 1995. Prior to that time Mr.
Maisel had been the President and owner of Bagel World, Inc., a bagel
bakery, from March 1984 to January 1992. Prior thereto, Mr. Maisel served
as a supervisor of a commercial printing plant.
<PAGE>
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.
There is set forth in the following Summary Compensation
Table the compensation provided by the Company during fiscal 1997 to
its Chief Executive Officer. No other executive officer had a salary
and bonus equal to at least $100,000 during fiscal 1997. There is set
forth in the following Option Grant Table and Option Exercise Table
any stock options granted and exercised by Dr. Damadian during fiscal
1997.
<PAGE>
<TABLE>
I. SUMMARY COMPENSATION TABLE
<CAPTION>
| |
| Long Term Compensation |
------------------------------------------------------
Annual Compensation | Awards | Payouts |
- -------------------------------------------------------------------------------------------------------------
| | |
(a) (b) (c) (d) (e) | (f) (g) | (h) | (i)
Name Other | | |
and Annual | Restricted | | All Other
Principal Compen- | Stock Options | LTIP | Compen-
Position Salary Bonus sation | Award(s) SARs | Payouts | sation
2 Year ($) ($) ($) | ($) (#) | ($) | ($)
- -------------------------------------------------------------------------------------------------------------
| | |
<S> <C> <C> <C> <C> | <C> <C> | <C> | <C>
Raymond V. 1997 $86,799.95 - - | - - | - | -
Damadian, 1996 $86,799.95 - - | - - | - | -
President & 1995 $86,679.94 - - | - - | - | -
CEO | | |
| | |
</TABLE>
<PAGE>
<TABLE>
II. OPTION/SAR GRANTS IN LAST FISCAL YEAR
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of Alternative
Stock Price to (f) and
Appreciation for (g): Grant
Individual Grants Option Term Date Value
_____________________________________________________________________________________________________________
(a) (b) (c) (d) (e) (f) (g) (f)
% of Total
Options/
SARs
Options/ Granted to
SARs Employees Excercise or Grant Date
Granted in Fiscal Base Price Expiration Present
Name (#) Year ($/Sh) Date 5% ($) 10% ($) Value $
_________ _________ _________ _________ _________ _________ _________ _________
<S> <C> <C> <C> <C> <C> <C> <C>
Raymond V.
Damadian, 0 - - - - - -
President &
CEO
</TABLE>
<PAGE>
<TABLE>
III. OPTION/SAR EXERCISES AND YEAR-END VALUE TABLE
<CAPTION>
Aggregated Options/SAR Exercises in Last Fiscal Year, amd FY-End Option/Sar Value
- -------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Number of Value of Unexercised
Name Shares Acquired Value Realized Unexercised In-the-Money
on Exercise (#) ($) Options/SARs Options/SARs at
at FY-End (#) FY-End ($)
Exercisable/ Exercisable/
Unexercisable Unexercisable
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Raymond V. 0 - 0 -
Damadian,
President
and CEO
</TABLE>
<PAGE>
EMPLOYEE COMPENSATION PLANS
The Company'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. 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, 1997, options to purchase 858,000 shares of Common Stock were
available for future grant under the plan.
The Company's 1995 Nonstatutory Stock Option Plan, adopted on April
1, 1995, permitted the issuance of stock options covering an aggregate of
5,000,000 shares of Common Stock. The options were issued at such prices
and upon such terms and conditions as were determined by the Company. The
1995 Nonstatutory Stock Option Plan will terminate on March 31, 2005. As of
June 30, 1997, no options were available for future grant under this Plan.
The Company's 1995 Stock Bonus Plan, adopted on April 1, 1995,
permits the Company to issue an aggregate of 5,000,000 shares of Common
Stock as a bonus or compensation. The Company 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, 1997, 1,684,708 shares of
Common Stock were available for future grant.
The Company'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. The options may be issued at such prices
and upon such terms and conditions as are determined by the Company. The
1997 Nonstatutory Stock Option Plan will terminate on May 8, 2007. As of
June 30, 1997, options to purchase 4,800,000 shares of Common Stock were
available for future grant.
The Company's 1997 Stock Bonus Plan, adopted on May 9, 1997,
permits the Company to issue an aggregate of 5,000,000 shares of Common
Stock as a bonus or compensation. The Company 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, 1997, 5,000,000 shares of
Common Stock were available for future grant.
<PAGE>
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 22,
1997.
