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, 1998
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 21, 1998, 52,879,701 shares of Common Stock, 5,411 shares of
Class B Common Stock, 9,562,824 shares of Class C Common Stock and 7,836,287
shares of Class A Non-voting Preferred Stock of the registrant were outstanding.
The aggregate market value of the approximately 50,316,374 shares of Common
Stock held by non-affiliates as of such date (based on the closing price per
share on September 21, 1998 as reported on the NASDAQ System) was approximately
$66,015,082 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.
Health Management Corporation of America (formerly U.S. Health Management
Corporation and hereinafter sometimes referred to as "HMCA") was formed by the
Company in March 1997 as a wholly-owned subsidiary in order to enable the
Company to expand into the business of providing comprehensive management
services to medical providers, sometimes referred to as "physician practice
management" or "PPM." In connection with its entry into this new line of
business, HMCA has completed five acquisitions. HMCA provides management
services, administrative services, office space, equipment, repair and
maintenance service and clerical and other non-medical personnel to physicians
and other medical providers, including diagnostic imaging centers.
See Note 20 to the Financial Statements for separate financial information
respecting the Company's medical equipment and physician practice management
services segments.
FORWARD LOOKING STATEMENTS.
Certain statements made in this Annual Report on Form 10-K are
"forward-looking statements" (within the meaning of the Private Securities
Litigation Reform Act of 1995) regarding the plans and objectives of Management
for future operations. Such statements involve known and unknown risks,
uncertainties and other factors that may cause actual results, performance or
achievements of the Company to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. The forward-looking statements included herein are based on current
expectations that involve numerous risks and uncertainties. The Company's plans
and objectives are based, in part, on assumptions involving the expansion of
business. Assumptions relating to the foregoing involve judgments with respect
to, among other things, future economic, competitive and market conditions and
future business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Although the
Company believes that its assumptions underlying the forward-looking statements
are reasonable, any of the assumptions could prove inaccurate and, therefore,
there can be no assurance that the forward-looking statements included in this
Report will prove to be accurate. In light of the significant uncertainties
inherent in the forward-looking statement included herein, the inclusion of such
information should not be regarded as a representation by the Company or any
other person that the objectives and plans of the Company will be achieved.
RECENT DEVELOPMENTS AND OVERVIEW.
The Company's principal products are its new "QUAD" series of MRI scanners.
The "QUAD(TM) 12000" MR scanner utilizes a 6000 gauss iron core electromagnet
and is accessible from four sides. The QUAD 12000 is the first "open" MR scanner
at high field. The greater field strength of the 6000 gauss magnet, when
enhanced by the electronics already utilized by the Company's scanners, produces
images of a quality and clarity competitive with high field superconductive
magnets. The QUAD 12000 scanner magnet is the highest field "open MRI" in the
industry.
The Company also produces the "QUAD(TM) 7000," a MR scanner which is
similar in design to the QUAD 12000 but utilizes a smaller 3,500 gauss
electromagnet. The less expensive QUAD 7000 offers an economical solution to the
rising cost of medicine.
In addition, the Company's current "works in progress" include a breast MRI
scanner and an operating room scanner (the OR 360). (See "Works in Progress".)
As a result of these new products and other research and development, the
Company is positioning itself to dramatically increase sales and improve its
competitive position in the marketplace.
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 of New York. On July 2, 1997, following the trial
and appeal of the Company's claims against General Electric Company, General
Electric Company paid FONAR $128.7 million (inclusive of interest) for
infringement of FONAR's Multi-Angle Oblique (MAO) and original MRI (Cancer
Detection) patents. Previously, immediately prior to trial, in April, 1995, the
Company reached a settlement with Hitachi Ltd. and related defendants.
In March 1996, the Company commenced a patent infringement suit against
Toshiba Corporation, Toshiba America Medical Systems, Inc. and Toshiba America
MRI, Inc. Toshiba America MRI, Inc. in turn commenced an action against FONAR
alleging patent infringement. In May 1998 FONAR and the Toshiba companies
settled the pending litigation between them, neither party admitting liability.
FONAR and Toshiba cross-licensed each other on the patents in suit, and FONAR
received a monetary payment from Toshiba.
The Company is optimistic about sales of its new scanner products. To
further promote product recognition and sales, FONAR will attend the RSNA
(Radiological Society of North America) trade show in November 1998 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 attended the RSNA
trade shows previously in 1997, 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, Saudi Arabia,
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 Health Management Corporation of America
(formerly U.S. Health Management Corporation and hereinafter sometimes referred
to as "HMCA") as a wholly-owned subsidiary for the purpose of engaging in the
business of providing comprehensive management and administrative services,
office space, equipment, repair and maintenance service for equipment and
clerical and other personnel (other than physicians) to physicians' practices
and other medical providers, including diagnostic centers (sometimes referred to
as "physician practice management," "PPM" or "practice management.")
HMCA entered the PPM business through the consummation of two acquisitions,
effective June 30, 1997. As a result of these two acquisitions, three additional
acquisitions completed through August, 1998 and the opening of two new
facilities, HMCA currently is managing 38 facilities and offices located
principally in New York State and Florida.
PRODUCTS
The Company's principal products are its new "QUAD" series of MRI scanners.
The QUAD(TM) 12000 MR scanner utilizes a 6000 gauss iron core electromagnet and
is accessible from four sides. The QUAD 12000 is the first "open" MR scanner at
high field. The 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.
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.
Prior to the introduction of the QUAD scanners, the Ultimate(TM) 7000
scanner, introduced in 1990, was the Company's principal product. The Ultimate
scanner replaced the Company's traditional principal products, the Beta(TM) 3000
scanner (which utilized a permanent magnet) and the Beta(TM) 3000M scanner
(which utilized an iron core electromagnet). All of the Company's current and
earlier model scanners create cross-sectional images of the human body.
The Company's majority-owned subsidiary, Medical SNI, manufactures and
markets teleradiology equipment. Such equipment, through the use of computer
hardware and software, permits MRI images to be transmitted by telephone lines,
enabling a physician to view the results of an MRI scan (immediately, if
necessary) without the necessity of being present at the site of the scan or
receiving film.
During fiscal 1998, sales of the Company's QUAD scanners accounted for
approximately 15% of the Company's total revenues and 53% of its medical
equipment segment revenues, as compared to 27% of total revenues and 50% of
medical equipment revenues during fiscal 1997. There were no sales of Ultimate
or Beta scanners in fiscal 1997 or fiscal 1998.
The materials and components used in the manufacture of the Company's
products (circuit boards, computer hardware components, electrical components,
steel and plastic) are generally available at competitive prices. The Company
has not had difficulty acquiring such materials.
WORKS IN PROGRESS
The Company's current "works in progress" center around the development of
its breast MRI scanner and operating room scanner (the OR 360). Both seek to
bring to the public scanners that are expected to provide important advances
against serious disease.
MRI takes advantage of the nuclear resonance signal elicited from the
body's tissues and the exceptional sensitivity of this signal for detecting
disease. Much of the serious disease of the body occurs in soft tissue. The
principal diagnostic modality currently in use for detecting disease, as in the
case of x-ray mammography, are diagnostic x-rays. X-rays discriminate soft
tissues like healthy breast tissue and cancerous tissue poorly because the x-ray
particle traverses the tissues almost equally thereby rendering the target film
equally exposed by the two tissues and creating healthy and cancerous shadows on
the film that differ very little in brightness. The image contrast between
cancerous and healthy tissue is poor, making the detection of breast cancers by
the x-ray mammogram less than optimal. If microscopic stones
(microcalcifications) are not present to provide the missing contrast the breast
cancer goes undetected. They frequently are not present. The maximum contrast
available by x-ray with which to discriminate disease is 4%. Brain cancers
differ from surrounding healthy brain by only 1.6%.
On the other hand the soft tissue contrasts with which to distinguish
cancers on images by MRI are up to 180%. This is because the nuclear resonance
signals from the body's tissues differ so dramatically. Liver cancer and healthy
liver signals differ by 180%. Thus there is some urgency to bring to market an
MRI based breast scanner that can overcome the x-ray limitation and assure that
mammograms do not miss serious lesions. The added benefit of MRI mammography
relative to x-ray mammography is the elimination of the need for the patient to
disrobe and the painful compression of the breast typical of the x-ray
mammogram. The patient is scanned in her street clothes in MRI mammography.
Moreover MRI mammogram scans the entire chest wall including the axilla for the
presence of nodes which the x-ray mammogram cannot reach.
In addition there is a need for a treatment modality that can deal
effectively with the diseased tissue once it has been detected.
The OR 360 is Fonar's latest works-in-progress product. The OR 360 has an
enlarged room sized magnet in contrast to the small bore "tunnel" MRI magnet the
public is familiar with. Thus full-fledged surgical teams may walk into the
magnet and thereby perform conventional surgery on the patient inside the
magnet. Most importantly the exceptional quality of the MRI image and its
exceptional capacity to exhibit tissue detail on the image, by virtue of the
nuclear resonance signal's extraordinary capacity to create image contrast, can
then be obtained real time during surgery to guide the surgeon in his surgery.
Thus surgical instruments, needles, catheters, endoscopes and the like can be
introduced directly into the human body and guided to the malignant lesion by
means of the MRI image. The number of inoperable lesions should be greatly
reduced by the availability of this new capability. Most importantly treatment
can be carried directly to the target tissue.
With current cancer treatment methods, therapy must always be restricted in
the doses that can be applied to the malignant tissue because of the adverse
effects on the healthy tissues. Thus chemotherapies must be limited at the first
sign of toxic side effects. The same is the case with radiation therapy. The
Company expects that once its new OR 360 product is available treatment agents
may be administered directly to the malignant tissue through small catheters or
needles allowing much larger doses of chemotherapy, x-rays, laser ablation,
microwave, or rf to be applied directly and exclusively to the malignant tissue
with more effective results. Since the procedure of introducing a treatment
needle or catheter under image guidance will be minimally invasive the procedure
can be readily repeated should metastases occur elsewhere, with minimum impact
on the patient beyond a straightforward needle injection.
The presence of the MRI image during treatment will enable the operator to
judge during treatment if his treatment is being effective. The Company received
an enthusiastic reception for its new "works-in-progress" OR 360 scanner at the
annual International Radiology Congress held in Chicago's McCormick Place known
as the RSNA (Radiological Society of North America) and expects to be extremely
successful with this new product.
Most of the design work for the OR 360 has been completed and construction
of a prototype is approximately 90% complete.
The Company is negotiating with two universities to install and commence
clinical trials of its breast scanning equipment. The Company is working with
these universities to jointly secure research funding for the breast scanning
and treatment program.
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, 1996
and 1997 and plans to attend the RSNA trade shows in November 1998 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 $980,000 for the
QUAD 12000 and of $780,000 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.
During the fiscal year ended June 30, 1998, 5% of the Company's revenues
were generated by foreign sales, as compared to 4% and 17% for fiscal 1997 and
1996 respectively. See "Note 9 to Notes to Consolidated Financial Statements"
for the percentage of foreign sales as in relation to the Company's total
revenues.
SERVICE AND UPGRADES FOR MRI SCANNERS
The Company 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 $6.1 million in fiscal 1996, $4.6 million in
fiscal 1997 and $3.7 million in fiscal 1998. The decreases in fiscal 1997 and
1998 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, 1998, the Company incurred
expenditures of $6,506,995 (none of which was capitalized) on research and
development, as compared to $3,928,035 ($108,809 of which was capitalized) and
$3,607,703 ($251,659) of which was capitalized) incurred during the fiscal years
ended June 30, 1997 and June 30, 1996, respectively.
Research and development activities have focused, in large part, on the
development of the Company's new OR 360 and the continued development and
enhancement of the Company's QUAD MR scanners. The OR 360 and QUAD scanners
involve significant software and hardware development as the new products
represented entirely new hardware design and architecture requiring a complete
new operating software system. The Company's research activity includes
developing a multitude of new features for the QUAD series scanners made
possible by the QUAD's high speed processing power.
BACKLOG
The Company's backlog of unfilled orders at September 1, 1998 was
approximately $2.8 million, as compared to $6.4 million at September 1, 1997. Of
these amounts, approximately $0.6 million and $1.2 million had been paid to the
Company as customer advances as at September 1, 1998 and September 1, 1997,
respectively. Of the backlog amounts at September 1, 1997, approximately
$800,000 represented orders from affiliates. None of the backlog existing at
September 1, 1998 represents orders from affiliates. It is expected that the
existing backlog of orders will be filled within the current fiscal year. The
Company's contracts generally provide that if a customer cancels an order, the
customer's initial down payment for the MRI scanner is nonrefundable.
PATENTS AND LICENSES
There are currently numerous patents in effect which relate to the
technology and components of the MRI scanners, some of which are registered in
the name of the Company and others which are registered in the name of Dr.
Raymond V. Damadian, the President and principal stockholder of the Company. The
Company believes that these patents, which expire at various times from 1999 to
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). Following
appeals to the United States Court of Appeals for the Federal Circuit, General
Electric Company paid FONAR $128.7 million (inclusive of interest) on July 2,
1997. The Supreme Court denied General Electric Company's petition for a writ of
certiorari on October 6, 1997. The Company was 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
Corporation, Toshiba America MRI, Inc. and Toshiba America Medical Systems, Inc.
Toshiba America MRI, Inc. in turn commenced an action against FONAR alleging
patent infringement. In May 1998, FONAR settled with the Toshiba companies,
neither side admitting liability in the settlement agreement. The parties
cross-licensed each other on the patents-in-suit, and FONAR received a monetary
payment from Toshiba.
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. In 1997, however, sales of non-superconductive MRI's were almost
equal to sales of superconductive magnets. In 1997, the size of the MRI market
in the United States was approximately $565 million. The market share of
superconductive MRI's was approximately 53%. 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 at high field strength.
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. Superconductive 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 FONAR 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. Such competitors sell both superconductive and
non-superconductive products. FONAR's current market share of the market for MRI
scanners is less than 5%. FONAR introduced the first "Open MRI" in 1982. "Open
MRI" was made possible by FONAR's introduction of an MRI magnet built on an iron
frame. Thus the magnetic flux generating apparatus of the magnet (magnet coils
or permanent magnet bricks) was built into a frame of steel. The steel frame
provided a return path for the magnetic lines of force and thereby kept the
magnetic lines of force contained within the magnet. This enabled FONAR, from
1982 on, to show that the FONAR magnet was the only magnet that allowed the
patients to stretch out their arms, the only "open" MRI.
The iron frame, because it could control the magnetic lines of force and
place them where wanted and remove them from where not wanted (such as in the
operating room where surgeons are standing), provided a much more versatile
magnet design than was possible with superconductive magnets. Superconductive
magnets contain no iron but consist entirely of turns of current carrying wire.
They therefore lack the versatility of design that the iron frame provides the
"open" MRI magnet. Thus the superconductive magnets made by Fonar's large
competitors that have dominated the MRI market since 1983 have been of the
confining "tunnel" design that the public has generally resented.
For an 11 year period, 1983-1994, Fonar's large competitors (with one
exception) generally rejected Fonar's "open" design but in 1994 all (with one
exception) added an "open" magnet to their MRI product line. In 1997 the sale of
non-superconductive "open" magnets exceeded the sale of traditional
superconductive magnets for the first time. One principal reason for this market
shift, in addition to patient claustrophobia, is the growing awareness that the
"open" magnet designs permit access to the patient to perform surgical
procedures under MRI image guidance, a field which is now growing rapidly and is
called "interventional MRI."
Fonar's OR 360 explicitly addresses this growing market reception of MRI
guided surgical procedures but is not yet available as a product. Fonar's QUAD
series magnets do also. Although not enabling a full operating theater as the OR
360 does, the "Open" QUAD design permits ready access to the patient from four
sides and therefore enables a wide range of interventional surgical procedures
such as biopsies and needle or catheter delivered therapies to be performed
under MRI image guidance. The "tunnel" superconductive scanners do not permit
access to the patient while the patient is inside the scanner.
While Fonar's current market share of the domestic MRI market is under 5%
and its current market share of the domestic "Open MRI" market is only of the
order of 10% at present, FONAR expects to be a leader in this market for several
reasons. In MRI, scanning speed and image quality is controlled by the strength
of the magnetic field. Fonar's QUAD 12000 scanner operates at twice the field
strength of its closest market share "Open MRI" competitor, Hitachi (.6 Tesla
vs. .3 Tesla). High field MRI manufacturers convinced the marketplace for FONAR,
and the marketplace accepts, that higher field strength translates directly into
superior image quality and faster scanning speeds. This is the principal reason
GE's 1.5 Tesla superconductive scanner achieved market dominance in the MRI
market before the marketplace shifted and registered its preference for "Open
MRI." All of Fonar's other competitors in the "Open MRI" market are lower in
field strength than the Hitachi product other than Toshiba at .35 Tesla. No
companies possess the OR 360 and FONAR possesses the pioneer patents on "Open
MRI" technology.
OTHER IMAGING MODALITIES
FONAR's MRI scanners also compete with other diagnostic imaging systems,
all of which are based upon the ability of energy waves to penetrate human
tissue and to be detected by either photographic film or electronic devices for
presentation of an image on a television monitor. Three different kinds of
energy waves - X-ray, gamma and sound - are used in medical imaging techniques
which compete with MRI medical scanning, the first two of which involve exposing
the patient to potentially harmful radiation. These other imaging modalities
compete with MRI products on the basis of specific applications.
X-rays are the most common energy source used in imaging the body and are
employed in three imaging modalities:
1. Conventional X-ray systems, the oldest method of imaging, are typically
used to image bones and teeth. The image resolution of adjacent structures that
have high contrast, such as bone adjacent to soft tissue, is excellent, while
the discrimination between soft tissue organs is poor because of the nearly
equivalent penetration of x-rays.
2. Computerized Tomography ("CT") systems couple computers to x-ray
instruments to produce cross-sectional images of particular large organs or
areas of the body. The CT scanner addresses the need for images, not available
by conventional radiography, that display anatomic relationships spatially.
However, CT images are generally limited to the transverse plane and cannot
readily be obtained in the two other planes (sagittal and coronal). Improved
picture resolution is available at the expense of increased exposure to x-rays
from multiple projections. Furthermore, the pictures obtained by this method are
computer reconstructions of a series of projections and, once diseased tissue
has been detected, CT scanning cannot be focused for more detailed pictorial
analysis or obtain a chemical analysis.
3. Digital radiography systems add computer image processing capability to
conventional x-ray systems. Digital radiography can be used in a number of
diagnostic procedures which provide continuous imaging of a particular area with
enhanced image quality and reduced patient exposure to radiation.
Nuclear medicine systems, which are based upon the detection of gamma
radiation generated by radioactive pharmaceuticals introduced into the body, are
used to provide information concerning soft tissue and internal body organs and
particularly to examine organ function over time.
Ultrasound systems emit, detect and process high frequency sound waves
reflected from organ boundaries and tissue interfaces to generate images of soft
tissue and internal body organs. Although the images are substantially less
detailed than those obtainable with x-ray methods, ultrasound is generally
considered harmless and therefore has found particular use in imaging the
pregnant uterus.
