SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
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FORM 10-K/A
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [Fee Required] For the fiscal year ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 [No Fee Required] For the transition period from
_____________ to _____________
Commission File No. 0-10248
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FONAR CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 11-2464137
(State of incorporation) (IRS Employer Identification Number)
110 Marcus Drive, Melville, New York 11747
(Address of principal executive offices) (Zip Code)
(631) 694-2929
(Registrant's telephone number, including area code)
____________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.0001 per share (Title of Class)
______________________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes ___X___ No _______
As of September 6, 2000, 56,678,153 shares of Common Stock, 4,211 shares of
Class B Common Stock, 9,562,824 shares of Class C Common Stock and 7,836,287
shares of Class A Non-voting Preferred Stock of the registrant were outstanding.
The aggregate market value of the approximately 54,125,684 shares of Common
Stock held by non-affiliates as of such date (based on the closing price per
share on September 6, 2000 as reported on the NASDAQ System) was approximately
$125.2 million. The other outstanding classes do not have a readily determinable
market value.
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE>
REASONS FOR ADMENDMENT
REASONS FOR ADMENDMENT
The primary reason for this admendment is to correct an error in Item 8,
in the Cash Flow Statement, on page F-13. The error does not effect the results
of operations or financial position of the company. Within "Cash Flows From
Operating Activities", the item "Liabilities assumed by purchaser on sale of
subsidiary" was inadvertently typed as (989,506) instead of (824,394). The
correction of this error did not affect the Net Cash used in Operating
Activities.
In addition:
In Item 8, Note 4, on page F-24 - Marketable Securities - additional
disclosures were made to provide maturity groups for debt securities.
In Item 8, Note 8, on page F-27 - Investment in Sales-Type lease with
Related Party - additional disclosures were made to provide minimum future lease
payments.
In Item 8, Note 12, on page F-34 - Long-Term Debt - the interest rate in
the second note was changed to 7.22% from 6.06%.
In Item 8, Note 15, on page F-43 - Commitments and Contingencies - the
second paragraph under Management Contracts was deleted.
On the cover page and in Item 1, BUSINESS - GENERAL - In paragraph 1,
the area code has been corrected to (631).
In Item 1, BUSINESS - RECENT DEVELOPMENTS AND OVERVIEW - In paragraph 6,
the second sentence is amended to add "as well as in the typical supine
position."
In Item 1, BUSINESS - PRODUCT MARKETING - In the last paragraph foreign
sales during the year ended June 30, 2000, was changed to 2.8% from 0.2%.
In Item 1, BUSINESS - RESEARCH AND DEVELOPMENT - In paragraph 2 the word
"Stand-Up" has been replaced with "Indomitable" twice.
In Item 1, BUSINESS - GOVERNMENT REGULATION - In paragraph 1 the 3rd
sentence has added "and November 12, 1985."
In Item 6, SELECTED FINANCIAL DATA - Working Capital as of June 30, 2000
has been changed to $24,439,609 from $24,934,609.
In Item 7, INTRODUCTION - In paragraph 3, in the 1st sentence, the year
has been changed from 1999 to 2000.
In Item 7, MANAGEMENT'S DISCUSSION AND ANALYSIS - LIQUIDITY AND CAPITAL
RESOURCES - In the 17th paragraph, working capital as of June 30, 2000, was
changed to $24.4 million from $24.9 million.
<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 (631) 694-2929.
FONAR also maintains a WEB site at www.fonar.com.
FONAR is engaged in the business of designing, manufacturing, selling
and servicing magnetic resonance imaging ("MRI" or "MR") scanners which utilize
MRI technology for the detection and diagnosis of human disease. FONAR
introduced the first MRI scanner in 1980 and is the originator of the iron-core
non-superconductive and permanent magnet technology.
FONAR's iron frame technology made FONAR the originator of "open" MRI
scanners. FONAR introduced the first "open" MRI in 1980 and maintained its
"open" design ever since.