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 2,371,338 4.75%
Class C Stock 9,561,174 99.98%
Class A Preferred 477,328 6.08%
Claudette Chan
Director
Common Stock 4,000 *
Class A Preferred 800 *
Robert J. Janoff
Director
Common Stock 42,000 *
Class A Preferred 2,000 *
Herbert Maisel
Director
Common Stock (2) 100 *
Class A Preferred 20 *
All Officers and Directors
as a Group (6 persons)
(2)(3)
Common Stock 2,458,147 4.93%
Class C Stock 9,561,174 99.98%
Class A Preferred 492,765 6.27%
___________________________
* 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 50 shares of the Company's Common Stock and 10 shares of the
Company's Class A Non-voting Preferred Stock which are held in the name of
Mr. Maisel as trustee for his daughter and 50 shares of the Company's Common
Stock and 10 shares of the Company's Class A Non-voting Preferred Stock
which are held by Mr. Maisel's wife.
3. Includes 96 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 188 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.
<PAGE>
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.
("Macon Center"), 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 MRI
scanning centers ("Centers") in New York, Florida, Georgia and other
locations. 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, U.S.
Health Management Corporation ("HMC"), 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, if the judgment against The General Electric Company
for patent infringement (see "Litigation") is reversed, or 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
HMC, 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 HMC and the Centers.
In addition, in connection with and immediately prior to the
acquisition of RVDC by HMC, sales agreements between FONAR and RVDC to sell
and install MRI scanners at twenty (20) future sites (involving
approximately $13.7 million in the aggregate) were canceled. The
opportunity to establish diagnostic imaging centers or other ancillary
service facilities at these locations will be pursued directly by HMC to the
extent appropriate after they are reviewed and coordinated with HMC's
overall business and marketing strategies.
NEW AGREEMENTS WITH HMC.
Effective July 1, 1997, immediately following the effective date of
the acquisition of RVDC by HMC, all previous management arrangements between
RVDC and the Centers were terminated and new management agreements were
entered into by the Centers and HMC ("Management Agreements").
Pursuant to the Management Agreements, HMC 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, HMC 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, there are
17 Centers having Management Agreements with HMC.
With respect to the scanners at 8 of the 17 Centers, the lease or
sales agreement between RVDC (or the Center in some cases) and FONAR have
been terminated. In substitution for the previous arrangements, HMC,
effective as of July 1, 1997, entered into new scanner leases ("Scanner
Leases") with the 8 Centers.
The fees to HMC under both the Management Agreements and the
Scanner Leases are on a per scan basis.
Following the acquisition of RVDC by HMC and related transactions,
15 of the Centers continued to be wholly-owned by Dr. Raymond Damadian.
Since fees under the Management Agreements and Scanner Leases between HMC
and the Centers are determined on a per scan (usage) basis, as discussed
previously, the fees which will be payable during the current fiscal year
(July 1, 1997 to June 30, 1998) cannot be predicted with certainty.
Nevertheless, HMC has estimated, by annualizing the actual number of scans
performed at the Centers owned by Dr. Damadian during the first quarter of
fiscal 1998 (July 1, 1997 to September 30, 1997), that the annual aggregate
of management and scanner lease fees that would be payable to HMC by the 15
Centers owned by Dr. Damadian would be approximately $8.2 million.
From May, 1990 to June 30, 1997, RVDC was party to a service
agreement with FONAR for the servicing of the scanner at the Macon Center.
From April, 1996 to April 1997, the service agreement price in effect was
$123,760 per annum and from April 1997 to June 30, 1997 the price in effect
was $50,000 per annum. Commencing July 1, 1997, HMC entered into a
Management Agreement with the Macon Center. Service for the scanner is
included under the Management Agreement.
By agreement dated June 27, 1990, Tallahassee Magnetic Resonance
Imaging, P.A. ("TMRI"), a Florida professional association of which Raymond
V. Damadian is the sole shareholder, director and President, agreed to
support the Company's financial obligations to one of its secured lenders by
agreeing to be the lessee of one of its mobile scanners for a period of five
years, subject to the superior rights of the Company's secured lender.
Effective June 30, 1991, the lease arrangements were restructured to provide
for a five year term, commencing June 30, 1991, and the monthly payment was
fixed at $43,217. Since service and maintenance for the scanner were not
included under the new lease, TMRI was party to a service agreement with the
Company for the scanner from June 30, 1991 to June 30, 1997. During the
fiscal year ended June 30, 1997 the service agreement price in effect was
$50,000 per annum. Effective June 30, 1997, the scanner lease and service
agreement with FONAR were terminated.