X-ray machines, ultrasound machines, digital radiography systems and
nuclear medicine compete with the MRI scanners by offering significantly lower
price and space requirements. However, FONAR believes that the quality of the
images produced by its MRI scanners is generally superior to the quality of the
images produced by those other methodologies.
GOVERNMENT REGULATION
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 Company anticipates that it will need FDA
approvals for its OR 360 and breast scanners.
The FDA has authority to conduct detailed inspections of manufacturing
plants, to establish "good manufacturing practices" which must be followed in
the manufacture of medical devices, to require periodic reporting of product
defects and to prohibit the exportation of medical devices that do not comply
with the law. The Company is subject to these requirements and has received the
necessary approvals. In addition, the Company needs to obtain any necessary
approvals from the appropriate foreign governmental and other authorities in
connection with its export sales.
Effective November 22, 1985, the Department of Health and Human Services
authorized reimbursement of MRI scans under the Federal Medicare program. In
addition, most private insurance companies have authorized reimbursement for MRI
scans.
Proposed and enacted legislation at the State and Federal levels has
restricted referrals by physicians to medical and diagnostic centers in which
they or their family members have an interest. In addition, regulations have
been adopted by the Secretary of Health and Human Services which provide limited
"safe harbors" under the Medicare Anti-Kickback Statute. These safe harbors
describe payments and transactions which are permitted between an entity
receiving reimbursement under the Medicare program and those having an interest
in or dealings with the entity. Although the Company cannot predict the overall
effect of the adoption of these regulations on the medical equipment industry,
the use and continuation of limited partnerships (where investors may be
referring physicians) to own and operate MRI scanners could be greatly
diminished.
The Company obtains approvals as necessary in connection with the sales of
its products in foreign countries. In some cases, U.S. Food and Drug
Administration approval has been sufficient for foreign sales as well. The
Company's standard practice has been to require either the distributor or the
customer to obtain any such foreign approvals or licenses which may be required.
Commencing in fiscal 1998, however, export sales to most European countries
and certain other countries require CE certification (essentially safety
requirements for electrical products). The Company is in the process of
complying with these requirements and obtaining this certification.
HEALTH MANAGEMENT CORPORATION OF AMERICA
(PHYSICIAN PRACTICE MANAGEMENT BUSINESS)
Health Management Corporation of America (formerly known as U.S. Health
Management Corporation and referred to as "HMCA") was organized by the Company
in March 1997 as a wholly-owned subsidiary for the purpose of engaging in the
business of providing comprehensive management services to physicians' practices
and other medical providers, including diagnostic imaging centers and ancilliary
services. The services provided by the Company include development,
administration, leasing of office space, facilities and medical equipment,
provision of supplies, staffing and supervision of non-medical personnel, legal
services, accounting, billing and collection and the development and
implementation of practice growth and marketing strategies. This business is
sometimes referred to as "physician practice management," "PPM" or "practice
management."
Since its formation, HMCA has completed five acquisitions. HMCA became
actively engaged in the PPM business through its initial two acquisitions which
were consummated effective June 30, 1997. Following these two initial
acquisitions, HMCA completed two additional acquisitions in fiscal 1998 and one
additional acquisition in the first quarter of fiscal 1999 (August 1998).
The first acquisition was of a group of several interrelated corporations,
limited liability companies and a partnership engaged in the business of
managing three diagnostic imaging centers and one multi-speciality practice in
New York State. The transaction was effected through a merger between a
wholly-owned subsidiary of HMCA (formed for the purpose of effecting the
transaction) and Affordable Diagnostics, Inc., one of the acquired companies
which immediately prior to the merger had acquired the assets and assumed the
liabilities of the other acquired companies (together, the "Affordable
Companies").
The business of the Affordable Companies, which is being continued by HMCA,
consisted of providing management, space, equipment, personnel and other
resources to the four managed facilities. The services provided at the
facilities include MRI scans, CAT scans, x-rays, physical rehabilitation, and in
connection with physical rehabilitation, ultra-sound and SSEP/EMG
electromygographic diagnostics. The four managed facilities are located in
Brewster, New York (MRI), Yonkers, New York (MRI and x-ray), Bronx, New York
(MRI and CT) and Riverdale, New York (multi-specialty practice, ultra-sound and
SSEP/EMG electromygographic diagnostics). The assets acquired through the
acquisition include three MRI scanners, one CT scanner, one x-ray machine,
rehabilitation equipment and ultra-sound and electromygographic machines. The
equipment is leased to and used at the managed facilities. In addition, HMCA 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,
on a mobile route in northern New Jersey and Rockland, Orange and Putnam
counties in New York.
The second completed acquisition was of Raymond V. Damadian, M.D. MR
Scanning Centers Management Company ("RVDC"). Pursuant to the terms of the
transaction, HMCA purchased all of the issued and outstanding shares of stock of
RVDC from Raymond V. Damadian in exchange for 10,000 shares of the Common Stock
of FONAR. Raymond V. Damadian, the principal stockholder, President and Chairman
of the Board of FONAR, was the sole stockholder, director and President of RVDC
immediately prior to the acquisitions. The business of RVDC, which is being
continued by HMCA, was the management of MRI diagnostic imaging centers in New
York, Florida, Georgia and other locations.
As a result of these transactions with Dr. Damadian, HMCA has acquired the
business of managing 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, HMCA
entered into new management agreements with the centers. Pursuant to the
management agreements, HMCA is providing comprehensive management services,
including administrative services, office facilities, office equipment, supplies
and personnel (except for physicians) to the centers. Service for the centers'
MRI scanning equipment is provided under the management agreements in these
cases. MRI scanning systems are provided to 9 of the centers pursuant to scanner
leases entered into effective July 1, 1997. All of the facilities previously
managed by RVDC are MRI scanning centers.
The third completed acquisition, consummated on January 20, 1998, was an
acquisition of the business and assets of Central Health management Co., LLC
(Central Health). Central Health is a management service organization (MSO)
managing a multi-specialty practice in Yonkers, New York. The assets acquired
include therapy and rehabilitation equipment, x-ray equipment, office equipment
and office furnishings.
The fourth completed acquisition, consummated effective March 20, 1998, was
the acquisition of A & A Services, Inc. ("A & A Services"), an MSO managing four
primary care practices in Queens County, New York. A & A Services provides the
practices with management services, office space, equipment, repair and
maintenance service for the equipment and clerical and other non medical
personnel. The office locations for the practices are located in Woodhaven,
Richmond Hill, Corona and Ridgewood in Queens County, New York and account for
over 52,000 primary care patient visits per year.
The fifth completed acquisition, consummated effective August 20, 1998, was
the acquisition of Dynamic Health Care Management, Inc. ("Dynamic"). Dynamic is
an MSO which manages three physician practices in Nassau and Suffolk Counties on
Long Island, New York. The office locations for these practices are in Bellmore
and Hempstead in Nassau County and Deer Park in Suffolk County and account for
approximately 85,000 patient visits per year.
HMCA GROWTH STRATEGY
In addition, HMCA may also pursue acquisitions pursuant to which HMCA would
purchase the assets of physicians' practices. Simultaneously with the
acquisition of the assets, HMCA would enter into agreements with the physicians
(or a professional corporation employing the physicians) pursuant to which HMCA
would lease the use of the assets and provide management services. The
professional corporation could be either affiliated with HMCA or owned by the
selling physicians.
HMCA believes that there are numerous existing medical practices that could
benefit from improved management techniques which would allow the physicians to
spend more time treating patients (thereby increasing their revenue) and less
time being concerned with the day to day tasks of managing the business.
In addition, expansion plans for HMCA's clients include opening more
offices and expanding existing offices so as to enable practices to treat more
patients more efficiently.
HMCA is seeking to create a network of physicians to participate in managed
care and to promote an expansion of the medical services offered by its medical
practice clients.
HMCA believes that the creation of this network will be particularly
helpful to its clients where capitated fee agreements are negotiated with
insurers since its clients will be able to offer more services from more
locations and thereby obtain a higher capitation rate than they might otherwise
have been able to obtain.
HMCA's growth strategy is intended to enable its medical practice clients
to retain and enhance revenues and to offer patients cost-effective medical care
within an integrated practice offering a broad range of evaluation, testing,
diagnostic, treatment and therapeutic services. In the longer term, as the
network of offices to which it provides its management services grows, HMCA
believes that it will be in an excellent position to attract managed care
contracts for its clients from employers and insurance carriers.
MEDICAL PRACTICE MANAGEMENT SERVICES
HMCA's services to the facilities it manages encompass substantially all of
the facilities' operations. These services include:
(1) Offices and Equipment. HMCA provides office space and equipment to its
clients. This includes technologically sophisticated medical equipment. HMCA
also provides improvements to leaseholds, assistance in site selection and
advice on improving, updating, expanding and adapting to new technology.
(2) Personnel. HMCA staffs all the non-medical positions of its clients
with its own employees, eliminating the client's need to interview, train and
manage non-medical employees, as well as process the necessary tax, insurance
and other documentation relating to employees.
(3) Administrative. HMCA assists in the scheduling of patient appointments,
purchasing of medical supplies and equipment and handling of reporting,
accounting, processing and filing systems. It prepares and files the physician
portions of complex forms to ensure full and timely regulatory compliance and
appropriate cost reimbursement under no-fault insurance and workers'
compensation guidelines.
(4) Billing and Collections. HMCA is responsible for the billing and
collection of revenues from third-party payors including those governed by
no-fault and workers' compensation statutes.
(5) Cost Saving Programs. Based on available volume discounts, HMCA seeks
to obtain favorable pricing for medical supplies, equipment, pharmaceuticals and
other inventory for its clients.
(6) Diagnostic Imaging and Ancilliary Services. HMCA can offer access to
diagnostic imaging equipment through diagnostic imaging facilities managed by
it. The Company is expanding the ancilliary services offered in its network to
include CT-scans, x-rays, ultrasound, and other ancilliary services useful to
its clients.
(7) Marketing Strategies. HMCA is responsible for developing marketing
plans for its clients.
HMCA provides its services pursuant to negotiated contracts with its
clients. While HMCA believes it can provide the greatest value to its clients by
furnishing the full range of services appropriate to that client, HMCA would
also be willing to enter into contracts providing for a more limited spectrum of
management services.
HMCA MARKETING
HMCA's marketing strategy is to increase the size, number and locations of
medical practices and facilities which it manages. HMCA will also seek to
broaden the types of medical practices which it services and to develop a client
base of primary care and speciality practices as well as diagnostic imaging
facilities and other ancilliary services. HMCA will seek to promote growth of
its clients' patient and revenue bases by developing a network of medical
providers and assisting its clients in the development of multi-specialty
medical practices.
Marketing activities include locating medical practices which meet the
size, quality and operating parameters set by HMCA. HMCA will focus on
opportunities for expanding the services clients offer and expanding into new
geographic areas. HMCA will also seek to increase the patient volume of clients.
DIAGNOSTIC IMAGING CENTERS AND OTHER ANCILLIARY SERVICES
Diagnostic imaging centers managed by HMCA provide diagnostic imaging
services to patients referred by physicians who are either in private practice
or affiliated with managed care providers or other payor groups. The centers are
operated in a manner which eliminates the admission and other administrative
inconveniences of in-hospital diagnostic imaging services. Imaging services are
performed in an outpatient setting by trained medical technologists under the
direction of interpreting physicians. Following diagnostic procedures, the
images are reviewed by the interpreting physicians who prepare a report of these
tests and their findings. These reports are transcribed by HMCA personnel and
then delivered to the referring physician.
In addition, HMCA is expanding the ancilliary services offered in its
network to include CT scans, x-rays, ultrasound and other modalities as may be
appropriate for the physician practice mix.
HMCA develops marketing programs in an effort to establish and maintain
profitable referring physician relationships and to maximize reimbursement
yields. These marketing approaches identify and target selected market segments
consisting of area physicians with certain desirable medical specialties and
reimbursement yields. Corporate and center managers determine these market
segments based upon an analysis of competition, imaging demand, medical
specialty and payor mix of each referral from the local market. HMCA also
directs marketing efforts at managed care providers.
Managed care providers are becoming an increasingly important factor in the
diagnostic imaging industry. To further its position, HMCA will seek to expand
the imaging modalities offered at its managed centers or to create networks with
other imaging centers.
COMPETITION (HMCA)
The medical practice management field is highly competitive. A number of
large hospitals have acquired medical practices and this trend may continue.
HMCA expects that more competition will develop. Many competitors have greater
financial and other resources than HMCA.
With respect to the diagnostic imaging centers managed by HMCA, the
outpatient diagnostic imaging industry is highly competitive. Competition
focuses primarily on attracting physician referrals at the local market level
and increasing referrals through relationships with managed care organizations.
HMCA believes that principal competitors for the diagnostic imaging centers are
hospitals and independent or management company-owned imaging centers.
Competitive factors include quality and timeliness of test results, ability to
develop and maintain relationships with managed care organizations and referring
physicians, type and quality of equipment, facility location, convenience of
scheduling and availability of patient appointment times.
GOVERNMENT REGULATION APPLICABLE TO HMCA
Various States prohibit business corporations from practicing medicine.
Consequently, HMCA leases space and equipment to clients and provides clients
with a range of non-medical administrative and managerial services. HMCA does
not engage in the practice of medicine or establish standards of medical
practice or policies for its clients.
Under the federal Self-Referral Law (the "Stark Law") (which is applicable
to Medicare and Medicaid patients) and the self-referral laws of various States,
certain health practitioners (including physicians, chiropractors and
podiatrists) are prohibited from referring their patients for the provision of
designated health services (including diagnostic imaging and physical therapy
services) to any entity with which they or their immediate family members have a
financial relationship, unless the referral fits within one of the specific
exceptions in the statutes or regulations. Statutory exceptions under the Stark
Law include, among others, direct physician services, in-office ancillary
services rendered within a group practice, space and equipment rental and
services rendered to enrollees of certain prepaid health plans. Some of these
exceptions are also available under the State self-referral laws.
HMCA's clients generate revenue from patients covered by no-fault insurance
and workers' compensation programs. In the event that changes in these laws
alter the fee structures or methods of providing service, or impose additional
or different requirements, HMCA could be required to modify its business
practices and services in ways that could be more costly to HMCA or in ways that
decrease the revenues which HMCA receives from its clients.
HMCA believes that it is in compliance with applicable Federal, State and
local laws. HMCA does not believe that such laws will have any material effect
on its business.
EMPLOYEES
As of July 1, 1998, the Company employed 444 persons on a full-time
basis. Of such employees, 10 were engaged in marketing and sales, 38 in
research and development, 94 in manufacturing, 48 in customer support services,
219 in administration (including 116 on site at facilities and offices managed
by HMCA and 57 performing billing, collection and transcription services for
those facilities) and 35 professional MRI technicians on site at diagnostic
imaging centers managed by HMCA.
<PAGE>
ITEM 2. PROPERTIES
The Company leases approximately 135,240 square feet of office and plant
space at its principal offices in Melville, New York and at one other location
in Farmingdale, New York at a current aggregate annual rental rate of
approximately $913,800, 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 9 years on its principal
facilities. Management believes that these premises are adequate for its current
needs. In addition, HMCA maintains leased office premises for its clients at
approximately 34 site locations having an aggregate annual rental rate of
approximately $1.6 million.
ITEM 3. LEGAL PROCEEDINGS
On September 2, 1992, the Company filed an action against General Electric
Company, ("General Electric"), Hitachi Ltd. ("Hitachi") and other defendants for
patent infringement in the United States District Court for the Eastern District
of New York seeking injunctive relief and damages. (FONAR Corporation and Dr.
Raymond V. Damadian v. Hitachi Ltd. et. al. Civil Action No. 92-4196). 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 March 4, 1996, the Company filed an action against Toshiba Corporation,
Toshiba America Medical Systems, Inc., Toshiba America MRI, Inc. and others
alleging infringement of four of its MRI patents. FONAR Corporation and Dr.
Raymond V. Damadian v. Toshiba Corporation, Toshiba America Medical Systems,
Inc., Toshiba America MRI, Inc. et al. (U.S. District Court, Eastern District of
New York, Civil Action No. 96-0963). Thereafter, in February 1997, Toshiba
America MRI, Inc. commenced an action against FONAR in the U.S. District Court
for the Northern District of California (Toshiba America MRI, Inc. v. Fonar
Corporation, Case No.: C97-00664 SBA ENE) alleging infringement of certain of
its patents relating to magnetic resonance imaging technology. Both FONAR and
the Toshiba companies asserted counterclaims in the actions brought against
them. In May 1998 FONAR and Toshiba amicably resolved the litigation in both the
New York and California United States District Courts. Neither party admitted
liability in the settlement agreement. The parties cross-licensed each other on
the patents-in-suit, and FONAR received a monetary payment from Toshiba. Other
terms of the settlement are confidential.
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. Subsequently, judgments were entered on the
California judgment in New York, Pennsylvania, Michigan and Florida and
enforcement proceedings were commenced. The plaintiffs to date have not
collected any part of the judgment in these proceedings.
Thereafter, plaintiffs purportedly assigned the judgment to Phoenix General
& Health Services, Inc. ("Phoenix"). Phoenix commenced a new and separate action
in United States District Court for the Eastern District of New York seeking to
enforce the judgment against AMD and FONAR, as well. FONAR is defending this
claim on the ground, among others, that in the original California action it was
determined that FONAR was not liable, and both FONAR and AMD are defending on
the grounds that the assignment to Phoenix, a Nevada corporation, was made
solely for the purpose of seeking to bring this case within the diversity
jurisdiction of the Federal Courts. A motion to dismiss this case on various
grounds is now under consideration by the United States District Court for the
Eastern District of New York.
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 increased the dividends payable on the Company's Common Stock and
Class A Non-voting Preferred Stock from the proceeds of its patent litigation.
The three percent (3%) dividend originally payable on the Common Stock of any
awards collected by the Company on its Cancer Detection Patent (U.S. Patent No.
3,789,832) was increased to 3 1/4% of the first $10 million collected, 4 1/2% of
the next $20 million collected and 5 1/2% of any additional amounts collected of
any such cash award. The 3% dividend originally payable on the Class A
Non-voting Preferred Stock of any awards on the other four patents asserted in
the litigation against General Electric Company and Hitachi Ltd., including the
Company's Multi-Angle Oblique Imaging Patent, was similarly increased and
extended to any patent litigation seeking to enforce those patents commenced
prior to November 29, 1997. In addition, the Company 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.
Subsequently, on December 17, 1997, the parties agreed to modification of
the settlement agreement, which was approved by the Court of Chancery on March
2, 1998. The modification provided that the Company issue 2,231,689.3 shares of
FONAR Common Stock in substitution for the Warrants which would have been issued
under the original terms of the settlement agreement. In addition, the
modification provides for a schedule to pay the special dividends on the
Company's Common Stock and Class A Non-voting Preferred Stock with respect to
awards and settlements already received by the Company in connection with its
patent litigations. These first installments (comprising one-half of the total)
was paid in May 1998 and the second installment (comprising one-sixth of the
total) was paid in September 1998. The remaining two installments (each
comprising one-sixth of the total) are required to be paid as follows: one prior
to December 31, 1998 and one prior to March 31, 1999.