Health Management Corporation of America (formerly U.S. Health
Management Corporation and hereinafter sometimes referred to as "HMCA") was
formed by the Company in March 1997 as a wholly-owned subsidiary in order to
enable the Company to expand into the business of providing comprehensive
management services to medical providers. In connection with its entry into this
new line of business, HMCA has completed five acquisitions. HMCA provides
management services, administrative services, office space, equipment, repair
and maintenance service and clerical and other non-medical personnel to
physicians and other medical providers, including diagnostic imaging centers.
See Note 20 to the Financial Statements for separate financial
information respecting the Company's medical equipment and physician and
diagnostic management services segments.
FORWARD LOOKING STATEMENTS.
Certain statements made in this Annual Report on Form 10-K are
"forward-looking statements" (within the meaning of the Private Securities
Litigation Reform Act of 1995) regarding the plans and objectives of Management
for future operations. Such statements involve known and unknown risks,
uncertainties and other factors that may cause actual results, performance or
achievements of the Company to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. The forward-looking statements included herein are based on current
expectations that involve numerous risks and uncertainties. The Company's plans
and objectives are based, in part, on assumptions involving the expansion of
business. Assumptions relating to the foregoing involve judgments with respect
to, among other things, future economic, competitive and market conditions and
future business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Although the
Company believes that its assumptions underlying the forward-looking statements
are reasonable, any of the assumptions could prove inaccurate and, therefore,
there can be no assurance that the forward-looking statements included in this
Report will prove to be accurate. In light of the significant uncertainties
inherent in the forward-looking statement included herein, the inclusion of such
information should not be regarded as a representation by the Company or any
other person that the objectives and plans of the Company will be achieved.
RECENT DEVELOPMENTS AND OVERVIEW.
The Company's products and works-in-progress (dubbed the "Fonar Seven")
are intended to significantly improve the Company's competitive position. The
Company's products are the Fonar 360(TM), the "QUAD(TM)" series of MRI scanners
and the Echo(TM) MRI scanner.
The Fonar 360, approved for marketing by the FDA on March 16, 2000,
includes the "Open Sky MRI (TM)". The magnet frame is incorporated into the
floor, ceiling and sidewalls of the scan room and is open. Consequently,
physicians and family members can walk inside the magnet to approach the
patient. The Open Sky version of the Fonar 360 is decoratively designed so that
it is incorporated into the panoramic landscape that decorates the walls of the
scan room. The ability of the Fonar 360 to give physicians direct 360 access to
patients and the availability of MRI compatible surgical instruments will also
enable the Fonar 360, in its future "OR-360(TM)" version, to be used for image
guided surgery.
The "QUAD(TM) 12000" MR scanner utilizes a 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 offers a low cost open MRI scanner, the
"Echo(TM)" operating at .3 Tesla field strength. The Company's current "works in
progress" include its "Stand-Up MRI", also called "Indomitable(TM)", a scanner
which will allow patients to be scanned while in weight-bearing positions, and
the "Pinnacle(TM)" which combines many of the features of the QUAD scanners with
a superconducting magnet. (See "Works in Progress".)
Indomitable(TM) will permit, for the first time, MRI diagnoses to be
made in the weight-bearing state. It is also anticipated that Indomitable(TM)
will enable MRI-guided surgical and interventional procedures to be performed
when the patient is upright as well as in the typical supine position. The
Company submitted the Indomitable(TM) to the FDA for approval in August, 2000.
As a result of these new products and other research and development,
the Company is positioning itself to dramatically increase sales and improve its
competitive position in the marketplace.
Following a two and a half year period of intense research and
development activity the Company is now in the process of turning its attention
from predominately research and development to predominantly sales.
The Company intends to increase its sales force and is seeking
experienced medical equipment salesmen and distributors worldwide. Among other
things the Company also intends to expand its website to a full-scale
interactive sales desk for reaching new customers and assisting existing
customers.