Effective December 1, 1993, 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 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 addition, from December 1,
1993 to June 30, 1997, the Albany Center was party to a service agreement
with the Company for the scanner. During the fiscal year ended June 30,
1997, the service agreement price in effect was $50,000 per annum.
Commencing July 1, 1997, HMC entered into a Management Agreement with the
Albany Center. Service for the scanner is included under the Management
Agreement.
Pursuant to an agreement dated March 7, 1990, RVDC agreed to assume
the financial and other obligations of the original lessee under a lease for
a mobile scanner dated December 13, 1988. Effective June 30, 1991, the
lease arrangements were restructured to provide for a five year term
commencing June 30, 1991, and the monthly payment was fixed at $42,387.
RVDC in turn has provided the use of the scanner to Central Island MRI, P.C.
(the "Staten Island Center"), a New York professional corporation of which
Raymond V. Damadian is the sole shareholder, director and President. In
addition, RVDC was party to a service agreement with the Company for the
scanner from June 30, 1991 to June 30, 1997. During the fiscal year ended
June 30, 1997, the service agreement price in effect was $50,000 per annum.
Effective June 30, 1997, the scanner lease and service agreement with FONAR
were terminated. Commencing July 1, 1997, HMC entered into a Management
Agreement and a Scanner Lease with the Staten Island Center. Service for
the scanner is included under the Management Agreement.
In July 1994, Deerfield Magnetic Resonance Imaging, P.A. (the
"Deerfield 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 by assuming the
Company's indebtedness to the lender secured by the scanner in the amount of
$508,180.07, which was paid pursuant to a note, guaranteed by the Company,
with interest at 10% per annum over a period of 18 months. In connection
with assuming the debt to the lender, the Deerfield Center also assumed the
remaining outstanding lease obligation of RVDC to the Company respecting the
scanner in the amount of $454,005.11. This amount is to be paid pursuant to
a promissory note, bearing interest at the rate of 10% per annum, in 17
monthly installments (16 installments of $30,000 each and one installment of
$7,274.79) commencing January 1, 1996. During the fiscal year ended June
30, 1997, the Deerfield Center was party to a service agreement for its
scanner at a price of $120,000 per annum. Commencing July 1, 1997, HMC and
the Deerfield Center entered into a Management Agreement. Service for the
scanner is included under the Management Agreement.
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 is required to be paid pursuant to a promissory note, with interest
at 10% per annum, over a 45 month term commencing July 1, 1994 as follows:
eleven installments of $15,000 each, thirty-three installments of $35,000
each and one installment of $19,097.26. From May 6, 1996 to May 5, 1997,
the Daytona Beach Center was party to a service agreement with the Company
for the scanner at a price of $105,105.60 per annum and from May 5, 1997 to
June 30, 1997 at a price of $50,000 per annum. Commencing July 1, 1997, HMC
and the Daytona Beach Center entered into a Management Agreement. Service
for the scanner is included under the Management Agreement.
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 is to be paid
concurrently with the payments to the lender pursuant to a note, with
interest at 10% per annum, providing for 60 monthly payment of $2,367.58
each. From December 15, 1995 to December 14, 1996, the Melville Center was
party to a service contract with the Company for the scanner at a price of
$125,000 per annum and from December 15, 1996 to June 30, 1997 at a price of
$50,000 per annum. Commencing July 1, 1997, HMC entered into a Management
Agreement with the Melville Center. Service for the scanner is included
under the Management Agreement.
Effective November 13, 1993, Astoria MRI, P.C. (the "Astoria
Center"), a New York professional corporation of which Raymond V. Damadian
is the sole shareholder, director and President, entered into a lease with
the Company for one of the Company's scanners providing for 84 monthly
payments of $16,978.43 each commencing February 1, 1994. In addition, the
Astoria Center was party to a service agreement with the Company for the
scanner, the fee for which was $105,000 per annum from October 27, 1995 to
October 26, 1996 and $50,000 per annum from October 27, 1996 to June 30,
1997. Effective June 30, 1997, the scanner lease and the service agreement
with FONAR were terminated. Commencing July 1, 1997, HMC and the Astoria
Center entered into a Management Agreement and a Scanner Lease. Service for
the Scanner is included under the Management Agreement.
Effective November 13, 1993, Damadian MRI at Islandia, P.C. (the
"Islandia Center"), a New York professional corporation of which Raymond V.