<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 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 1996 2.63 2.13 2.72 2.19
October - December 1996 3.06 2.22 3.13 2.25
January - March 1997 4.44 2.09 4.50 2.13
April - June 1997 3.16 2.28 3.19 2.34
July - September 1997 3.87 2.72 3.94 2.75
October - December 1997 4.03 2.63 4.06 2.66
January - March 1998 3.03 2.38 3.13 2.41
April - June 1998 2.72 1.94 2.75 2.00
July - September 21 1998 2.47 1.25 2.50 1.31
On September 21, 1998, the Company had approximately 5,476 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 4,621 stockholders of record of the Company's Class A Non-voting
Preferred Stock.
At the present time, the only class of the Company's securities for which
there is a market is the Common Stock.
The Company paid cash dividends in fiscal 1998 and the first quarter of
fiscal 1999 on monies it received from the enforcement of its patents. Prior to
these dividends, the Company had not paid any cash dividends. The Company
anticipates paying additional dividends on monies it receives from the
enforcement of its patents. Except for these dividends, however, it is expected
that the Company will continue to retain earnings to finance the development and
expansion of its business.
<PAGE>
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, 1998. This consolidated selected financial data should be read in
conjunction with the consolidated financial statements of the Company and the
related notes included in Item 8 of this form. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" for a discussion
of the Company's business plan.
As of, or For the Period Ended June 30,
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues $27,554,357 $17,633,066 $13,915,725 $16,522,676 $15,387,000
Cost of $23,841,844 $13,828,574 $10,417,384 $10,192,542 $ 7,814,000
revenues
Research and $ 6,506,995 $ 3,928,035 $ 3,607,703 $ 3,356,120 $ 2,803,000
Development Expenses
Net Income (loss) $(5,653,086) $56,068,771 $(11,407,444) $(7,549,625) $ (335,000)
Net income (loss) $(.09) .95 (.22) (.17) (0.01)
per common share
Weighted average $61,175,986 $56,097,965 51,516,470 45,055,334 36,774,000
number of shares
outstanding *
BALANCE SHEET DATA
- ------------------
Working capital $54,426,483 $62,659,470 $(1,575,857) $(4,498,911) $ (7,749,000)
(deficit)
Total $108,447,780 $106,690,561 $28,057,384 $27,949,122 $48,418,000
assets
Long-term debt and $16,003,479 $ 4,626,269 $ 4,204,935 $ 4,274,420 $ 5,884,000
obligations under
capital leases
Stockholders' $72,572,486 $ 73,245,262 $11,412,629 $29,394,096 $28,333,000
equity
</TABLE>
* Adjusted for stock dividend of Class A Non-voting Preferred Stock
declared in October, 1995.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
INTRODUCTION.
The Company was formed in 1978 to engage in the business of designing,
manufacturing and selling MRI scanners. In 1997, the Company formed a
wholly-owned subsidiary, Health Management Corporation of America ("HMCA"),
formerly known as U.S. Health Management Corporation, in order to expand into
the physician practice management business.
FONAR's principal MRI products are its QUAD 7000 and QUAD 12000 MRI
scanners. Having received the necessary FDA approvals for its QUAD scanners, the
Company believes it is in a position to aggressively seek new sales. The QUAD
scanners are highly competitive and totally new non-claustrophobic scanners not
previously available in the MRI market. At .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, 1996 and 1997 and plans to do so again in November 1998. 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.
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.
HMCA generates revenues from providing comprehensive management services
(including development, administration, accounting and billing and collection
services) together with office space, medical equipment, supplies and
non-medical personnel to its clients. Revenues are in the form of management and
leasing fees. HMCA has completed five acquisitions since it was formed in March
1997.
The first acquisition was of a group of companies engaged in the business
of managing three diagnostic imaging centers and one multi-specialty practice in
New York State (the "Affordable Companies"). The second acquisition was of
Raymond V. Damadian, M.D. MR Scanning Centers Management Company ("RVDC"), a
company owned by FONAR's principal stockholder, President and Chairman of the
Board, Raymond V. Damadian. The business of RVDC, which is being continued by
HMCA, was the management of MRI diagnostic imaging centers in New York, Florida,
Georgia and other locations. The third acquisition was the acquisition of the
business and assets of Central Health Management Co., LLC ("Central Health") a
multi-specialty management service organization (MSO) in Yonkers, New York. The
fourth acquisition was the acquisition of A & A Services, Inc. ("A & A"), an MSO
managing four primary care practices in Queens County, New York, and the fifth
acquisition was the acquisition of Dynamic Health Care Management, Inc.
("Dynamic"), an MSO managing three multi-specialty physician practices in Nassau
and Suffolk Counties in New York.
In addition, HMCA sponsored the opening of two new multi-specialty
facilities during fiscal 1998. These facilities are located in Albany County,
New York and in Melbourne, Florida.
HMCA did not actively engage in business until after June 30, 1997, which
was the effective date of its acquisitions of the Affordable Companies and RVDC.
As separate businesses, the Affordable Companies had been engaged in business
since 1994 and RVDC had been engaged in business since 1990. For financial
statement presentation the results of operations, assets and liabilities of the
Company and RVDC have been consolidated for prior periods. The Affordable
Companies, Central Health and A & A, have been consolidated effective as of the
dates of their respective acquisitions. The acquisition of Dynamic was
consummated on August 20, 1998, following the end of the 1998 fiscal year, and
consequently is not reflected in the financial statements for fiscal 1998.
The Company has assessed and continues to assess the impact of the Year
2000 Issue (Y2K) on its financial reporting systems and operations. The Year
2000 Issue is the result of computer programs being written using two digits
(rather than four) to define the applicable year. The Company is developing a
plan to meet this issue. The Company is reviewing all in-house computer based
systems. The MIS department is updating or replacing older systems that are not
Y2K compatible. The Company is also reviewing and has started to plan changes to
its existing customer base of MRI scanners. The Company expects that all
computer based systems will be Y2K compliant and in the final phase of testing
in the second quarter of 1999. Based on preliminary information, costs of
addressing these items are currently not expected to have a material adverse
impact on the Company's financial position.
RESULTS OF OPERATIONS. FISCAL 1998 COMPARED TO FISCAL 1997
In fiscal 1998, the Company experienced a net loss of $5.5 million on
revenues of $27.6 million as compared to net income of $56.1 million on revenues
of $17.6 million for fiscal 1997. As a result of HMCA's acquisitions, revenues
attributable to the Company's physician practice management services segment
(HMCA) increased dramatically, to $21.1 million in fiscal 1998 from $8.1 million
in fiscal 1997. Income of $2.7 million was recognized from the Company's
physician practice management services in fiscal 1998, as compared to a loss of
$71,769 in fiscal 1997. Revenues attributable to the Company's medical equipment
segment declined to $7.8 million in fiscal 1998 from $9.5 million, reflecting
lower sales volume in fiscal 1998. Results of operations for the medical
equipment segment improved, however, from a loss of $24.3 million in fiscal 1997
to a loss of $20.3 million in fiscal 1998. Other income of $8.7 million
(principally the net proceeds from the Company's patent enforcement lawsuits)
and interest income of $3.7 million were recognized by the Company in fiscal
1998 as compared to other income of $83.1 million (principally the net proceeds
from the Company's patent enforcement lawsuits) and interest income of $385,500
in fiscal 1997.
Costs of revenues and expenses increased from $42 million in fiscal 1997 to
$45.1 million in fiscal 1998, reflecting the expansion of the Company's
physician practice management services operations and an increase in research
and development in the medical equipment segment. Costs of revenue and expenses
for the Company's physician practice management services increased to $17.0
million in fiscal 1998 from $9.1 million in fiscal 1997. Research and
development expenses increased to $6.5 million in fiscal 1998 as compared to
$3.9 million in fiscal 1997.
Overall, costs of revenues and expenses for the Company's medical equipment
segment, however, declined to $28.1 million in fiscal 1998 from $34.4 million in
fiscal 1997 reflecting, most significantly, reductions in general and
administrative expenses ($7.3 million in fiscal 1998 as compared to $11.8
million in fiscal 1997) and costs of revenue ($11.6 million in fiscal 1998 as
compared to $12.3 million in fiscal 1997).
Net income for the Company for fiscal 1997 reflects the net income
attributable to the award received by the Company in its patent litigation.
Revenues generated by sales of QUAD MRI scanners were $1.4 million (10% of
total revenues) in fiscal 1996, $4.8 million (approximately 27% of total
revenues) in fiscal 1997 and $4.1 million (15% of total revenues) in fiscal
1998. Revenues attributable to sales of the Company's Ultimate scanners during
the same period were $94,000 (approximately 1% of total revenues) in fiscal 1996
and $0.00 in fiscal 1997 and fiscal 1998.
Sales of Beta scanners approximated $4.7 million in fiscal 1996
(approximately 35.9% of total revenues) as compared to $0.00 in fiscal 1997 and
1998. Of these revenues approximately 94.5% were attributable to sales to
affiliates in fiscal 1996.
Sales to affiliated parties represented approximately 0.3% ($0.1 million)
of the Company's revenues in fiscal 1998, as compared to approximately 4% ($0.7
million) in fiscal 1997 and 54.4% ($7.1 million) in fiscal 1996.
Gross profit margins on product sales to unrelated parties were negative
(133%) in fiscal 1996, negative (60%) in fiscal 1997 and negative (98%) in
fiscal 1998. This reflects the losses on sales of the Company's QUAD scanners.
The Company's strategy is to attempt to hold down the price of its QUAD scanners
and to increase profitability by reducing manufacturing costs and increasing
volume. The effectiveness of this strategy will not be discernible until higher
sales volume for the Company's QUAD scanners is achieved.
To reduce the cost of manufacturing its QUAD scanners, the Company expanded
its manufacturing capacity in fiscal 1998 by acquiring approximately $1.4
million worth of new capital equipment. In addition, the Company expanded its
operating capacity by hiring additional personnel.
Notwithstanding the Company's increased manufacturing activities, revenues
attributable to the Company's medical equipment segment declined to
approximately $7.8 million in fiscal 1998 from approximately $9.5 million in
fiscal 1997, but were the same as the revenues of $7.8 million in fiscal 1996.
The Company has not yet been able to achieve the sales volumes from its new QUAD
scanners necessary to become profitable because of intense competition and the
challenges of introducing a new product. These trends reflect a decline in
service revenue from $3.9 million in fiscal 1996 to $2.7 million in fiscal 1997
and $2.5 million in fiscal 1998 and a decrease in product sales in fiscal 1998
($4.0 million) from fiscal 1997 ($5.2 million), but an increase in product sales
from fiscal 1996 ($2.1 million). The decline in service revenue reflects the
retirement of old scanners by the Company's customers. The Company does not
expect the decline in revenue to continue. The Company is enthusiastic about the
future of its FONAR 360 product line (See Works in Progress) which will bring a
new plateau of "openness" to diagnostic MRI and a new frontier in surgery for
performing surgical treatments using MRI images to guide surgery.
Continuing its tradition as the originator of MRI, the Company remained
committed to maintaining its position as the leading innovator of the industry
through aggressive investing in research and development. In fiscal 1998 the
Company continued its investment in the development of its new MRI scanners,
together with software and upgrades, with an investment of $6,506,995 in
research and development (none of which was capitalized) as compared to
$3,928,035 ($108,809 of which was capitalized) in fiscal 1997. The research and
development expenditure was approximately 80.8% of revenues attributable to the
Company's medical equipment segment (and 22.9% of total revenues) in 1998 and
$41.2% of medical equipment segment revenues in 1997 (and 22.3% of total
revenues).
The Company has continued its efforts to increase scanner sales in foreign
countries as well as domestically. Based on sales to date, further indications
of interest, meetings, sales trips abroad and negotiations, the Company is
optimistic that foreign sales will continue to prove a significant source of
revenue.
The Company continued to benefit as a result of programs set in motion in
fiscal 1989; namely strict cost containment initiatives and expanding the
corporate business into a greater number of profitable enterprises within and
related to the MRI and medical industries (e.g., physician practice management,
customer service, upgrades). As a result of this expansion, the percentage of
the Company's revenue derived from sources other than scanner sales was
approximately 85.7% for fiscal 1998 and 70.64% for fiscal 1997.
During the fiscal year ended June 30, 1998, the Company realized income of
approximately $8.7 million from the settlement of various legal disputes
(essentially its patent infringement actions) as compared to approximately $83.1
million in fiscal 1997.
FISCAL 1997 COMPARED TO FISCAL 1996
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
the Company's physician practice management services segment were $8.1 million
and ($1.1 million), respectively for fiscal 1997 and $6.2 million and ($3.4
million), respectively for fiscal 1996.
As the Company 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.
As at September 1, 1997, the Company's backlog of unfilled scanner orders
was approximately $6.4 million, as compared to $6.8 million at September 1,
1996.
In fiscal 1997 the Company invested $3,928,035 in research and development
($108,809 of which was capitalized) as compared to $3,607,703 in research and
development ($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.
During the fiscal year ended June 30, 1997, the Company realized income of
approximately $83.1 million from the settlement of various legal disputes
(essentially its patent infringement actions) as compared to $4.0 million in
fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company's liquidity and capital resources positions
changed from the June 30, 1997 position as follows:
June 30, June 30,
1998 1997 Change
____________ ____________ __________
Working capital
(deficiency) $54,426,483 $62,659,470 $(8,232,987)
The change in the Company's working capital position resulted primarily
from its investments in new equipment ($2.8 million), the cash portions of the
purchase prices for its acquisitions ($4.0 million) and its overall operating
losses, notwithstanding a decrease in its current liabilities ($22.1 million as
at June 30, 1998 as compared to $31 million as at June 30, 1997.
The increase in long-term debt from $1.8 million as at June 30, 1997 to
$13.7 million as at June 30, 1998 was attributable to notes issued in connection
with HMCA's acquisitions and new indebtedness for equipment and repayment of
existing debt.
As at June 30, 1998, the Company's past due obligations consisted of
approximately $1.1 million in past due taxes (various state taxes), and
approximately $100,000 in other past due indebtedness. The Company is seeking to
enter into payment plans with taxing authorities with respect to past due taxes
and to restructure its other past due indebtedness.
As of June 30, 1998, the Company had no unused credit facilities with banks
or financial institutions.
The Company's business plan currently includes an aggressive program for
manufacturing and selling its new line of QUAD scanners which are achieving
success in the marketplace. In addition the Company plans, through its
subsidiary, Health Management Corporation of America, to develop and expand its
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.
Advances and notes to affiliates and related parties decreased by
approximately $0.9 million from June 30, 1997 to June 30, 1998. As these are
long-term assets, they tend to reduce the Company's liquidity.
There were no past due receivables and lease payments from affiliates as at
June 30, 1998 and June 30, 1997.
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 1998 and 1997 approximated $3.6
million and $1.75 million, respectively, and substantially consisted of office
and production equipment.
The Company's business plan initiated in September 1989, had as its
objective the enhancement and stabilization of revenue streams through the
generation of additional income from its installed base of scanners and leasing
programs. In addition, the Company instituted strict cost containment programs.
While continuing to focus on new sources of income, the Company now has
commenced aggressive sales and manufacturing of its new generation of Open MRI
scanners, the QUAD scanners and is reemphasizing MRI Scanner sales. In addition,
the Company is enhancing its revenue by entering into the PPM (physician
practice management) business through its new subsidiary, HMCA.
Cost containment programs continue in force notwithstanding an increase in
costs and expenses resulting from increased manufacturing activity and marketing
of its MRI scanners. These programs, which include increasing the portion of
manufacturing conducted on the Company's premises, have enabled the Company to
achieve significantly lower manufacturing costs than would have otherwise been
experienced in the production of its QUAD scanners. This has enabled the Company
to pass on to customers a much needed reduction in the sales price of MRI
scanners.
The Company's plan calls for a continuing emphasis on providing its
customers with enhanced equipment service and maintenance capabilities and
delivering state-of-the-art, innovative and high quality equipment upgrades at
competitive prices. Fees for on-going service and maintenance from the Company's
installed base of scanners were $2.7 million for the year ended June 30, 1997
and $2.5 million for the year ended June 30, 1998 (transactions between the
Company and its subsidiaries are eliminated in the consolidation). The Company
will continue to aggressively develop and market upgrades and enhancements for
previously installed scanners.
The Company's working capital surplus as of June 30, 1998 approximates
$54.4 million, as compared to a working capital surplus of $62.7 million as of
June 30, 1997.
During fiscal 1998, cash provided by operating activities increased to
approximately $68 million from $(3.6) million in fiscal 1997 and cash used in
investing activities increased to approximately $27.1 million from approximately
$1.5 million in fiscal 1997. Cash used in financing activities increased to
approximately $5.6 million for fiscal 1998 from approximately $(7.1) million
provided by in fiscal 1997.
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.
STOCKHOLDER LITIGATION.
In June 1995, one of the Company's stockholders commenced an action in the
Delaware Court of Chancery against FONAR and its directors, alleging breaches of
fiduciary duties by the defendants for adopting the recapitalization plan
(Horace Rubenstein, Individually and on Behalf of All Others Similarly Situated
v. Raymond V. Damadian et al.) The action was brought derivatively, on behalf of
FONAR and as a class action on behalf of the public holders of FONAR's Common
Stock. FONAR and its directors answered the complaint and vigorously denied any
wrongdoing or liability.
The parties reached a settlement agreement, which was approved by the Court
of Chancery on April 29, 1997. As approved by the Court, the settlement
increased the dividends payable on the Company's Common Stock and Class A
Non-voting Preferred Stock from the proceeds of its patent litigation.
The three percent (3%) dividend originally payable on the Common Stock of
any awards collected by the Company on its Cancer Detection Patent (U.S. Patent
No. 3,789,832) was increased to 3 1/4% of the first $10 million collected, 4
1/2% of the next $20 million collected and 5 1/2% of any additional amounts
collected of any such cash award. The 3% dividend originally payable on the
Class A Non-voting Preferred Stock of any awards on the other four patents
asserted in the litigation against General Electric Company and Hitachi Ltd.,
including the Company's Multi-Angle Oblique Imaging Patent, was similarly
increased and extended to any patent litigation seeking to enforce those patents
commenced prior to November 29, 1997. In addition, the Company 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.
Subsequently, on December 17, 1997, the parties agreed to modification of
the settlement agreement, which was approved by the Court of Chancery on March
2, 1998. The modification provided that the Company issue 2,231,689.3 shares of
FONAR Common Stock in substitution for the Warrants which would have been issued
under the original terms of the settlement agreement. In addition, the
modification provides for a schedule to pay the special dividends on the
Company's Common Stock and Class A Non-voting Preferred Stock with respect to
awards and settlements already received by the Company in connection with its
patent litigations. These first installments (comprising one-half of the total)
was paid in May 1998 and the second installment (comprising one-sixth of the
total) was paid in September 1998. The remaining two installments (each
comprising one-sixth of the total) are required to be paid as follows: one prior
to December 31, 1998 and one prior to March 31, 1999.
<PAGE>
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to equity price risks on the marketable equity
securities included in its portfolio of investments. As at June 30, 1998, equity
securities and mutual funds composed of equity securities had a fair value of
$10,994,776.
The Company's investments in equity securities consist of common stock
traded in the major United States security markets. Approximately 97% of the
Company's investment in equity securities is composed of United States based
companies. The Company's portfolio of common stock is not concentrated in any
particular industry. Common stock prices are sensitive to changes in interest
rates and economic changes. The Company anticipates the future fair value of its
investment in common stock will closely follow the movement of the major United
States security markets.
The Company also invests in fixed rate instruments. None of the fixed rate
instruments in which the Company invests extend beyond June 30, 2000. Below is a
tabular presentation of the maturity profile of the fixed rate instruments held
by the Company at June 30, 1998.
INTEREST RATE SENSITIVITY
PRINCIPAL AMOUNT BY EXPECTED MATURITY
WEIGHTED AVERAGE INTEREST RATE
6/30/99 6/30/00 Total Fair Value
at 6/30/98
Investments in
Fixed Rate
Instruments $5,652,277 $3,750,000 $9,402,277 $9,257,055
Weighted Average
Interest Rate 5.4% 5.7%
All of the Company's revenue, expense and capital purchasing activities are
transacted in United States dollars.
See Note 12 to the Company's Financial Statements for information on long
term debt.
<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 to F-5
At June 30, 1998 AND 1997
CONSOLIDATED STATEMENTS OF OPERATIONS F-6
For the Three Years Ended June 30, 1998, 1997 and 1996
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY F-7 to F-12
For the Three Years Ended June 30, 1998, 1997 and 1996
CONSOLIDATED STATEMENTS OF CASH FLOWS F-13; F-14
For the Three Years Ended June 30, 1998, 1997 and 1996
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-15 to F-58
SELECTED FINANCIAL DATA (*)
For the Five Years Ended June 30, 1998
(*) 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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the consolidated
results of their operations and cash flows for each of the years in the
three-year period ended June 30, 1998, in conformity with generally accepted
accounting principles.
During each of the years in the three-year period ended June 30, 1998, a
significant portion of the Company's revenues was from related parties (see
Notes 2, 3 and 19).
TABB, CONIGLIARO & McGANN, P.C.
s/s TABB, CONIGLIARO & McGANN, P.C.
New York, New York
September 25, 1998
F-2
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
------
June 30,
------------------------------
1998 1997
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 41,751,704 $ 5,861,500
Marketable securities 20,251,832 -
Receivable from litigation award (received
July 1997) - 77,223,460
Accounts receivable, net 9,877,347 6,000,063
Costs and estimated earnings in excess of
billings on uncompleted contracts 833,615 818,865
Inventories 3,513,622 3,440,509
Prepaid expenses and other current assets 285,965 409,673
------------ ------------
TOTAL CURRENT ASSETS 76,514,085 93,754,070
RESTRICTED CASH 5,000,000 -
PROPERTY AND EQUIPMENT - Net 9,102,239 6,068,675
ADVANCES AND NOTES TO RELATED PARTIES, Net of
discounts and allowance for doubtful
accounts of $904,000 and $3,750,000 at
June 30, 1998 and 1997, respectively 1,350,114 1,928,625
LONG-TERM ACCOUNTS RECEIVABLE, Net of allowance
for doubtful accounts of $2,490,018 at June
30, 1997 - 253,534
NOTES RECEIVABLE, Net of allowance for doubtful
accounts of $477,456 and $865,964 at June 30,
1998 and 1997, respectively 65,751 107,384
EXCESS OF COST OVER NET ASSETS OF BUSINESSES
ACQUIRED, NET 14,745,555 2,796,197
OTHER INTANGIBLE ASSETS, Net 1,161,601 1,544,471
OTHER ASSETS 508,435 237,605
------------ ------------
TOTAL ASSETS $108,447,780 $106,690,561
============ ============
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
-------------------------------------
June 30,
--------------------------
1998 1997
------------ ------------
CURRENT LIABILITIES
Current portion of debt and capital leases $ 2,443,326 $ 2,802,508
Accounts payable 2,029,552 2,837,421
Other current liabilities 11,256,159 13,470,373
Dividends payable 3,909,366 7,855,067
Customer advances 669,731 764,402
Billings in excess of costs and estimated
earnings on uncompleted contracts 31,032 192,932
Income taxes payable 954,642 100,000
Deferred income taxes 793,794 3,071,897
------------ ------------
TOTAL CURRENT LIABILITIES 22,087,602 31,094,600
------------ ------------
DEFERRED INCOME TAXES - NON-CURRENT - 221,897
LONG-TERM DEBT AND CAPITAL LEASES, Less
current maturities 13,560,153 1,823,761
OTHER LIABILITIES 113,663 100,941
------------ ------------
13,673,816 2,146,599
------------ ------------
MINORITY INTEREST 113,876 204,100
------------ ------------
COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Notes 1,
2, 3, 10, 11, 12, 15, 18 and 22)
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
(Continued)
June 30,
------------------------------
1998 1997
------------ -----------
STOCKHOLDERS' EQUITY
Common stock - $.0001 par value;
issued and outstanding - 52,954,465 shares
and 49,133,422 shares at June 30, 1998 and
1997, respectively $ 5,294 $ 4,913
Class B common stock (10 votes per
share) - $.0001 par value; issued
and outstanding - 5,411 shares at
June 30, 1998 and 1997 - -
Class C common stock (25 votes per share) -
$.0001 par value; 9,562,824 issued and
outstanding at June 30, 1998 and 1997 956 956
Class A non-voting preferred stock -
$.0001 par value; issued and outstanding -
7,836,286 and 7,855,627 shares at June 30,
1998 and 1997, respectively 784 785
Preferred stock - $.001 par value; issued and
outstanding - none - -
Paid-in capital in excess of par value 94,502,717 90,640,637
Accumulated other comprehensive income (42,296) -
Accumulated deficit (19,645,074) (13,991,988)
Notes receivable from stockholders (1,854,450) (1,918,596)
Unearned compensation - (1,096,000)
Treasury stock - 108,864 shares of common
stock at June 30, 1998 and 1997 (395,445) (395,445)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 72,572,486 73,245,262
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $108,447,780 $106,690,561
============ ============
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended June 30,
1998 1997 1996
----------- ----------- ------------
REVENUES
<S> <C> <C> <C>
Product sales - net $ 3,937,726 $ 5,177,346 $ 2,060,888
Service and repair fees - net 2,520,637 2,686,048 3,927,383
Management and other fees -
related parties - net 21,095,994 9,769,672 7,927,454
----------- ----------- ------------
TOTAL REVENUES - Net 27,554,357 17,633,066 13,915,725
----------- ----------- ------------
COSTS AND EXPENSES
Costs related to product sales 7,800,569 8,277,945 4,818,952
Costs related to service and
repair fees 2,373,808 2,202,120 2,451,708
Costs related to management and
other fees - related parties 13,667,467 7,948,509 7,146,724
Research and development 6,506,995 3,928,035 3,607,703
Selling and marketing 2,325,479 2,369,652 2,069,045
General and administrative 10,164,060 13,273,396 7,517,538
Provision for bad debts 929,786 3,608,062 1,226,014
Compensatory element of stock
issuances 1,108,362 407,052 355,327
Amortization of excess of cost
over net assets of business
acquired 272,224 - -
----------- ----------- ------------
TOTAL COSTS AND EXPENSES 45,148,750 42,014,771 29,193,011
----------- ----------- ------------
LOSS FROM OPERATIONS (17,594,393) (24,381,705) (15,277,286)
Interest expense (728,327) (311,900) (609,071)
Investment income 3,708,938 385,500 310,489
Other income, principally gain on
litigation awards 8,610,035 83,099,685 4,007,576
----------- ----------- ------------
(LOSS) INCOME BEFORE PROVISION
FOR TAXES AND MINORITY INTEREST (6,003,747) 58,791,580 (11,568,292)
Provision (credit) for income
taxes (497,551) 2,950,000 19,965
----------- ----------- ------------
(LOSS) INCOME BEFORE MINORITY
INTEREST (5,506,196) 55,841,580 (11,588,257)
Less: Minority interest in net income
(loss) of subsidiary and
partnerships 146,890 (227,191) (180,813)
----------- ----------- ------------
NET (LOSS) INCOME $(5,653,086) $56,068,771 $(11,407,444)
=========== =========== ============
NET (LOSS) INCOME PER SHARE $(.09) $1.00 $(0.22)
===== ===== ======
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 61,175,986 56,097,965 51,516,470
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
Class A
Non- Paid-in Notes
Per Class A Common Stock Class C Voting Capital in Treasury Receivable
Share -------------------- Common Preferred Excess of Stock from
Amount Shares Amount Stock Stock Par Value Amount Stockholders
------ ---------- -------- -------- --------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - June 30, 1997 $ - 49,133,422 $ 4,913 $ 956 $ 785 $90,640,637 $(395,445) $(1,918,596)
Net loss - - - - - - - -
Other comprehensive income, net of tax:
Unrealized gains on
securities, net
of tax - - - - - - - -
Stock issued to employees
under 1995 stock
bonus plan 2.96 400,430 40 - - 1,184,838 - -
Shares issued under 1993
incentive stock option
plan 3.00 153,170 15 - - 459,495 - -
Issuance of stock under
1986 incentive
option plan .37 3,125 1 - - 1,171 - -
Issuance of stock in
settlement of
liabilities 2.75 236,345 23 - - 650,641 - -
Shares issued under 1997
non-statutory plan - 2,600 1 - - 19,836 - -
Issuance of stock under
consulting contracts 2.79 223,030 22 - - 622,754 - -
Additional consideration
related to acquisition
of Affordable
Diagnostics, Inc. 1.60 576,000 57 - - 923,385 - -
Issuance of stock in
substitution for
4,909,767 warrants - 2,226,343 222 - - (40) - -
Net change in notes
receivable from
stockholders - - - - - - - 64,146
Amortization of unearned
compensation - - - - - - - -
Class A preferred stock
retired - - - - (1) - - -
---------- ---------- -------- -------- --------- ----------- --------- -----------
BALANCE - JUNE 30, 1998 - 52,954,465 $ 5,294 $ 956 $ 784 $94,502,717 $(395,445) $(1,854,450)
========== ========== ======== ======== ========= =========== ========= ===========
</TABLE>
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, 1998
<TABLE>
<CAPTION>
Accumulated
Other Total
Unearned Comprehensive Accumulated Comprehensive
Compensation Income Deficit Total Income
------------ ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance - June 30, 1997 $(1,096,000) $ - $(13,991,988) $73,245,262 $ -
Net loss - - (5,653,086) (5,653,086) (5,653,086)
Other comprehensive income,
net of tax:
Unrealized gains on
securities, net
of tax - (42,296) - (42,296) (42,296)
Stock issued to employees
under 1995 stock
bonus plan - - - 1,184,878 -
Shares issued under 1993
incentive stock option
plan - - - 459,510 -
Issuance of stock under
1986 incentive
option plan - - - 1,172 -
Issuance of stock in
settlement of
liabilities - - - 650,664 -
Shares issued under 1997
non-statutory plan - - - 19,837 -
Issuance of stock under
consulting contracts - - - 622,776 -
Additional consideration
related to acquisition
of Affordable
Diagnostics, Inc. - - - 923,442 -
Issuance of stock in
substitution for
4,909,767 warrants - - - 182 -
Net change in notes
receivable from
stockholders - - - 64,146 -
Amortization of unearned
compensation 1,096,000 - - 1,096,000 -
Class A preferred stock
retired - - - (1) -
------------ ------------- ------------ ----------- -----------
BALANCE - JUNE 30, 1998 $ - $ (42,296) $(19,645,074) $72,572,486 $(5,695,382)
============ ============= ============ =========== ===========
</TABLE>
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, 1997
<TABLE>
<CAPTION>
Class A
Class A Class B Class C Non-Voting
Common Stock Common Stock Common Stock Preferred Stock
Per Share ------------------- --------------- -------------------- -----------------
Amount Shares Amount Shares Amount Shares Amount Shares Amount
---------- ---------- ------- ------ ------- --------- -------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - June 30, 1996 $ - 42,871,751 $ 4,287 5,411 $ - 9,562,824 $ 956 7,855,627 $ 785
Shares issued as follows:
Stock bonus to employees (measured
at the average quoted market price
on the award dates) 2.56 159,025 16 - - - - - -
Under incentive stock option plan 2.09 259,375 26 - - - - - -
Shares issued under non-statutory plans 2.46 2,100,000 210 - - - - - -
Issuance of stock in settlement of
liabilities 2.49 579,271 58 - - - - - -
Issuance of stock under stock bonus
plans 2.38 1,000,000 100 - - - - - -
Issuance of stock under consulting
contracts 2.74 400,000 40 - - - - - -
Issuance of stock for acquisition of
Affordable Diagnostics, Inc. 2.06 1,764,000 176 - - - - - -
Net change in notes receivable from
stockholders - - - - - - - - -
Dividend - common stock .05 - - - - - - - -
Dividend - Class A preferred stock .65 - - - - - - - -
Net income - - - - - - - -
---------- ------- ----- -------- --------- -------- --------- ------
BALANCE - JUNE 30, 1997 49,133,422 $ 4,913 5,411 $ - 9,562,824 $ 956 7,855,627 $ 785
========== ======= ===== ======== ========= ======== ========= ======
</TABLE>
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, 1997
<TABLE>
<CAPTION>
Paid-in Notes
Capital in Treasury Stock Receivable
Excess of ------------------- from Unearned Accumulated
Par Value Shares Amount Stockholders Compensation Deficit
----------- -------- ---------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance - June 30, 1996 $75,985,245 108,864 $(395,445) $(1,760,281) $ - $ (62,422,918)
Shares issued as follows:
Stock bonus to employees (measured
at the average quoted market price
on the award dates) 407,036 - - - - -
Under incentive stock option plan 543,334 - - - - -
Shares issued under non-statutory plans 5,159,166 - - - - -
Issuance of stock in settlement of
liabilities 1,444,464 - - - - -
Issuance of stock under stock bonus
plans 2,375,296 - - - - -
Issuance of stock under consulting
contracts 1,095,960 - - - (1,096,000) -
Issuance of stock for acquisition of
Affordable Diagnostics, Inc. 3,630,136 - - - - -
Net change in notes receivable from
stockholders - - - (158,315) - -
Dividend - common stock - - - - - (2,551,146)
Dividend - Class A preferred stock - - - - - (5,086,695)
Net income - - - - - 56,068,771
----------- ------- --------- ----------- ----------- ------------
BALANCE - JUNE 30, 1997 $90,640,637 108,864 $(395,445) $(1,918,596) $(1,096,000) $(13,991,988)
=========== ======= ========= =========== =========== ============
</TABLE>
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
<TABLE>
<CAPTION>
Class A
Class A Class B Class C Non-Voting
Per Common Stock Common Stock Common Stock Preferred Stock
Share -------------------- -------------------- --------------------- ----------------------
Amount Shares Amount Shares Amount Shares Amount Shares Amount
------ ---------- -------- ---------- -------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - June 30, 1995 $ - 38,229,448 $ 3,822 3,193,456 $ 319 - $ - 7,624,117 $ 762
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 settlement
of liabilities 2.73 802,400 80 - - - - - -
Issuance of stock 2.08 500,000 50 - - - - - -
Conversion from Class B
to Class A - - - (3,187,608) (318) 9,562,824 956 - -
Conversion from Class B
to Class A liabilities - 437 1 (437) (1) - - - -
Net change in notes receivable
from stockholders - - - - - - - - -
Stock dividend adjustment -
Class A non-voting preferred - - - - - - - 231,510 23
Dividend - Class A preferred
stock .03 - - - - - - - -
Net loss - - - - - - - -
---------- -------- ---------- -------- --------- --------- --------- ----------
BALANCE - JUNE 30, 1996 42,871,751 $ 4,287 5,411 $ - 9,562,824 $ 956 7,855,627 $ 785
========== ======== ========== ======== ========= ========= ========= ==========
</TABLE>
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, 1996
<TABLE>
<CAPTION>
Paid-in Notes
Capital in Treasury Stock Receivable
Excess of ---------------------- from Accumulated
Par Value Shares Amount Stockholders Deficit
----------- ---------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Balance - June 30, 1995 $63,779,202 108,864 $ (395,445) $(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) 420,187 - - - -
Under incentive stock
option plan 218,780 - - - -
Shares issued under
non-statutory plans 8,337,190 - - - -
Issuance of stock in settlement
of liabilities 2,190,892 - - - -
Issuance of stock 1,039,655 - - - -
Conversion from Class B
to Class A (638) - - - -
Conversion from Class B
to Class A liabilities - - - - -
Net change in notes receivable
from stockholders - - - 136,766 -
Stock dividend adjustment -
Class A non-voting preferred (23) - - - -
Dividend - Class A preferred
stock - - - - (217,226)
Net loss - - - - (11,407,444)
----------- ---------- ---------- ----------- ------------
BALANCE - JUNE 30, 1996 $75,985,245 108,864 $ (395,445) $(1,760,281) $(62,422,918)
=========== ========== ========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-12
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended June 30,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income (loss) ................... $ (5,653,086) $ 56,068,771 $(11,407,444)
Adjustments to reconcile net income
(loss) to net cash (used in)
provided by operating activities:
Minority interest in subsidiary
and partnerships ............... (90,224) (227,191) (180,813)
Depreciation and amortization .... 2,917,603 2,023,465 2,636,556
Writedown of assets held for
resale ......................... -- -- 148,062
Imputed interest on deferred
payment obligation ............. 27,000 -- --
Provision for bad debts .......... 929,786 3,608,027 1,226,014
Compensatory element of stock
issuances ...................... 1,108,362 407,052 355,327
Stock issued in settlement of
current liabilities ............ 639,715 1,444,522 1,257,909
Writedown of deferred patent
litigation costs ............... -- 2,366,200 --
Provision for income taxes ....... (497,551) 2,850,000 --
(Increase) decrease in operating
assets, net:
Receivable from litigation
award ....................... 77,223,460 (77,223,460) --
Accounts and notes receivable (3,911,903) (891,793) 297,973
Costs and estimated earnings
in excess of billings on
uncompleted contracts ....... (814,750) (482,410) 12,537
Inventories ................... (73,113) 638,735 (916,898)
Prepaid expenses and other
current assets .............. 123,708 515,504 (207,608)
Other assets .................. (270,830) (33,687) (12,049)
Receivables and advances to
related parties ............. 578,511 681,232 (132,117)
Increase (decrease) in operating liabilities, net:
Accounts payable ........... (175,483) (320,501) 84,588
Other current liabilities .. (1,998,835) 5,114,858 (1,361,848)
Customer advances .......... (94,671) (169,202) 640,117
Billings in excess of
costs and estimated
earnings on uncompleted
contracts ................. (161,900) 22,924 158,906
Other liabilities .......... 12,722 (39,982) (39,998)
Deferred taxes payable ..... (1,200,000) -- --
------------ ------------ ------------
NET CASH PROVIDED BY (USED
IN) OPERATING ACTIVITIES .. 68,618,521 (3,646,936) (7,440,786)
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements
F-13
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended June 30,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
<S> <C> <C> <C>
Investment in marketable securities .. $(20,294,129) $ -- $ --
Acquisitions, net of cash acquired.... (4,025,000) -- --
Purchases of property and equipment,
net of capital lease obligations of
$1,391,304, $227,665 and $965,442
for the years ended June 30, 1998, 1997
and 1996, respectively................ (2,785,795) (1,256,203) (186,188)
Cost of capitalized software
development......................... -- (108,809) (505,990)
Cost of patents and copyright......... (19,114) (162,297) (103,579)
------------ ------------ ------------
NET CASH USED IN INVESTING
ACTIVITIES ..................... (27,124,038) (1,527,309) (795,757)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank borrowings,
net of capital lease obligations ... 5,000,000 -- --
Restricted cash for collateral of
bank loan .......................... (5,000,000) -- --
Repayment of borrowings and capital
lease obligations .................. (2,260,424) (745,245) (1,034,927)
Proceeds from exercise of stock
options and warrants ............... 1,353 3,516 5,859
Repayments of notes receivable in
connection with shares issued
under stock option and bonus plans . 600,493 7,916,307 9,726,900
Dividends paid ....................... (3,945,701) -- --
------------ ------------ ------------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES ........... (5,604,279) 7,174,578 8,697,832
------------ ------------ ------------
INCREASE IN CASH ....................... 35,890,204 2,000,333 461,289
CASH - BEGINNING OF YEAR ............... 5,861,500 3,861,167 3,399,878
------------ ------------ ------------
CASH - END OF YEAR ..................... $ 41,751,704 $ 5,861,500 $ 3,861,167
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-14
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 1 - DESCRIPTION OF BUSINESS
FONAR Corporation (the "Company" or "FONAR") is a Delaware
corporation which was incorporated on July 17, 1978. FONAR is
engaged in the research, development, production and marketing of
medical scanning equipment which uses principles of Magnetic
Resonance Imaging ("MRI") for the detection and diagnosis of
human diseases. In addition to deriving revenues from the direct
sale of MRI equipment, revenue is also generated from its
installed base of customers through its service and upgrade
programs.