Damadian is the sole shareholder, director and President, entered into a
lease with the Company for one of the Company's scanners. The lease
provides for monthly payments of $15,586.21 for a term of 84 months
commencing February 1, 1994. From December 6, 1995 to December 5, 1996, the
Islandia Center was party to a service agreement with the Company for the
scanner, at a fee of $105,000 per annum and from December 6, 1997 to June
30, 1997 at a fee of $50,000 per annum. Commencing July 1, 1997, HMC and
the Islandia Center entered into a Management Agreement. Service for the
scanner is included under the Management Agreement.
Pursuant to a sales agreement dated April 29, 1992, RVDC agreed to
purchase an MRI scanner for a site in Bayside, New York for a purchase price
of $1,000,000, payable in installments. In turn, the scanner was provided
by RVDC to Bayside MRI, P.C. (the "Bayside Center"), a New York professional
corporation of which Raymond V. Damadian is the sole shareholder, director
and President. From January 11, 1996 to January 10, 1997, the Bayside
Center was party to a service agreement with FONAR for the scanner at a fee
of $105,000 per annum and from January 11, 1997 to June 30, 1997 at a fee of
$50,000 per annum. Effective June 30, 1997, the sale of the scanner was
reversed and the service agreement was terminated. Commencing July 1, 1997,
HMC and the Bayside Center entered into a Management Agreement and a Scanner
Lease. Service for the scanner is included under the Management Agreement.
Pursuant to a sales agreement dated June 3, 1992, RVDC agreed to
purchase an MRI scanner for a site in Elmhurst, New York for a purchase
price of $1,000,000, payable in installments. In turn, the scanner was
provided by RVDC to Damadian MRI at Elmhurst, P.C., a New York professional
corporation of which Raymond V. Damadian is the sole shareholder, director
and President (the "Elmhurst Center"). From December 14, 1995 to December
13, 1996, the Elmhurst Center was party to a service agreement with FONAR
for the scanner at a fee of $105,000 per annum and from December 13, 1996 to
June 30, 1997 at a fee of $50,000 per annum. Effective June 30, 1997, the
sale of the scanner was reversed and the service agreement was terminated.
Commencing July 1, 1997, HMC and the Elmhurst Center entered into a
Management Agreement and a Scanner Lease. Service for the scanner is
included under the Management Agreement.
Pursuant to a sales agreement dated June 18, 1992, RVDC agreed to
purchase an MRI scanner for a site in Forest Hills, New York for a purchase
price of $1,000,000, payable in installments. In turn, the scanner was
provided by RVDC to Damadian MRI in Forest Hills, P.C. (the "Forest Hills
Center"), a New York professional corporation of which Raymond V. Damadian
is the sole shareholder, director and President. From October 11, 1996 to
June 30, 1997, RVDC was party to a service agreement with FONAR for the
scanner at a price of $50,000 per annum. Effective June 30, 1997, the sale
of the scanner was reversed and the service agreement was terminated.
Commencing July 1, 1997, HMC and the Forest Hills Center entered into a
Management Agreement and a Scanner Lease. Service for the scanner is
included under the Management Agreement.
Pursuant to an agreement dated April 6, 1993, First Coast Magnetic
Resonance Imaging, P.A. ("First Coast"), a professional association of which
Raymond V. Damadian is the sole stockholder, director and President,
purchased the Company's partnership/joint venture interests in two MRI
scanning centers in Florida (one in Jacksonville and one in Fort Meyers) for
a purchase price of $3,200,000. The agreement provided for payment of the
purchase price as follows: $200,000 no later than June 30, 1993 and the
balance in (a) 36 equal monthly installments of principal and interest (8%
per annum) in the amount of $46,758.64 each and (b) one final 37th
installment of principal in the amount of $1,915,323.60. Subsequently, the
joint venture/partnership was terminated and partitioned with First Coast
ultimately receiving the Jacksonville Center. First Coast has been party to
service agreements with the Company with prices as follows: $105,416 per
annum from May 18, 1996 to May 17, 1997 and $50,000 per annum from May 18,
1997 to June 30, 1997. Effective June 30, 1997, the sale and purchase of
the joint venture interests was rescinded and the service agreement with
First Coast was terminated. Commencing July 1, 1997, HMC and First Coast
entered into a Management Agreement and a Scanner Lease. Service for the
scanner at the Center is included under the Management Agreement.