Health Management Corporation of America ("HMCA") was organized
by the Company in March 1997 as a wholly-owned subsidiary in
order to enable the Company to expand into the business of
providing comprehensive management services to medical providers,
sometimes referred to as "Physician Practice Management" or
("PPM"), including diagnostic imaging centers and ancillary
services. The services to be provided by the Company include
development, administration, leasing of office space, facilities
and medical equipment, provision of supplies, staffing and
supervision of non-medical personnel, legal services, accounting,
billing and collection and the development and implementation of
practice growth and marketing strategies.
HMCA entered the PPM business through the consummation of two
acquisitions, effective June 30, 1997, and two acquisitions which
were consummated during fiscal 1998. The acquired companies in
all cases were actively engaged in the business of managing
medical providers. The medical providers are diagnostic imaging
centers, principally MRI scanning centers, multi-specialty
practices and primary care practices.
F-15
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of
FONAR Corporation, its majority and wholly-owned subsidiaries/
partnerships and its proportionate share in the accounts of all
joint ventures. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates
----------------
The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities in the consolidated financial
statements and accompanying notes. The most significant estimates
relate to contractual and other allowances, income taxes,
contingencies and the useful lives of equipment. In addition,
healthcare industry reforms and reimbursement practices will
continue to impact the Company's operations and the determination
of contractual and other allowance estimates. Actual results
could differ from those estimates.
Investment in Marketable Securities
-----------------------------------
The Company accounts for its investments using Statement of
Financial Accounting Standards No. 115, "Accounting for Certain
Investments in debt and Equity Securities" ("SFAS No. 115"). This
standard requires that certain debt and equity securities be
adjusted to market value at the end of each accounting period.
Unrealized market value gains and losses are charged to earnings
if the securities are traded for short-term profit. Otherwise,
such unrealized gains and losses are charged or credited to
comprehensive income.
Management determines the proper classifications of investments
in obligations with fixed maturities and marketable equity
securities at the time of purchase and reevaluates such
designations as of each balance sheet date. At June 30, 1998, all
securities covered by SFAS No. 115 were designated as available
for sale. Accordingly, these securities are stated at fair value,
with unrealized gains and losses reported in comprehensive
income. Realized gains and losses on sales of investments, as
determined on a specific identification basis, are included in
the Consolidated Statement of Operations.
F-16
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Investments in Joint Ventures and Limited Partnerships
------------------------------------------------------
The minority interests in the equity of consolidated joint
ventures and limited partnerships, which are not material, are
reflected in the accompanying consolidated financial statements.
Investments by the Company in joint ventures and limited
partnerships over which the Company can exercise significant
influence but does not control are accounted for using the equity
method.
The Company suspends recognition of its share of joint ventures
losses in entities in which it holds a minority interest when its
investment is reduced to zero. The Company does not provide for
additional losses unless, as a partner or joint venturer, the
Company has guaranteed obligations of the joint venture or
limited partnership.
Property and Equipment
----------------------
Property and equipment procured in the normal course of business
is stated at cost. Property and equipment purchased in connection
with an acquisition is stated at its estimated fair value,
generally based on an appraisal. Property and equipment is being
depreciated for financial accounting purposes using the
straight-line method over the shorter of their estimated useful
lives, generally five to seven years, or the term of a capital
lease, if applicable. Leasehold improvements are being amortized
over the shorter of the useful life or the remaining lease term.
Upon retirement or other disposition of these assets, the cost
and related accumulated depreciation of these assets, 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.
F-17
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Excess of Cost Over Net Assets of Businesses Acquired
-----------------------------------------------------
The excess of the purchase price over the fair market value of
net assets of businesses acquired is being amortized using the
straight-line method over 20 years.
Other Intangible Assets
-----------------------
1)Capitalized Software Development Costs
Certain software development costs incurred subsequent to the
establishment of the software's technological feasibility and
completion of the research and development on the product
hardware, in which it is to be used, are required to be
capitalized. Capitalization ceases when the product is available
for general release to customers, at which time amortization of
capitalized costs begins. Amortization is calculated on the
straight-line basis over 5 years.
2)Patents and Copyrights
Amortization is calculated on the straight-line basis over 17
years.
Long-Lived Assets
-----------------
The Company periodically assesses the recoverability of
long-lived assets, including property and equipment, intangibles
and excess of cost over net assets of businesses acquired, when
there are indications of potential impairment, based on estimates
of undiscounted future cash flows. The amount of impairment is
calculated by comparing anticipated discounted future cash flows
with the carrying value of the related asset. In performing this
analysis, management considers such factors as current results,
trends, and future prospects, in addition to other economic
factors.
Revenue Recognition
-------------------
Revenue on sales contracts for scanners is recognized under the
percentage-of-completion method. The Company manufactures its
scanners under specific contracts that provide for progress
payments. Production and installation take approximately six
months. The percentage of completion is determined by the ratio
of costs incurred to date on completed sub-assemblies to the
total estimated cost for each scanner.
F-18
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Contract costs include material, direct labor and overhead.
Provisions for estimated losses on uncompleted contracts, if any,
are made in the period in which such losses are determined. The
asset, "Costs and Estimated Earnings in Excess of Billings on
Uncompleted Contracts", represents revenues recognized in excess
of amounts billed. The liability, "Billings in Excess of Costs
and Estimated Earnings on Uncompleted Contracts", represents
billings in excess of revenues recognized.
Revenue on scanner service contracts are recognized on the
straight-line method over the related contract period, usually
one year.
Revenue from sales of other items are recognized upon shipment.
Revenue under management contracts is recognized based upon
contractual agreements for management services rendered by the
Company under various long-term agreements with related medical
providers (the "PC's"), commencing July 1, 1997. The PC's are
primarily owned by Raymond V. Damadian, M.D., President and
Chairman of the Board of FONAR. The Company's agreements with the
PC's stipulate fees for services rendered, are primarily
calculated on activity based efforts at pre-determined rates per
unit of activity. All fees are re-negotiable at the anniversary
of the agreements and each year thereafter.
Research and Development Costs
------------------------------
Research and development costs are charged to expense as
incurred. The costs of materials and equipment that are acquired
or constructed for research and development activities, and have
alternative future uses (either in research and development,
marketing or production), are classified as property and
equipment and depreciated over their estimated useful lives.
Certain software development costs are capitalized. See property
and equipment and intangible assets (capitalized software
development costs) sections of this note.
Advertising Costs
-----------------
Advertising costs are expensed as incurred.
Income Taxes
------------
Deferred tax liabilities and assets are determined based on the
difference between the financial statement carrying amounts and
tax bases of assets and liabilities using enacted tax rates in
effect in the years in which the differences are expected to
reverse.
Product Warranty
----------------
The Company provides currently for the estimated cost to repair
or replace products under warranty provisions in effect at the
time of installation (generally for one year).
F-19
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Customer Advances
-----------------
Cash advances and progress payments received on sales orders are
reflected as customer advances until such time as revenue
recognition begins.
Per Share Data
--------------
Net income (loss) per common and common equivalent share has been
computed based on the weighted average number of common shares
and common stock equivalents outstanding during the year. No
effect has been given to options outstanding under the Company's
Stock Option Plans as no material dilutive effect would result
from the exercise of these items.
During fiscal 1998, the Company retroactively adopted Statement
of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS No. 128"), which requires companies to present basic
earnings per share and diluted earnings per share. No adjustments
were required as a result of this adoption.
Cash and Cash Equivalents
-------------------------
The Company considers all short-term highly liquid investments
with a maturity of three months or less when purchased to be cash
or cash equivalents.
Restricted Cash
---------------
At June 30, 1998, $5,000,000 of cash was pledged as collateral on
an outstanding bank loan and was classified as restricted cash on
the balance sheet.
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
77%, 55% and 57% of revenues for the years ended June 30, 1998,
1997 and 1996, respectively.
At June 30, 1998, the Company had cash deposits approximately
$45,000,000 in excess of federally insured limits.
F-20
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Value of Financial Instruments
-----------------------------------
The financial statements include various estimated fair value
information at June 30, 1998, 1997 and 1996, as required by
Statement of Financial Accounting Standards 107, "Disclosures
about Fair Value of Financial Instruments". Such information,
which pertains to the Company's financial instruments, is based
on the requirements set forth in that Statement and does not
purport to represent the aggregate net fair value to the Company.
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments for which it is
practicable to estimate that value:
Cash and cash equivalents: The carrying amount approximates fair
value because of the short-term maturity of those instruments.
Accounts receivable and accounts payable: The carrying amounts
approximate fair value because of the short maturity of those
instruments.
Investment in sales-type leases and investments, advances and
notes to affiliates and related parties. The carrying amount
approximates fair value because the discounted present value of
the cash flow generated by the related parties approximates the
carrying value of the amounts due to the Company.
Long-term debt and loans payable: The carrying amounts of debt
and loans payable approximate fair value due to the length of the
maturities, the interest rates being tied to market indices
and/or due to the interest rates not being significantly
different from the current market rates available to the Company.
All of the Company's financial instruments are held for purposes
other than trading.
Stock-Based Compensation
------------------------
Effective for fiscal year 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation", which permits entities
to recognize as expense over the vesting period the fair value of
all stock-based awards on the date of grant. Alternatively, SFAS
No. 123 also allows entities to continue to apply the provisions
of APB Opinion No. 25 and provide proforma net income and
proforma earnings per share disclosures for employee stock option
grants made during the year ended June 30, 1998 and future years
as if the fair-value-based method defined in SFAS No. 123 had
been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the proforma
disclosure provisions of SFAS No. 123.
F-21
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accounting Changes
------------------
In November 1997, Statement of Financial Accounting Standard No.
130, "Reporting Comprehensive Income" ("SFAS No. 130"), was
issued which establishes standards for reporting and displaying
comprehensive income in a full set of financial statements. SFAS
No. 130 defines comprehensive income as changes in equity of a
business enterprise during the periods presented, except for
transactions resulting from investments by an owner and
distribution to an owner. SFAS No. 130 does not require a company
to present a statement of comprehensive income if no items are
present. The Company adopted SFAS No. 130 during fiscal 1998.
New Pronouncements
------------------
In March 1998, the AICPA issued SOP 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal
Use", which revises the accounting for software development costs
and will require the capitalization of certain costs. The Company
recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures. Software
failures due to processing errors potentially arising from
calculations using the Year 2000 date are a known risk. The
Company is addressing this risk to the availability and integrity
of financial systems and the reliability of operational systems.
The Company has established processes for evaluating and managing
the risks and costs associated with this problem. The computing
portfolio was identified and an initial assessment has been
completed. The cost of achieving Year 2000 compliance will not
have a material impact on the accompanying financial statements.
Reclassifications
-----------------
Certain prior year balances have been reclassified to conform
with the current year presentation.
NOTE 3 - ACQUISITIONS
Affordable Diagnostics, Inc.
----------------------------
On June 30, 1997, the Company's wholly-owned subsidiary
consummated the merger of the assets, liabilities and operations
of Affordable Diagnostics, Inc. ("Affordable"), a New York
corporation, which managed and operated three diagnostic imaging
centers and managed one multi-specialty practice in the Bronx and
Westchester, New York. The merger was consummated pursuant to a
Merger Agreement ("Agreement") effective June 30, 1997, by and
among HMCA's wholly-owned subsidiary, HMCM, Inc. ("HMCM").
Pursuant to the agreement, HMCM acquired all of the assets and
liabilities of Affordable through the issuance of 1,764,000
shares of the Company's Common Stock, valued at $3,630,312.
F-22
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
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 would be issued to the
sellers. During fiscal 1998, the earnings objectives were
achieved and, accordingly, 576,000 shares of common stock were
issued to the sellers. The value assigned to the additional
shares issued was $923,442 and has been 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, valued at $1,096,000, were issued pursuant to one
year consulting agreements with HMCM.
Acquisition of RVDC
-------------------
Effective June 30, 1997, FONAR's wholly-owned subsidiary, HMCA,
acquired Raymond V. Damadian, M.D. MR Scanning Centers Mangement
Company ("RVDC") and two affiliates, by purchasing all of the
issued and outstanding shares of RVDC from Dr. Damadian for
10,000 shares of the common stock of FONAR. The business of RVDC,
continued by HMCA was the management of MRI diagnostics imaging
centers in New York, Florida and Georgia.
The Company has accounted for the acquisition in a manner similar
to the pooling-of-interests method due to Dr. Damadian's control
over both the Company and RVDC. Accordingly, all financial data
for the period from July 1, 1995 have been restated to include
the results of RVDC.
Prior to June 30, 1997, the Company and RVDC, in the normal
course of business entered into certain transactions for the
purchase and sale of equipment and service contracts. These
intercompany transactions have been eliminated in the
accompanying financial statements.
Effective July 1, 1997, immediately following the effective date
of the acquisition of RVDC by HMCA, all previous management
arrangements between RVDC and the imaging centers were terminated
and new management agreements and/or scanner lease agreements
were entered into by the Centers and HMCA.
F-23
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 3 - ACQUISITIONS (Continued)
Summarized results of operations of the separate companies for
the years ended June 30 are as follows:
1997:
----
Company RVDC Adjustment Consolidated
----------- ----------- ----------- ------------
Net revenues $10,065,830 $ 8,094,286 $ (527,050) $ 17,633,066
=========== =========== =========== ============
Net income $29,838,520 $ 4,321,552 $21,908,699 $ 56,068,771
=========== =========== =========== ============
1996:
----
Company RVDC Adjustment Consolidated
----------- ----------- ----------- ------------
(As Previously (As Restated)
Reported)
Net revenues $13,130,003 $ 5,669,056 $(4,883,334) $ 13,915,725
=========== =========== =========== ============
Net income (loss)$(3,376,411) $(4,823,564) $(3,207,469) $(11,407,444)
=========== =========== =========== ============
Central Health Care Management Service, Inc.
-------------------------------------------
On January 23, 1998, a wholly-owned subsidiary of HMCA acquired
the business and assets of Central Health Care Management
Services, Inc., a management service organization "MSO" operating
in Westchester County, New York. The purchase price is to be
determined in the future based on a multiple of the net positive
cash flow from the acquired business over the succeeding
twelve-month period. The purchase price, when determined, is
payable 1/3 in cash or marketable securities, 1/3 in notes and
1/3 in shares of common stock of FONAR or HMCA. An advance of
$50,000 was remitted to the seller at the closing date. Based on
current financial data, the purchase price is expected to range
from $660,000 to $1,100,000. Included in accrued liabilities at
June 30, 1998 is $1,000,000 representing an estimate of the
additional purchase price. Based on this estimate, the excess of
the cost over the acquired net assets would approximate $850,000.
F-24
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 3 - ACQUISITIONS (Continued)
A&A Services, Inc.
------------------
On March 20, 1998, the Company's physician management subsidiary,
HMCA, consummated the acquisition of the common stock of A&A
Services, Inc. ("A&A"), a New York corporation, which manages
four primary care practices in Queens, New York.
Pursuant to the A&A agreements, HMCA acquired all of the common
stock of A&A for $4,000,000 in cash, a note payable for
$4,000,000 bearing interest at 6.0% per annum, payable in 16
equal quarterly installments of interest and principal,
commencing March of 1999, a note payable for $1,293,000, bearing
interest at 6.0% per annum, payable in 60 equal monthly
installments of principal and interest, commencing April 20,
1998, a deferred payment obligation face amount of $2,000,000 and
a contingent payment based on the acquired operations achieving
certain earnings objectives over the five-year period following
the acquisition date.
The promissory notes are collateralized by all of the assets of
the acquired operations and are guaranteed by FONAR.
The deferred payment obligation of $2,000,000 is convertible into
shares of HMCA's common stock upon the effectiveness of an
Initial Public Offering ("IPO") of HMCA's securities, provided
the IPO is completed by September 20, 2000. In the event an IPO
of HMC's securities is not completed by such date, the deferred
payment obligation of $2,000,000 is then payable over the
following four years with interest at 6.0% per annum. At such
time when the deferred payment obligation is converted into
shares of HMC's common stock, the holders of such shares will
then have certain price protection guarantees from FONAR for a
two-year period following such conversions.
The acquisition was accounted for as a purchase, under which the
purchase price was allocated to the acquired assets and assumed
liabilities based upon fair values at the date of the
acquisition. The excess of the purchase price over the fair value
of the net assets acquired amounted to approximately $10,448,000
and is being amortized on a straight-line basis over 20 years.
The accompanying consolidated financial statements include the
operations of A&A from the date of the acquisition.