Damadian MRI in Philadelphia, P.C., (the "Philadelphia Center"), a
Pennsylvania professional corporation of which Raymond V. Damadian is the
sole shareholder, director and President, was party to a service agreement
with the Company for its scanner (leased directly from an independent
financing source) at an annual fee of $108,426 from November 2, 1995 to
November 1, 1996 and at an annual rate of $50,000 from November 1, 1996 to
June 30, 1997. Commencing July 1, 1997, HMC and the Philadelphia Center
entered into a Management Agreement. Service for the scanner is included
under the Management Agreement.
West Palm Beach MRI, P.A. (the "West Palm Beach Center"), a Florida
professional association of which Raymond V. Damadian is the sole
shareholder, director and President, was party to a service agreement with
the Company for its scanner at an annual fee of $105,000 from March 1, 1996
to February 28, 1997, and at an annual rate of $50,000 from March 1, 1997 to
June 30, 1997. Commencing July 1, 1997, HMC and the West Palm Beach Center
entered into a Management Agreement. Service for the scanner is included
under the Management Agreement.
Pursuant to a sales agreement dated June 30, 1993 RVDC agreed to
purchase an MRI scanner from the Company for a site in Coral Gables, Florida
(the "Coral Gables Center"). In turn, use of the scanner was provided to
Dade County MRI, P.A., a Florida professional association of which Raymond
V. Damadian is the sole stockholder, director and President. The sales
agreement provided for a purchase price of $1,000,000 payable in
installments. Effective June 30, 1997, the sales agreement was terminated.
Commencing July 1, 1997, HMC and Dade County MRI, P.A. entered into a
Management Agreement and a Scanner Lease for the Coral Gables Center.
Service for the scanner is included under the Management Agreement.
Damadian MRI in Garden City, P.C. (the "Garden City Center"), a New
York professional corporation of which Raymond V. Damadian is the sole
shareholder, director and President, was party to a service agreement with
the Company for its scanner at a rate of $50,000 per annum for the period
from October 1, 1996 to June 30, 1997. Commencing July 1, 1997, HMC and the
Garden City Center entered into a Management Agreement. Service for the
scanner is included under the Management Agreement.
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 ("the "Bensonhurst Center"). The
purchase price of $923,000 is payable in 84 equal monthly installments of
$14,386.07 each commencing May 1, 1993, which amount includes principal and
interest at the rate of 8% per annum amortized over the term. 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, 1997 to May 17, 1998. The price in effect during the prior year from
May 18, 1996 to May 17, 1997 was $105,000.
Pursuant to an agreement dated March 31, 1994, the Company sold an
MRI scanner to Ellwood City MRI Center Limited Partnership, a Pennsylvania
limited partnership of which RVDC is the general partner. The sales
agreement provided for a purchase price of $400,000, $200,000 of which has
been paid and $200,000 of which will be paid by the transfer of RVDC's
distributions until the sum of $200,000 is reached. The partnership is
utilizing the scanner at an MRI scanning center in Ellwood City,
Pennsylvania.
Pursuant to an agreement dated September 30, 1993, Advanced Medical
Diagnostics Corporation ("AMD"), a subsidiary of FONAR, sold its interests
in a partnership operating an MRI scanning center in Southfield Michigan to
RVDC for $600,000. The purchase price is payable with interest at 10% per
annum, over a period of 48 months commencing October 1, 1993 as follows:
$2,000 per month for the first year, $8,333.33 per month for the second
year, $16,666.67 per month for the third year and $20,909.91 for the fourth
and fifth years. The partnership is party to a service agreement with FONAR
for the scanner at a current annual fee of $120,000, for the period January
29, 1997 to January 28, 1998. For the prior year, the fee was $144,000.
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
Center"), 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 Center is a
Florida professional corporation of which Raymond V. Damadian is the sole
stockholder, director and President. During the fiscal year ended June 30,
1997, the partnership was party to a service agreement with the Company at a
price of $108,200 per annum. For the fiscal year July 1, 1997 to June 30,
1998 the price will be $50,000 per annum.
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 an agreement dated December 31, 1993, AMD sold its
interests in a partnership operating an MRI scanning center in San Francisco
to RVDC. The purchase price of $265,000 is payable, with interest at 10%
per annum, at the rate of $9,405.88 per month over a period of 36 months
commencing January 1, 1995. The partnership was party to a service
agreement with the Company for the scanner at an annual fee of $110,384 from
March 20, 1994 to March 19, 1996. The partnership is presently inactive.
Pursuant to a sales agreement dated April 1, 1996, RVDC agreed
to purchase an MRI scanner with certain upgrades from the Company which RVDC
has contributed to Orlando MRI Associates, Limited Partnership (the "Orlando
Partnership"), a limited partnership in which RVDC is the general partner.