Subject to the acquired business achieving certain earnings
objectives over the five-year period following the date of
acquisition, additional monies would be due to the sellers. The
contingent additional purchase price is not determinable as of
June 30, 1998 and, accordingly, has not been included in the
allocated purchase price in light of the contingent nature of the
arrangement. If the earnings objectives are ultimately achieved,
the additional purchase price will be recorded as additional
goodwill subject to amortization over the stated period.
F-25
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 4 - MARKETABLE SECURITIES
---------------------
The following is a summary of marketable securities at June
30, 1998:
Unrealized
Holdings Fair Market
Cost Gains (Loss) Value
----------- ----------- -----------
U.S. Government
Obligations $ 6,660,360 $ 274 $ 6,660,634
Corporate and government
agency bonds 2,595,960 462 2,596,422
Equity securities
including
mutual stock funds 11,037,808 (43,032) 10,994,776
----------- -------- -----------
$20,294,128 $(42,296) $20,251,832
=========== ======== ===========
NOTE 5 - ACCOUNTS RECEIVABLE, NET
------------------------
Accounts receivable, net is comprised of the following:
1998 1997
----------- ----------
Receivable from equipment
sales $ 1,930,204 $2,314,133
Receivables assigned from
related PC's 10,344,490 9,096,318
Less: Allowance for
doubtful accounts
and contractual
allowances (2,397,348) (5,410,388)
---------- ---------
$ 9,877,346 $6,000,063
=========== ==========
The Company's receivable assigned from the related PC's
substantially consists of fees outstanding under management
agreements and service contracts with related PC's. Payment of
the outstanding fees is based on collection by the PC's of fees
from third party medical reimbursement organizations, principally
insurance companies.
F-26
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 5 - ACCOUNTS RECEIVABLE, NET (Continued)
Approximately 14% and 13% of the PC's 1998 and 1997 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 6 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND CUSTOMER
ADVANCES
1)Information relating to uncompleted contracts as of June 30,
1998 and 1997 is as follows:
As of June 30,
------------------------
1998 1997
---------- ----------
Costs incurred on uncompleted
contracts $2,265,343 $2,360,010
Estimated earnings 560,898 429,673
---------- ----------
2,826,241 2,789,683
Less: Billings to date 2,023,658 2,163,750
---------- ----------
$ 802,583 $ 625,933
========== ==========
F-27
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 6 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND
CUSTOMER ADVANCES (Continued)
Included in the accompanying consolidated balance sheets under
the following captions:
As of June 30,
-----------------------------
1998 1997
---------- ---------
Costs and estimated
earnings in
excess of billings on
uncompleted contracts $ 833,615 $ 818,865
Billings in excess of
costs and estimated
earnings on
uncompleted contracts (31,032) (192,932)
--------- ---------
$ 802,583 $ 625,933
========= =========
2)Customer advances consist of the following:
As of June 30,
------------------------------
1998 1997
---------- ----------
Total advances from customers $2,693,389 $2,928,152
Less: Advances from customers
on contracts under
construction 2,023,658 2,163,750
---------- ----------
$ 669,731 $ 764,402
========== ==========
NOTE 7 - INVENTORIES
Inventories included in the accompanying consolidated balance
sheets consist of:
June 30,
-----------------------------
1998 1997
---------- ----------
Purchased parts,
components and
supplies $2,548,596 $2,534,028
Work-in-process 965,026 906,481
---------- ----------
$3,513,622 $3,440,509
========== ==========
F-28
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 8 - PROPERTY AND EQUIPMENT
Property and equipment, at cost, less accumulated depreciation
and amortization, at June 30, 1998 and 1997, is comprised of:
June 30,
-------------------------
1998 1997
---------- ----------
Equipment under construction $1,086,118 $ 315,000
Diagnostic equipment 6,560,772 6,215,739
Offsite research scanner 1,154,217 1,154,217
Research, development and
demonstration equipment 6,638,985 5,591,626
Machinery and equipment 4,784,164 3,880,488
Furniture and fixtures 2,987,930 1,872,166
Property under lease 2,616,890 2,117,711
Leasehold improvements 2,116,171 1,666,975
---------- ----------
27,945,247 22,813,922
Less: Accumulated depreciation
and amortization 18,843,008 16,745,247
---------- ----------
$9,102,239 $6,068,675
========== ==========
Depreciation and amortization of property and equipment for the
years ended June 30, 1998, 1997 and 1996 was $2,243,535,
$1,166,951 and $1,026,091, respectively.
The property under lease has a net book value of $1,736,775 and
$1,161,264 at June 30, 1998 and 1997, respectively.
NOTE 9 - OTHER INTANGIBLE ASSETS
Other intangible assets, net of accumulated amortization, at June
30, 1998 and 1997 are comprised of:
June 30,
-------------------------
1998 1997
---------- ----------
Capitalized software
development costs $1,359,618 $1,359,618
Patents and copyrights 1,125,237 1,106,123
---------- ----------
2,484,855 2,465,741
Less: Accumulated amortization 1,323,254 921,270
---------- ----------
$1,161,601 $1,544,471
========== ==========
F-29
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 9 - OTHER INTANGIBLE ASSETS (Continued)
Capitalized computer software costs are being amortized over 5
years. Patents costs are being amortized over 17 years.
Amortization of other intangible assets for the years ended June
30, 1998, 1997 and 1996 was $401,984, $820,514 and $1,231,093,
respectively.
NOTE 10 - SIGNIFICANT CUSTOMERS AND DISTRIBUTION AGREEMENTS
The Company's machine sale revenues for the three years ended
June 30, 1998 were derived as follows:
Customers
------------------------- Percent of
Foreign Foreign
Years Ended (Korea and Revenues to
June 30, Domestic Saudi Arabia) Total Total Revenues
----------- -------- ------------ ----- --------------
1998 9 2 11 5%
1997 7 3 10 4%
1996 9 5 14 17%
During the years ended June 30, 1998, 1997 and 1996, revenues
from related parties were 77%, 55% and 57%, respectively, of
total revenues. Not one unrelated customer accounted for more
than 10% of total revenues during fiscal years 1998, 1997 and
1996.
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-30
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 11 - 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, or approximately $.05 per share of common stock,
during fiscal 1997.
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, 1998.
F-31
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 11 - CAPITAL STOCK (Continued)
Class C Common Stock
--------------------
On April 3, 1995, the shareholders ratified a proposal creating a
new Class C common stock and authorized the exchange offering of
three shares of Class C common stock for each share of the
Company's outstanding Class B common stock. The Class C common
stock has 25 votes per share, as compared to 10 votes per share
for the Class B common stock and one vote per share for the
common stock. The Class C common stock was offered on a
three-for-one basis to the holders of the Class B common stock.
Although having greater voting power, each share of Class C
common stock has only one-third of the rights of a share of Class
B common stock to dividends and distributions. Class C common
stock is convertible into shares of common stock on a
three-for-one basis. During the year ended June 30, 1996,
approximately 3.2 million shares of Class B common stock were
converted to Class C common stock.
Class A Non-Voting Preferred Stock
----------------------------------
On April 3, 1995, the shareholders ratified a proposal consisting
of the creation of a new class of Class A non-voting preferred
stock with special dividend rights and the declaration of a stock
dividend on the Company's common stock consisting of one share of
Class A non-voting preferred stock for every five shares of
common stock. The stock dividend was payable to holders of common
stock on October 20, 1995. Class A non-voting preferred stock
issued pursuant to such stock dividend approximates 7.8 million
shares.
The Class A non-voting preferred stock is entitled to a special
dividend equal to 3-1/4% of first $10 million, 4-1/2% of next $20
million and 5-1/2% on amount in excess of $30 million of the
amount of any cash awards or settlements received by the Company
in connection with the enforcement of five of the Company's
patents in its patent lawsuits, discussed in Note 14, less the
revised special dividend payable on the common stock with respect
to one of the Company's patents. Pursuant to such dividend
entitlement, the Company recorded an obligation of $5,086,695, or
$.65 per share of Class A preferred stock, during fiscal 1997 and
$217,226, or $.03 per share of Class A preferred stock, during
fiscal 1996.
The Class A non-voting preferred stock participates on an equal
per share basis with the common stock in any dividends declared
and ranks equally with the common stock on distribution rights,
liquidation rights and other rights and preferences (other than
the voting rights).
The above described features essentially enable the holders of
the Class A non-voting preferred stock to share in the earnings
potential of the Company on substantially the same basis as the
common stock. Accordingly, the Company has classified the Class A
non-voting preferred stock as a common stock equivalent. Earnings
per share and weighted average shares outstanding have been
restated to reflect the Class A non-voting preferred stock
dividend.
F-32
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 11 - CAPITAL STOCK (Continued)
As of June 30, 1998 and 1997, 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, respectively.
Warrants
--------
As part of the settlement agreement dated April 29, 1997, the
holders of the Company's common stock as of October 20, 1995
received, as of July 29, 1997, one warrant to purchase one share
of the Company's common stock for every eight shares of common
stock. The total warrants issuable under this agreement totalled
4,909,767 and were exercisable at $2.938 per share, less the
special dividend declared on the common stock, as discussed
above. The warrants were valued at approximately $5,200,000 and
were recorded as a stock dividend out of paid-in capital for the
year ended June 30, 1997. On March 2, 1998, the Court of Chancery
approved a modification of the settlement agreement dated April
29, 1997, whereby the Company issued 2,226,343 shares of common
stock in exchange for cancellation of the 4,909,767 warrants.
Options
-------
The Company has 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.
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 $ 55,188,946 $(12,698,685)
Primary earnings per share:
As reported $1.00 $(.22)
Proforma $0.98 $(.25)
F-33
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 11 - CAPITAL STOCK (Continued)
The fair value of each option grant under all plans is estimated
on the date of grant using the Black-Scholes option-pricing model
based on the following assumptions:
1997 1996
---------- ----------
All Plans:
Dividend yield 0% 0%
Expected volatility 33% 33%
Expected life (years) 1 1
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 5.0% .
Stock option share activity and weighted average exercise prices
under these plans and grants for the years ended June 30, 1998,
1997 and 1996 were as follows:
Weighted
Average
Number of Exercise
Shares Price
---------- ----------
Outstanding, June 30, 1995 223,360 $ 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
Granted 556,200 2.99
Exercised (559,325) 2.98
Forfeited - -
---------- ------
Outstanding, June 30, 1998 182,735 $ 4.62
========== ======
Exercisable at:
June 30, 1996 181,235 $ 4.62
June 30, 1997 181,235 $ 4.62
June 30, 1998 178,110 $ 4.62
The exercise price for options outstanding as of June 30, 1998
ranged from $1.06 to $5.00.
F-34
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 11 - CAPITAL STOCK (Continued)
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 1998, 1997 and 1996, 1,653,433, 2,138,296
and 1,463,741 shares, respectively, were issued under the stock
bonus plans, of which 4,300, 159,025 and 161,341 shares,
respectively, were charged to operations as compensation expense,
632,475, 579,271 and 802,400 shares, respectively, were issued in
settlement of liabilities, 155,770, 1,000,000 and 500,000 shares,
respectively, were issued in exchange for notes, and 223,030
shares were issued in fiscal 1998 in connection with consulting
agreements during 1998 and 400,000 shares were issued during
fiscal 1997 in connection with consulting agreements pursuant to
the acquisition of Affordable. Compensation expense recognized
during the fiscal years ended June 30, 1998, 1997 and 1996
approximated $2,748,000, $407,000 and $355,000, respectively. The
balance due under these notes was paid in full.
F-35
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 12 - LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASES
Long-term debt, notes payable and capital leases consist of the
following:
June 30,
--------------------
1998 1997
---------- --------
Represents debt assumed in the
Affordable acquisition and consists
of a 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. $ 324,266 $ 315,000
Short-term bank credit and loans,
with interest at 10.8%, secured by
certain assets of the Company. 80,000 100,000
Promissory note payable to a bank,
collateralized by $5 million
certificate of deposit, requiring
monthly payments of interest only,
at a rate of 6.06% per annum with
payment of the entire principal due
on March 20, 2003. 5,000,000 -
Note payable to the former
shareholders of A&A $ 324,266 $
315,000 Services, Inc., The note
calls for 16 quarterly payments of
$300,044, including interest at a
rate of 6%, commencing March 20,
1999. The note is collateralized by
all of the assets acquired and
guaranteed by the Company. 4,000,000 -
F-36
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 12 - LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASES (Continued)
June 30,
--------------------
1998 1997
---------- --------
Note payable to the former
shareholder of A&A Services, Inc.
The note calls for 60 equal monthly
installments of principal and
interest of $25,000, including
interest at a rate of 6% per annum,
commencing April 20, 1998. The note
is collateralized by all of the
assets acquired and guaranteed by
the Company. $1,237,258 $ -
Note payable dated June 1990 -
$765,063, payable interest only at
12%, through July 1991 when the
entire balance is due. Repayment
terms were $1,237,258 $ - 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. - 392,181
Note payable related to
construction of a machine, calling
for monthly payments of $9,034,
including interest at a rate of
8.875% through July 2002. The loan
is collateralized by equipment
located in Ellwood, Pennsylvania. 369,360 400,000
Capital lease dated March 5, 1993 -
$340,895, due - 392,181 $11,162 per
month, commencing April 1993,
including interest at 11% for 36
months. Such lease is
collateralized by equipment, which
has been classified as property
under lease in the accompanying
financial statements. Repayment
terms were modified in May 1995
requiring 36 monthly payments of
$5,117. 62,306 72,628
Capital lease requiring monthly
payments of 369,360 400,000
$12,595, including interest at a
rate of 9% through October 1, 2002.
The loan is collateralized by
related equipment. 535,183 -
F-37
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 12 - LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASES (Continued)
June 30,
----------------------
1998 1997
---------- ---------
Deferred payment obligation,
aggregating $2,000,000, payable to
the former shareholder of A&A
Services, Inc., automatically
convertible into HMC's common stock
upon an initial public offering of
HMC's securities if completed by
September 20, 2000. If the offering
is not completed, the obligation is
payable over four years with
interest at 6% per annum. The
obligation has been recorded with
interest imputed at a rate of 6%. $1,807,000 $ -
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 $1,807,000 $ -
accompanying financial statements. 327,940 385,637
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 lease
in the accompanying financial
statements. 310,587 364,559
Capital lease obligations with
maturity dates through November 15,
2000 requiring monthly 327,940
385,637 payments, aggregating
$24,750, including interest at
13.15%. 637,344 921,354
Capital lease obligation assumed in
connection with the Affordable
acquisition related to a purchase
of medical equipment aggregating
$349,738, due $8,477 per month,
including interest of 12.3% through
August 31, 2001. Such lease is
collateralized by the related
equipment. 265,737 325,323
F-38
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 12 - LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASES (Continued)
June 30,
---------------------
1998 1997
---------- --------
Capital lease obligation assumed in
connection with the Affordable
acquisition related to a purchase
of medical equipment aggregating
$151,364, due $3,378 per month,
including interest of 12.15%
through August 2001, is
collateralized by the related
equipment. $108,411 $132,040
Capital lease obligations assumed
in connection with the Affordable
acquisition related to the purchase
of medical equipment aggregating
$94,125, $ 108,411 $ 132,040
calling for payments for $1,760 per
month, including interest at rates
averaging 13.0%, expiring at
various dates through May 2002.
Such leases have been
collateralized by the related
equipment. 55,447 66,541
Other (including capital leases for
property and equipment) 882,640 1,151,006
---------- ---------
16,003,479 4,626,269
Less: Current maturities 2,443,326 2,802,508
---------- ---------
$13,560,153 $1,823,761
=========== ==========
The maturities of long-term debt, including debt in arrears, over
the next five years and thereafter are as follows:
Years Ended
June 30,
-----------
1999 $2,443,326
2000 3,793,304
2001 2,314,385
2002 1,637,174
2003 5,815,290
----------
16,003,479
==========
F-39
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 13 - INCOME TAXES
Components of the provision (credit) for income taxes are as follows:
1998 1997 1996
---------- ---------- ----------
Current:
Federal $1,700,000 $ - $ -
State 302,452 100,000 19,965
---------- ---------- ----------
2,002,452 100,000 19,965
---------- ---------- ----------
Deferred:
Federal (2,500,000) 2,716,000 -
State - 134,000 -
---------- ---------- ----------
(2,500,000) 2,850,000 -
---------- ---------- ----------
Totals $ (497,548) $2,950,000 $ 19,965
========== ========== ==========
A reconciliation of the federal statutory income tax rate to the
Company's effective tax rate as reported is as follows:
1998 1997 1996
-------- -------- --------
Taxes at federal statutory
rate (34.0)% 34.0% (34.0)%
State and local income taxes,
net of utilization of
credits 5.0 .4 .2
Permanent differences 1.5 - -
Net operating loss carry-
forwards - (28.8) 34.0
Alternate minimum tax 28.0 2.0 -
Utilization of tax credits (8.8) (2.6) -
----- ----- -----
Effective income tax rate (8.3)% 5.0% .2%
===== ===== =====
For federal income tax purposes, the Company has tax credit
carryforwards aggregating $1,545,000, which are accounted for under
the flow through method. The tax credit carryforwards of $1,086,595,
$70,145 and $388,260 expire on June 30, 2006, 2012 and 2013,
respectively.
F-40
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 13 - INCOME TAXES (Continued)
Significant components, tax effected, of the Company's deferred
tax assets and liabilities at June 30, 1998 and 1997 are as
follows:
1998 1997
---------- ----------
Deferred tax assets:
Allowance for doubtful accounts $ 888,486 $2,211,325
Non-deductible accruals 235,223 1,766,778
Net operating carryforwards - 22,289,938
Tax credits 2,151,961 2,304,028
Inventory capitalization for
tax purposes 68,000 67,492
---------- ----------
3,343,670 28,639,561
Valuation allowance (3,343,670) (1,019,002)
---------- ----------
Net deferred tax assets - 27,620,559
---------- ----------
Deferred tax liabilities:
Fixed assets and depreciation 378,221 429,093
Capitalized software costs 174,064 98,562
Difference between cash and
accrual basis for tax
reporting 221,897 443,794
Gain on litigation settlement - 29,942,904
Other 19,612 -
---------- ----------
Gross deferred tax liabilities 793,794 30,914,353
---------- ----------
Net deferred tax liabilities $ 793,794 $3,293,794
========== ==========
The net change in the valuation allowance for deferred tax assets
increased by $2,324,668.
During 1997, the Company reduced the valuation allowance to
recognize a deferred tax asset of approximately $27 million at
June 30, 1997. The recognized deferred tax asset was based upon
the expected utilization of net operating loss carryforwards
during 1998 due primarily to a gain from a litigation award of
approximately $75 million.
F-41
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 14 - OTHER CURRENT LIABILITIES
Included in other current liabilities are the following:
1998 1997
----------- -----------
Unearned revenue on service
contracts $ 1,283,990 $ 1,399,243
Accrued bonus 1,410,345 4,000,000
Accrued payroll taxes 316,142 606,883
Accrued interest 566,890 245,527
Accrued additional purchase price 1,000,000 -
Accrued salaries and commissions 631,293 336,225
Accrued professional fees 1,260,029 1,813,255
Litigation judgement 1,645,305 1,325,824
Excise and sales taxes 1,455,476 1,438,930
Other 1,686,689 2,304,486
----------- -----------
$11,256,159 $13,470,373
=========== ===========
NOTE 15 - COMMITMENTS AND CONTINGENCIES
Leases
------
The Company rents its operating facilities and certain equipment
pursuant to operating lease agreements expiring at various dates
through February 2009. The leases for certain facilities contain
escalation clauses relating to increases in real property taxes
as well as certain maintenance costs.
F-42
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 15 - COMMITMENTS AND CONTINGENCIES (Continued)
Future minimum lease commitments consisted of the following at
June 30, 1998:
Facilities
Year Ended and
June 30, Equipment Capital
---------- ----------- -----------
1999 $ 2,906,454 $ 1,432,436
2000 2,767,812 571,169
2001 2,654,932 741,725
2002 2,434,888 135,846
2003 2,216,933 -
----------- -----------
12,981,019 2,881,176
Thereafter 4,048,599 -
----------- -----------
Total minimum obligations $17,029,618 2,881,176
===========
Less: Amount representing
interest 332,922
-----------
Present value of net
minimum lease obligations $ 2,548,244
===========
Rent expense for operating leases approximated $2,382,000,
$1,386,000 and $1,380,000 for the three years ended June 30,
1998, 1997 and 1996, respectively.
F-43
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 15 - 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. In April
1995, FONAR and Hitachi settled. In May 1995, the jury rendered a
verdict against General Electric awarding FONAR $110,575,000, for
infringement of FONAR's MAO patent and Cancer Detection patent.
Following appeals, on July 2, 1997, General Electric paid $128.7
million (inclusive of interest). After the deduction of
attorney's fees and expenses, the net amount of the judgement
proceeds 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.
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 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 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. Subsequently, the action was
transferred to U.S. District Court for the District of Delaware.
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., Philips Electronics North America Corp.,
Philips Medical Systems North American and U.S. Philips Corp.
settling the lawsuits and claims between them.
F-44
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 15 - COMMITMENTS AND CONTINGENCIES (Continued)
Litigation (Continued)
----------
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. Thereafter, in February 1997, Toshiba America
MRI, Inc. commenced an action against FONAR in the U.S. District
Court for the Northern District of California (Toshiba America
MRI, Inc. V. FONAR Corporation, Case No.: C97-00664 SBA ENE)
alleging infringement of certain of its patents relating to
magnetic resonance imaging technology. Both FONAR and the Toshiba
companies asserted counterclaims in the actions brought against
them. In May 1998, FONAR and Toshiba amicably resolved the
litigation in both the New York and California United States
District Courts. Neither party admitted liability in the
settlement agreement. The parties cross-licensed each other on
the patents-in-suit, and FONAR received a monetary payment from
Toshiba. Other terms of the settlement are confidential.
F-45
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 15 - 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. 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. Subsequently, judgements were entered on the California
judgement in New York, Pennsylvania, Michigan and Florida and
enforcement proceedings were commenced. The plaintiffs, to date,
have not collected any part of the judgement in these
proceedings. Thereafter, plaintiffs purportedly assigned the
judgement to Phoenix General & Health Services, Inc. ("Phoenix").
Phoenix commenced a new and separate action in United States
District Court for the Eastern District of New York seeking to
enforce the judgement against AMD and FONAR, as well. FONAR is
defending this claim on the ground, among others, that in the
original California action, it was determined that FONAR was not
liable, and both FONAR and AMD are defending on the grounds that
the assignment to Phoenix, a Nevada corporation, was made solely
for the purpose of seeking to bring this case within the
diversity jurisdiction of the Federal Courts. A motion to dismiss
this case on various grounds is now under consideration by the
United States District Court for the Eastern District of New
York. As of June 30, 1998, 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.
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, 1998.
F-46
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 15 - 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 Rubinstein 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 alleged 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.
F-47
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 15 - 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, was 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 increased the
dividends payable on the Company's common stock and Class A
non-voting preferred stock from the proceeds of its patent
litigation. The three percent (3%) dividend originally payable on
the common stock of any awards collected by the Company on its
Cancer Detection patent (U.S. Patent No. 3,789,832) was increased
to 3-1/4% of the first $10 million collected, 4-1/2% of the next
$20 million collected and 5-1/2% of any additional amounts
collected of any such cash award. The 3% dividend originally
payable on the Class A non-voting preferred stock of any awards
on the other four patents asserted in the litigation against
General Electric Company and Hitachi, Ltd., including the
Company's Multi-Angle Oblique Imaging patent, was similarly
increased and extended to any patent litigation seeking to
enforce those patents commenced prior to November 29, 1997. In
addition, the Company 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 recapitalization 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.
Subsequently, on December 17, 1997, the parties agreed to
modification of the settlement agreement, which was approved by
the Court of Chancery on March 2, 1998. The modification provided
that the Company issue 2,231,689.3 shares of FONAR common stock
in substitution for the warrants, which would have been issued
under the original terms of the settlement agreement. In
addition, the modification provides for a schedule to pay the
special dividends on the Company's common stock and Class A
non-voting preferred stock with respect to awards and settlements
already received by the Company in connection with its patent
litigations. These first installments (comprising one-half of the
total) was paid in May 1998 and the second installment
(comprising one-sixth of the total) was paid in September 1998.
The remaining two installments (each comprising one-sixth of the
total) are required to be paid as follows: one prior to December
31, 1998, and one prior to March 31, 1999. As of June 30, 1997, a
dividend payable was provided.
F-48
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 15 - COMMITMENTS AND CONTINGENCIES (Continued)
Litigation (Continued)
----------
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.
The Company also is involved in a number of smaller litigations
which aggregate approximately $3,560,000. 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.
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. In August 1998, the Company entered into a licensing
agreement, whereby the Company paid a royalty of $395,000 for the
use of certain patent rights. Subject to the terms of the
agreement, the Company acquired a non-exclusive right to make,
have made, use, modify, enhance, sell, lease or otherwise dispose
of the licensed products and to practice any and all methods and
processes in the manufacture, testing and assembly thereof.
Royalty expense charged to operations for the years ended June
30, 1998, 1997 and 1996 approximated $47,000 $-0- and $15,000,
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, 1998, 1997 and 1996, no material
claims arose.
F-49
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 15 - 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. In addition, an additional
240,000 shares of HMC's common stock are issuable to the
consultant provided certain financial hurdles are met over the
5-year term of the agreement.
Employment Agreements
---------------------
On March 20, 1998, an affiliate of HMCA entered into two
employment agreements with the former owners of A&A. The
agreements provide for a base annual salary of $300,000 for the
first five years and $630,000 per annum for each year thereafter
and shall be increased by 5% per annum up to a minimum base
salary of $500,000 per annum. Additionally, the agreement
provides for a bonus commencing in the sixth year of the
contract, contingent upon meeting certain thresholds of net
income. The employment agreements expire fifteen years from March
20, 1998.
NOTE 16 - OTHER INCOME (EXPENSE) AND SUPPLEMENTARY PROFIT AND
LOSS DATA
Other income consists of:
For the Years Ended June 30,
---------------------------------------
1998 1997 1996
---------- ----------- ----------
Other income (expense) $ (61,382) $ (336,681) $ 248,034
Gain on settlement of
various legal
disputes and other
claims 8,671,417 83,436,366 3,759,542
---------- ----------- ----------
$8,610,035 $83,099,685 $4,007,576
========== =========== ==========
Advertising expense approximated $651,000, $199,000 and $57,000
for the years ended June 30, 1998, 1997 and 1996, respectively.
Maintenance and repair expenses totalled approximately $224,000,
$312,000 and $358,000 for the years ended June 30, 1998, 1997 and
1996, respectively. Royalty expenses approximated $47,000, $-0-,
and $15,000 for the years ended June 30, 1998, 1997 and 1996,
respectively. Amortization of intangible assets was approximately
$674,000, $794,000 and $1,233,000 for the years ended June 30,
1998, 1997 and 1996, respectively.
F-50
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 17 - SUPPLEMENTAL CASH FLOW INFORMATION
During the years ended June 30, 1998, 1997 and 1996, the Company
paid $343,418, $336,857 and $668,956 for interest, respectively.
During the years ended June 30, 1998, 1997 and 1996, the Company
paid $1,202,449, $861 and $68,552 for income taxes, respectively.
During the years ended June 30, 1998 and 1997, the Company
acquired the assets and assumed the liabilities of various
entities. The transactions had the following non-cash impact on
the balance sheets:
1998 1997
---------- ----------
Accounts receivable $ 600,000 $1,196,000
Equipment 300,000 1,116,000
Other assets - 20,000
Intangibles 11,298,000 2,796,000
Accrued liabilities (1,100,000) (85,000)
Notes payable to sellers (7,073,000) (315,000)
Capital lease obligation - (524,000)
Other liabilities - (82,000)
Deferred taxes payable - (444,000)
Equity - (3,680,000)
---------- ----------
Net Cash (Used For) Provided
From acquisition $4,025,000 $ (2,000)
========== ==========
Non-Cash Transactions
---------------------
During the year ended June 30, 1998:
a)The Company issued 236,345 shares of its common stock in
settlement of current liabilities aggregating $632,386.
b)The Company issued 576,000 shares of its common stock valued at
$923,442 as additional contingent consideration related to
acquisition of Affordable Diagnostics, Inc.
c)The Company issued 385,530 shares of its common stock to
employees in satisfaction of accrued liabilities incurred
during the fiscal year ended June 30, 1997 aggregating
$1,147,906.
d)Accrued interest aggregating $146,330 was reclassified to
long-term debt pursuant to a debt restructuring agreement.
e)Equipment costing $800,000 was reclassified from Costs and
Estimated Earnings in Excess of Billings on Uncompleted
Contracts to Property and Equipment.
f)The Company purchased $1,391,304 of machinery and equipment
under capital leases.
F-51
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 17 - SUPPLEMENTAL CASH FLOW INFORMATION (Continued)
Non-Cash Transactions (Continued)
---------------------
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)TheCompany issued 1,764,000 shares of its common stock valued
at $3,630,312 in connection with the acquisition of
Affordable Diagnostics, Inc.
d)Pursuant to consulting contracts with shareholders of
Affordable Diagnostics, Inc., the Company issued 400,000
shares of its common stock valued at $1,096,000.
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.
d)Advances for legal fees of $475,000 were paid by the issuance
of common stock.
e)An obligation of $217,226 was accrued pursuant to special
dividend rights of Class A non-voting preferred stock.
NOTE 18 - 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.
F-52
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 18 - GOVERNMENT REGULATIONS (Continued)
If the Company's interpretation of the relevant laws and
regulations is inaccurate, the Company's business and its
prospects could be materially and adversely affected. The
following are among the laws and regulations that affect the
Company's operations and development activities; corporate
practice of medicine; fee splitting; anti-referral laws;
anti-kickback laws; certificates of need, regulation of
diagnostic imaging; no-fault insurance; worker's compensation;
and proposed healthcare reform legislation.
NOTE 19 - ADVANCES AND NOTES TO RELATED PARTIES
Effective December 1, 1993, Albany Magnetic Imaging Center, P.C.,
a Georgia professional corporation, of which Raymond V. Damadian
is the sole stockholder ("Albany Center"), purchased the scanner
being utilized at its site from the Company for a purchase price
of $1,128,844. Of the purchase price, $574,077 was paid by the
assumption and payment of the Company's indebtedness to the
lender secured by the scanner. Such indebtedness to the lender
was retired pursuant to a new equipment finance lease between the
lender and the Albany Center. Following payment of the lease, the
remaining $554,767 of the purchase price due to the Company is
required to be paid pursuant to a promissory note, with interest
at 10% per annum, over an 18-month term (17 payments of $35,000
each and one final payment of $2,454.08).
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. 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-53
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 19 - ADVANCES AND NOTES TO 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. The remaining $454,005 of the purchase price due to the
Company will be paid pursuant to a promissory note with interest
at 10% per annum, over a 17-month term commencing January 1, 1996
as follows: sixteen installments of $30,000 each and one
installment of $7,275. The Deerfield Center paid the remaining
balance due under the note during fiscal 1998.
Pursuant to an agreement dated September 30, 1993, Advanced
Medical Diagnostics Corporation ("AMD"), a subsidiary of the
Company sold to Dade County MRI, P.A. its interests in a
partnership which had formerly operated an MRI scanning center in
Miami, Florida. The purchase price of $100,000 is payable, with
interest at 10% per annum in sixty (60) equal consecutive monthly
installments of principal and interest (including interest
accrued from September 30, 1993), commencing 90 days after the
scanner is placed in service. The partnership is presently
inactive. Dade County MRI, P.A. is a Florida professional
association of which Raymond V. Damadian is the sole stockholder,
director and President.
F-54
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 19 - ADVANCES AND NOTES TO RELATED PARTIES (Continued)
Canarsie MRI Associates ("Canarsie"), a joint venture partnership
of which MRI Specialties, Inc. ("Specialties") is an owner, is
party to a service agreement for its scanner with the Company at
an annual fee of $70,000 for the period September 1, 1997 through
August 31, 1999. Timothy Damadian, a Vice-President of the
Company, is the sole stockholder , director and president of
Specialties.
Pursuant to an agreement dated January 2, 1996, Guardian MRI,
Inc. ("Guardian") engaged the Company to de-install, 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, 1998 and 1997, the aggregate indebtedness of
Specialties and Canarsie to the Company was $12,447 and $19,547,
respectively, and the aggregate indebtedness of Guardian and
Pompano to the Company was $53,732 and $97,757, respectively.
F-55
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 20 - 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:
1998 1997 1996
----------- ----------- -----------
Net revenues:
Medical equipment $ 7,807,549 $ 9,534,048 $ 7,758,805
Physician management
services 21,095,994 8,099,018 6,156,920
Intersegement eliminations (1,349,186) - -
----------- ----------- -----------
Total $27,554,357 $17,633,066 $13,915,725
=========== =========== ===========
Income (loss) from
operations:
Medical equipment $(20,292,707) $(24,309,936) $(11,912,687)
Physician practice
management 2,698,314 (71,769) (3,364,599)
------------ ----------- ------------
Total $(17,594,393) $(24,381,705) $(15,277,286)
============ ============ ============
Identifiable assets:
Medical equipment $98,342,625 $96,623,863 $24,914,610
Physician practice
management 10,105,155 10,066,698 3,142,774
------------ ------------ -----------
Total $108,447,780 $106,690,561 $28,057,384
============ ============ ===========
Depreciation and
amortization:
Medical equipment $1,415,923 $1,593,586 $2,259,183
Physician practice
management 1,501,820 429,879 377,373
----------- ----------- -----------
Total $2,917,743 $2,023,465 $2,636,556
=========== =========== ===========
Capital expenditures:
Medical equipment $1,889,450 $1,530,145 $1,761,199
Physician practice
management 2,287,398 218,574 -
----------- ----------- -----------
Total $4,176,848 $1,748,719 $1,761,199
=========== =========== ===========
F-56
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 21 - PROFORMA INFORMATION (UNAUDITED)
The Company's consolidated financial statements for the years
ended June 30, 1996 and 1997 do not include the results of
operations of Affordable Diagnostics, Inc. and the consolidated
financial statements do not include the results of operations of
A&A Services, Inc. for the years ended June 30, 1996 and 1997 and
for the period July 1, 1997 through March 20, 1998. The following
summarizes the unaudited proforma results of operations for the
years ended June 30, 1998, 1997 and 1996, assuming the foregoing
acquisition had occurred on June 30, 1998, 1997 and 1996 (in
thousands, except per share data):
1998 1997 1996
------------ ----------- ------------
(Unaudited) (Unaudited) (Unaudited)
Revenues, net $ 30,790 $ 24,982 $ 18,592
Loss from
operations $ (1,686) $ (23,098) $ (14,232)
Income (loss)
before income
taxes $ (5,539) $ 59,646 $ (10,883)
Fully diluted
net income
(loss) per
share $(.09) $1.01 $(0.21)
NOTE 22 - SUBSEQUENT EVENTS
Acquisition
-----------
On August 20, 1998, the Company's physician management
subsidiary, HMCA, consummated the acquisition of the common stock
of Dynamic Health Care Management, Inc. ("Dynamic"), a New York
corporation, which manages three physician practices on Long
Island, New York. The practices consist of internal medicine,
physiatry and physical rehabilitation.
Pursuant to the Dynamic agreements, HMCA acquired all of the
common stock of Dynamic for $2,000,000 in cash, a note payable
for $1,265,000 bearing interest at 8% per annum, payable in sixty
monthly installments, or commencing one month following the
closing date, a note payable for $2,870,000 bearing interest at
8% per annum payable in three annual installments of principal
and interest commencing one year after the closing date, and
convertible notes face amount of $5,490,000, payable in
thirty-six monthly installments of principal and interest,
commencing two years after the closing date.
The promissory notes are collateralized by all of the assets of
the acquired operations and are guaranteed by the Company.
F-57
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 22 - SUBSEQUENT EVENTS (Continued)
A substantial portion of the covertible notes of $5,490,000 are
convertible into shares of HMCA's common stock upon the
effectiveness of an Initial Public Offering ("IPO") of HMCA's
securities providing the IPO is consummated within two years of
the closing date.
The Company intends to account for this acqusition as a purchase.
Litigation
----------
On August 4, 1998, Beal Bank filed a notice of motion for summary
judgement against Melville Magnetic Resonance Imaging, P.C.
("Melville Magnetic") and the Company. The motion for summary
judgement seeks to recover $733,855, plus accrued interest of
$221,809 for payment of a bank loan executed by Melville Magnetic
and guaranteed by the Company. In the event a judgement is levied
against the Company as a guarantor on the loan, the Company will
exercise its rights to seek recovery from Melville Magnetic.
F-58
<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. 62 President, Chairman of the
Board and a Director
Timothy R. Damadian 34 Vice President of Operations
David B. Terry 51 Secretary and Treasurer
Claudette J.V. Chan 61 Director
Robert J. Janoff 71 Director
Herbert Maisel * 54 Director
Charles N. O'Data ** 62 Director
* Mr. Maisel resigned on March 9, 1998.
** Mr. O'Data was elected on February 20, 1998.
Raymond V. Damadian, M.D. has been the Chairman of the Board and President
of FONAR since its inception. Dr. Damadian was employed by the State University
of New York, Downstate Medical Center, New York, as an Associate Professor of
Biophysics from 1967 until September 1979. Dr. Damadian received an M.D. degree
in 1960 from Albert Einstein College of Medicine, New York, and a B.S. degree in
mathematics from the University of Wisconsin in 1956. In addition, Dr. Damadian
conducted post-graduate work at Harvard University, where he studied extensively
in the fields of physics, mathematics and electronics. Dr. Damadian is the
author of numerous articles and books on the nuclear magnetic resonance effect
in human tissue, which is the theoretical basis for the FONAR MRI scanners. Dr.