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. As at
June 30, 1997, the Orlando Partnership was indebted to the Company in the
amount of $27,404. Timothy Damadian, a Vice President of the Company, is a
limited partner in Orlando.
Pursuant to an agreement dated December 31, 1992, RVDC agreed to
lease from the Company a mobile scanner, which was in turn leased to a third
party in Bethesda, Maryland. The term of the lease was for 84 months, and
the monthly lease payment of $15,586.21 (commencing January 1, 1993) was
based on a principal amount of $1,000,000 amortized over 84 months with an
interest rate of 8% per annum. The lease was terminated effective as of
June 30, 1997. RVDC was party to a service agreement with the Company for
the scanner, the annual rate for which was $50,000 for the period from June
22, 1996 to June 21, 1997.
RVDC executed and delivered to the Company a promissory note, dated
June 30, 1992 in the principal amount of $4,284,692 with interest thereon at
the rate of 10% per annum, payable in quarterly installments of interest
only during the first year and thereafter, amortized over a five-year
period. The note represented the indebtedness of RVDC to the Company
incurred during fiscal 1992 for lease payments, service contract fees,
management fees and reimbursable expenses and incorporated and superseded
the outstanding balance of the note to the Company from RVDC dated June 30,
1991 in the principal amount of $1,996,100 (which was amortized over five
years with interest at 10%). The note is guaranteed by the Macon Center,
Albany Center, Staten Island Center, Deerfield Center, Daytona Beach Center
and Melville Center and is secured by certain assets of RVDC and the
guarantors. These security interests are in certain cases subordinate to
the security interests of unrelated lenders.
TMRI executed and delivered to the Company a promissory note dated
June 30, 1992 in the principal amount of $803,272, with interest thereon at
the rate of 10% per annum, payable in quarterly installments of interest
only during the first year and thereafter, amortized over a five year
period. The note represents the indebtedness of TMRI to the Company during
fiscal 1992 for lease payments, service contract fees and reimbursable
expenses and incorporates and supersedes the outstanding balance of the note
to the Company from TMRI dated June 30, 1991 in the principal amount of
$169,200 (which was amortized over five years with interest at 10%).
Pursuant to an agreement dated August 3, 1993 MRI Specialties, Inc.
("Specialties") engaged the Company to deinstall, transport and reinstall an
MRI scanner purchased from a third party. Timothy Damadian, a Vice
President of the Company, is the stockholder, director and President of
Specialities. The agreement provided for a price of $120,000 payable in 36
monthly installments of $3,760.36 each (inclusive of interest at 8% per
annum), which amount has now been paid in full. The agreement also provided
that the Company provide a Four Post Canopy and Steel upgrade, Signal Plus
Surface Coils and Whisper Gradients for the MRI scanner. The scanner is
owned by Canarsie MRI Associates ("Canarsie"), a joint venture partnership
of which Specialties is an owner. Canarsie has been party to a service
agreement for the scanner with the Company at an annual fee of $70,000 for
the periods September 1, 1996 through August 31, 1997 and September 1, 1997
through August 31, 1998.
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, a Vice President of the Company, 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. 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, 1997, the aggregate indebtedness of Specialties and
Canarsie to the Company was $19,547 and the aggregate indebtedness of
Guardian to the Company was $95,757.
<PAGE>
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, 1997 and 1996.
Consolidated Statements of Operations for the Three
Years Ended June 30, 1997, 1996 and 1995.
Consolidated Statements of Stockholders' Equity
for the Three Years Ended June 30, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the Three
Years Ended June 30, 1997, 1996 and 1995.
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.
21. Subsidiaries of the Registrant. See Exhibits.
<PAGE>
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 14, 1997
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 14, 1997
Raymond V. Damadian Board of Directors,
President and a
Director (Principal
Executive Officer)
/s/ Claudette J.V. Chan Director October 14, 1997
Claudette J.V. Chan
/s/ Robert J. Janoff Director October 14, 1997
Robert J. Janoff
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<RECEIVABLES> 11410
<ALLOWANCES> 5410
<INVENTORY> 3440
<CURRENT-ASSETS> 93304
<PP&E> 23094
<DEPRECIATION> 17025
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<TOTAL-LIABILITY-AND-EQUITY> 106691
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EXHIBIT 21
SUBSIDIARIES
NAME OF SUBSIDIARY STATE OF INCORPORATION
U.S. Health Management Corporation Delaware
Advanced Medical Diagnostics Corporation Delaware