Damadian is a 1988 recipient of the National Medal of Technology and in 1989 was
inducted into the National Inventors Hall of Fame, for his contributions in
conceiving and developing the application of magnetic resonance technology to
medical applications including whole body scanning and diagnostic imaging. Dr.
Damadian is the director of HMCA.
Timothy R. Damadian has been a Vice President of FONAR since July 1992 and
President of HMCA since its formation in March 1997. Mr. Damadian served as a
field service technician for FONAR, after graduating from Suburban Technical
School in 1982, where he studied digital computer technology. Mr. Damadian
became Director of Manufacturing in October 1989 and was promoted to Vice
President of Operations of FONAR in July 1992. 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 was a Director of FONAR from February, 1989 to March, 1998.
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.
Charles N. O'Data has been a Director of FONAR since February, 1998. From
1968 to 1997, Mr. O'Data was the Vice President for Development for Geneva
College, a liberal arts college located in western Pennsylvania. In that
capacity, he acted as the College's chief investment officer. His
responsibilities included management of the College's endowment fund and fund
raising. In July 1997, Mr. O'Data retired from Geneva College after 36 years of
service and took a position as a National Sales Executive with SC Johnson
Company (Johnson Wax), where his responsibilities include health care and
education. Mr. O'Data also acts as an independent financial consultant to
various entities, including Pittsburgh National Bank. Mr. O'Data served on the
board of the Medical Center of Beaver, Pennsylvania for 22 years, from 1975 to
1997, with three years as the chair. He presently serves as a director of and
the President of Beaver County Community Foundation, a philanthropic
organization he founded in 1992. Mr. O'Data is a graduate of Geneva College,
where he received a B.S. degree in Economics in 1958. Mr. O'Data is listed as a
finance associate in the Middle States Association, Commission on Higher
Education. The commission is the formal accrediting body for higher education in
the eastern region of the country. In this capacity he evaluates the financial
aspects of educational organizations.
<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.
The Board of Directors has established an audit committee. The members of
the committee are Raymond V. Damadian, Robert J. Janoff and Charles N. O'Data.
There is set forth in the following Summary Compensation Table the
compensation provided by the Company during fiscal 1998 to its Chief Executive
Officer. There is set forth in the following Option Grant Table and Option
Exercise Table any stock options granted and exercised by Dr. Damadian during
fiscal 1997.
<PAGE>
I. SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other
Name Annual Restricted All Other
and Compen- Stock Options LTIP Compen-
Principal Salary Bonus sation Award(s) SARs Payouts sation
Position Year ($) ($) ($) ($) (#) ($) ($)
- -------- ---- ---------- ----- ------ -------- --- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Raymond V. 1998 $84,218.10 - - - - - -
Damadian, 1997 $86,799.95 - - - - - -
President & 1996 $86,679.95 - - - - - -
CEO
</TABLE>
- --------------------------------------------------------------------------------
II. OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of Alternative
Stock Price to (f) and
Appreciation for (g): Grant
Individual Grants Option Term Date Value
(a) (b) (c) (d) (e) (f) (g) (f)
% of Total
Options/
SARs
Options/ Granted to
SARs Employees Excercise or Grant Date
Granted in Fiscal Base Price Expiration Present
Name (#) Year ($/Sh) Date 5% ($) 10% ($) Value $
- ----- ------- --------- ---------- ---- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Raymond V.
Damadian, 0 - - - - - -
President &
CEO
</TABLE>
- -------------------------------------------------------------------------------
III. OPTION/SAR EXERCISES AND YEAR-END VALUE TABLE
<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, 1998, options to purchase 0
shares of Common Stock were available for future grant under the 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, 1998, 190,150 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, 1998, options to
purchase 4,797,400 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, 1998, 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 21, 1998.
Name and Address of Shares Percent
Beneficial Owner (1) Beneficially Owned of Class
Raymond V. Damadian, M.D.
c/o FONAR Corporation
Melville, New York
Director, President
CEO, 5% + Stockholder
Common Stock 2,488,274 4.71%
Class C Stock 9,561,174 99.98%
Class A Preferred 477,328 6.09%
Claudette Chan
Director
Common Stock 4,195 *
Class A Preferred 800 *
Robert J. Janoff
Director
Common Stock 50,000 *
Class A Preferred 1,999 *
Charles N. O'Data
Director
Common Stock 100 *
All Officers and Directors
as a Group (6 persons) (2)
Common Stock 2,563,327 4.85%
Class C Stock 9,561,174 99.98%
Class A Preferred 492,744 6.29%
___________________________
* Less than one percent
1. Address provided for each beneficial owner owning more than five percent
of the voting securities of the Company.
2. Includes 101 shares of the Company's Common Stock and 19 shares of the
Company's Class A Non-voting Preferred Stock held by an officer jointly with his
wife and 192 shares of the Company's Common Stock and 38 shares of the Company's
Class A Non-voting Preferred Stock held in trust by an officer for his children.
<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., a Georgia professional corporation
wholly-owned by, and of which Dr. Damadian is, the President.
Thereafter, between 1990 and 1996, Raymond V. Damadian, M.D. MR Scanning
Centers Management Company, a Delaware corporation of which Dr. Damadian was the
sole stockholder, director and President ("RVDC"), purchased and leased scanners
from Fonar to establish a network of professional corporations operating MRI
scanning centers ("Centers"), including the Macon Center, in New York, Florida,
Georgia and other locations. Dr. Damadian was the owner, director and President
of each of these professional corporations. RVDC provided the necessary
management and the scanners to the Centers, although in certain situations, a
Center would acquire the scanner directly from FONAR.
ACQUISITION OF RVDC.
Effective June 30, 1997, FONAR's wholly-owned subsidiary, Health Management
Corporation of America ("HMCA"), formerly known as U.S. Health Management
Corporation, acquired RVDC by purchasing all of the issued and outstanding
shares of RVDC from Dr. Damadian for 10,000 shares of the Common Stock of FONAR.
The transactions can be rescinded by Dr. Damadian, however, in the event of a
change of control in FONAR or the bankruptcy of FONAR. In connection with the
transaction, FONAR granted RVDC a nonexclusive royalty free license to FONAR's
patents and software. These licenses may be terminated by FONAR in the event of
the bankruptcy of RVDC or a change in control of RVDC.
In connection with and immediately prior to the sale of RVDC to HMCA,
certain leases and sales of scanners to RVDC were terminated. The scanners were
then leased directly to the Centers at which they were installed pursuant to new
scanner leases between HMCA and the Centers.
NEW AGREEMENTS WITH HMCA.
Effective July 1, 1997, immediately following the effective date of the
acquisition of RVDC by HMCA, all previous management arrangements between RVDC
and the Centers were terminated and new management agreements were entered into
by the Centers and HMCA ("Management Agreements").
Pursuant to the Management Agreements, HMCA is providing comprehensive
management and administrative services and office facilities, including
marketing, advertising, billing and collection of accounts, payroll and accounts
payable processing, supplies and utilities to the Centers. Under the Management
Agreements, HMCA provides service through FONAR for the scanners at the Centers,
eliminating the need for the Centers to have separate service agreements for
their scanners. In total, 17 of the Centers previously managed by RVDC have
Management Agreements with HMCA.
With respect to the scanners at 9 of the 17 Centers, the lease or sales
agreement between RVDC (or the Center in some cases) and FONAR were terminated.
In substitution for the previous arrangements, HMCA, effective as of July 1,
1997, entered into new scanner leases ("Scanner Leases") with these Centers
pursuant to which the scanners are provided to the Centers.
The fees to HMCA under both the Management Agreements and the Scanner
Leases are on a per scan basis.
In addition, a new Center owned by Dr. Damadian and managed by HMCA was
established in Latham, New York, in March 1998.
During the fiscal year ended June 30, 1998 the aggregate of fees payable to
HMCA by the Centers owned by Dr. Damadian was approximately $12.8 million.
Effective December 1, 1993, one of the Centers, Albany Magnetic Resonance
Imaging, P.C. (the "Albany Center"), a Georgia professional corporation of which
Raymond V. Damadian is the sole shareholder, director and President, purchased
the scanner being utilized at its site from the Company for a purchase price of
$1,128,844. Of the purchase price, $574,077 was paid by the assumption and
payment of the Company's indebtedness to the lender secured by the scanner. Such
indebtedness to the lender was retired pursuant to a new equipment finance lease
between the lender and the Albany Center, guaranteed by the Company, providing
for 18 monthly payments of $35,000 each. Following payment of the lease, the
remaining $554,767 of the purchase price due to the Company 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 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 was 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. The Deerfield Center
paid the remaining balance due under the note during fiscal 1998.
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.
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.
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 provided for monthly
payments of $15,586.21 for a term of 84 months commencing February 1, 1994.
Effective June 30, 1997, his lease was terminated.
ACQUISITION OF THE AFFORDABLE COMPANIES.
Effective June 30, 1997, HMCA acquired a group of several interrelated
corporations, limited liability companies and a partnership engaged in managing
three diagnostic imaging centers and one multi-specialty practice in New York
State (the "Affordable Companies") pursuant to a series of transactions
concluding with a merger between a wholly-owned subsidiary of HMCA and
Affordable Diagnostics, Inc. Concurrently with the acquisition, Raymond V.
Damadian purchased three New York professional corporations to which the
Affordable Companies were providing their services under several agreements. Dr.
Damadian is the sole stockholder, director and President of these professional
corporations (the "Affordable Professional Corporations"). During the fiscal
year ended June 30, 1998, the aggregate of fees recognized by HMCA from the
Affordable Professional Corporations was approximately $5.1 million.
ACQUISITION OF A & A SERVICES.
Effective March 20, 1998, HMCA acquired A & A Services, Inc. ("A & A
Services"), an MSO managing four primary care practices in Queens County, New
York. Concurrently with the acquisition, Raymond V. Damadian purchased the four
New York professional service corporations under contract with A & A Services
(the "A & A Professional Corporations"). During the fiscal year ended June 30,
1998, the aggregate of fees recognized by HMCA from the A & A Professional
Corporations was $1.3 million.
Pursuant to an agreement dated March 31, 1993, RVDC agreed to purchase the
Company's general partnership interest (approximately 92% of the partnership) in
a partnership owning and operating an MRI scanning center in Bensonhurst
(Brooklyn), New York. Robert Janoff, a director of the Company, is a limited
partner in the partnership. The partnership is also party to a service agreement
with the Company. The current annual rate is $50,000 for the one year service
contract from May 18, 1998 to May 17, 1999. The price in effect during the prior
year from May 18, 1997 to May 17, 1998 was $50,000.
Pursuant to an agreement dated September 30, 1993, AMD sold its interests
in a partnership operating an MRI scanning center in Melbourne, Florida to
Melbourne Magnetic Resonance Imaging, P.A. (the "Melbourne Facility"), for a
purchase price of $150,000. The purchase price is payable, with interest at 10%
per annum, over a period of fifteen months commencing September 1, 1995 as
follows: $13,500 per month for the first fourteen months and $1,185.60 for the
fifteenth month. The Melbourne Facility is a Florida professional corporation of
which Raymond V. Damadian is the sole stockholder, director and President. From
May 19, 1997 to May 18, 1998, the partnership was party to a service agreement
with the Company at a price of $53,200 per annum. For May 19, 1998 to May 19,
1999 the price is $53,200 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 a sales agreement dated April 1, 1996, RVDC agreed to purchase
an MRI scanner with certain upgrades from the Company which RVDC then
contributed to Orlando MRI Associates, Limited Partnership (the "Orlando
Partnership"), a limited partnership. The Orlando Partnership is utilizing the
scanner at a site located in Orlando, Florida. The sales agreement provides for
a purchase price of $400,000 payable in installments as follows: (1) $40,000
down payment within thirty (30) days of execution and (2) $360,000 in 84 monthly
installments of $5,611.04 each (inclusive of interest at 8% per annum) pursuant
to a promissory note executed by RVDC upon acceptance of the scanner. Commencing
October 8, 1996, the Orlando Partnership has been party to a service agreement
for the scanner with the Company at an annual fee of $70,000, which fee will
remain in effect for a period of five years. Timothy Damadian, a Vice President
of the Company, is a limited partner in Orlando.
Canarsie MRI Associates ("Canarsie"), a joint venture partnership of which
MRI Specialties, Inc. ("Specialties") is an owner, is party to a service
agreement for its scanner with the Company at an annual fee of $70,000 for the
periods September 1, 1997 through August 31, 1998 and September 1, 1998 through
August 31, 1999. Timothy Damadian, a Vice President of the Company, is the sole
stockholder, director and President of Specialties.
Pursuant to an agreement dated January 2, 1996, Guardian MRI, Inc.
("Guardian") engaged the Company to deinstall, transport and reinstall an MRI
scanner purchased for Pompano MRI Associates ("Pompano") from a third party.
Timothy Damadian, 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, 1998, the indebtedness of Canarsie to the Company was
$25,076.00 and the aggregate indebtedness of Guardian and Pompano to the Company
was $72,058.
<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, 1998 and 1997.
Consolidated Statements of Operations for the Three Years Ended June 30,
1998, 1997 and 1996.
Consolidated Statements of Stockholders' Equity for the Three Years Ended
June 30, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the Three Years Ended June 30,
1998, 1997 and 1996.
Notes to Consolidated Financial Statements.
The following consolidated financial statement schedules are included in
Item 14 (d).
Report of Independent Certified Public Accountants on Schedules.
Information required by schedules called for under Regulation S-X is either
not applicable or is included in the consolidated financial statements or notes
thereto.
b) REPORTS ON FORM 8-K
None.
c) EXHIBITS
3.1 Certificate of Incorporation, as amended, of the Company incorporated
herein by reference to Exhibit 3.1 to the Registrant's registration statement on
Form S-1, Commission File No. 33-13365.
3.2 Article Fourth of the Certificate of Incorporation, as amended, of the
Company incorporated by reference to Exhibit 4.1 to the Registrant's
registration statement on Form S-8, Commission File No. 33-62099.
3.3 By-Laws, as amended, of the Company incorporated herein by reference to
Exhibit 3.2 to the Registrant's registration statement on Form S-1, Commission
File No. 33-13365.
4.1 Specimen Common Stock Certificate incorporated herein by reference to
Exhibit 4.1 to the Registrant's registration statement on Form S-1, Commission
File No. 33-13365.
4.2 Specimen Class B Common Stock Certificate incorporated herein by
reference to Exhibit 4.2 to the Registrant's registration statement on Form S-1,
Commission File No. 33-13365.
10.1 License Agreement between FONAR and Raymond V. Damadian incorporated
herein by reference to Exhibit 10 (e) to Form 10-K for the fiscal year ended
June 30, 1983, Commission File No. 0-10248.
10.2 1983 Nonstatutory Stock Option Plan incorporated herein by reference
to Exhibit 10 (a) to Form 10-K for the fiscal year ended June 30, 1983,
Commission File No. 0-10248, and amendments thereto dated as of March 7, 1984
and dated August 22, 1984, incorporated herein by referenced to Exhibit 28 (a)
to Form 10-K for the year ended June 30, 1984, Commission File No. 0-10248.
10.3 1984 Incentive Stock Option Plan incorporated herein by reference to
Exhibit 28 (c) to Form 10-K for the year ended June 30, 1984, Commission File
No. 0-10248.
10.4 1986 Nonstatutory Stock Option Plan incorporated herein by reference
to Exhibit 10.7 to Form 10-K for the fiscal year ended June 30, 1986, Commission
File No. 0-10248.
10.5 1986 Stock Bonus Plan incorporated herein by reference to Exhibit 10.8
to Form 10-K for the fiscal year ended June 30, 1986, Commission File No.
0-10248.
10.6 1986 Incentive Stock Option Plan incorporated herein by reference to
Exhibit 10.9 to Form 10-K for the fiscal year ended June 30, 1986, Commission
File No. 0-10248.
10.7 Lease Agreement, dated as of August 18, 1987, between FONAR and
Reckson Associates incorporated herein by reference to Exhibit 10.26 to Form
10-K for the fiscal year ended June 30, 1987, Commission File No. 0-10248.
10.8 1993 Incentive Stock Option Plan incorporated herein by reference to
Exhibit 28.1 to the Registrant's registration statement on Form S-8, Commission
File No. 33-60154.
10.9 1993 Non-Statutory Stock Option Plan incorporated herein by reference
to Exhibit 28.2 to the Registrant's registration statement on Form S-8,
Commission File No. 33-60154.
10.10 1993 Stock Bonus Plan incorporated herein by reference to Exhibit
28.3 to the Registrant's registration statement on Form S-8, Commission File No.
33-60154.
10.11 1994 Non-Statutory Stock Option Plan incorporated herein by reference
to Exhibit 28.1 to the Registrant's registration statement on Form S-8,
Commission File No. 33-81638.
10.12 1994 Stock Bonus Plan incorporated herein by reference to Exhibit
28.2 to the Registrant's registration statement on Form S-8, Commission File No.
33-81638.
10.13 1995 Non-Statutory Stock Option Plan incorporated herein by reference
to Exhibit 28.1 to the Registrant's registration statement on Form S-8,
Commission File No. 33-62099.
10.14 1995 Stock Bonus Plan incorporated herein by reference to Exhibit
28.2 to the Registrant's registration statement on Form S-8, Commission File No.
33-62099.
10.15 1997 Non-Statutory Stock Option Plan incorporated herein by reference
to Exhibit 28.1 to the Registrant's registration statement on Form S-8,
Commission File No.: 333-27411.
10.16 1997 Stock Bonus Plan incorporated herein by reference to Exhibit
28.2 to the Registrant's registration statement on Form S-8, Commission File No:
333-27411.
10.17 Stock Purchase Agreement, dated July 31, 1997, by and between U.S.
Health Management Corporation, Raymond V. Damadian, M.D. MR Scanning Centers
Management Company and Raymond V. Damadian, incorporated herein by reference to
Exhibit 2.1 to the Registrant's Form 8-K, July 31, 1997, Commission File No:
0-10248.
10.18 Merger Agreement and Supplemental Agreement dated June 17, 1997 and
Letter of Amendment dated June 27, 1997 by and among U.S. Health Management
Corporation and Affordable Diagnostics Inc. et al., incorporated herein by
reference to Exhibit 2.1 to the Registrant's 8-K, June 30, 1997, Commission File
No: 0-10248.
10.19 Stock Purchase Agreement dated March 20, 1998 by and among Health
Management Corporation of America, Fonar Corporation, Giovanni Marciano, Glenn
Muraca et al., incorporated herein by reference to Exhibit 2.1 to the
Registrant's 8-K, March 20, 1998, Commission File No: 0-10248.
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: September 28, 1998
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 September 28, 1998
Raymond V. Damadian Board of Directors,
President and a
Director (Principal
Executive Officer)
/s/ Claudette J.V. Chan Director September 28, 1998
Claudette J.V. Chan
/s/ Robert J. Janoff Director September 28, 1998
Robert J. Janoff
_____________________ Director
Charles N. O'Data
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