The Company will also continue to actively seek to promote foreign
sales. The Company believes there are and will be significant market
opportunities abroad, particularly in Asia and Eastern Europe.
In March 1997, FONAR formed Health Management Corporation of America
(formerly U.S. Health Management Corporation and hereinafter sometimes referred
to as "HMCA") as a wholly-owned subsidiary for the purpose of engaging in the
business of providing comprehensive management and administrative services,
office space, equipment, repair and maintenance service for equipment and
clerical and other personnel (other than physicians) to physicians' practices
and other medical providers, including diagnostic centers.
HMCA entered the physician and diagnostic management services business
through the consummation of two acquisitions, effective June 30, 1997. As a
result of these two acquisitions, three additional acquisitions and the opening
of new facilities, HMCA currently is managing 22 diagnostic imaging centers and
12 primary care and specialty medical practices located principally in New York
State and Florida.
PRODUCTS
The Company's principal products are the Fonar 360, the QUAD series of
MRI scanners and the Echo.
The Fonar 360 has an enlarged room sized magnet in which the magnet
frame is incorporated into the floor, ceiling and walls of the scan room. This
is made possible by Fonar's patented Iron-Frame(TM) technology which allows the
Company's engineers to control, contour and direct the magnet's lines of flux in
the patient gap where wanted and almost none outside of the steel of the magnet
where not wanted. Physicians and family members are able to actually enter the
scanner and approach the patient. In its Open Sky version, the Fonar 360 serves
as an open patient friendly scanner which allows 360 access to the patient on
the scanner bed. The walls can be decorated with panoramic murals and the entire
scan room can be decorated to be incorporated into the pictured landscape.
In its future interventional OR-360 version, the enlarged room sized
magnet and 360 access to the patient afforded by the Fonar 360 permit
full-fledged surgical teams to walk into the magnet and perform surgery on the
patient inside the magnet. Most importantly the exceptional quality of the MRI
image and its exceptional capacity to exhibit tissue detail on the image, by
virtue of the nuclear resonance signal's extraordinary capacity to create image
contrast, can then be obtained real time during surgery to guide the surgeon in
the surgery. Thus surgical instruments, needles, catheters, endoscopes and the
like can be introduced directly into the human body and guided to the malignant
lesion by means of the MRI image. The number of inoperable lesions should be
greatly reduced by the availability of this new capability. Most importantly
treatment can be carried directly to the target tissue.
With current treatment methods, therapy must always be restricted in the
doses that can be applied to the malignant tissue because of the adverse effects
on the healthy tissues. Thus chemotherapies must be limited at the first sign of
toxic side effects. The same is the case with radiation therapy. The Company
expects that with the OR 360 treatment agents may be administrated directly to
the malignant tissue through small catheters or needles allowing much larger
doses of chemotherapy, x-rays, laser ablation, microwave, or 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 make assessments during treatment if his treatment is being effective.
To increase the number of patients who can be scanned, patients are rolled into
the scanner room on a special high-throughput gurney. Once the bed is anchored
in position, it allows for full horizontal, vertical and rotational positioning
for scanning any region of the body. To optimize the patient-friendly character
of the Open Sky MRI, the walls, floor, ceiling and magnet poles are decorated
with landscape murals. The patient gap is twenty inches and the magnetic field
strength, like that of FONAR's QUAD 12000, is 0.6 Tesla. The Open Sky MRI shares
the fundamental technology of the QUAD 12000 and offers the same speed,
precision and image quality.
The QUAD(TM) 12000 MR scanner utilizes a 6000 gauss iron core
electromagnet and is accessible from four sides. The QUAD 12000 is the first
"open" MR scanner at high field. The QUAD(TM) 7000 is similar in design to the
QUAD 12000 but utilizes a smaller 3,500 gauss electromagnet.
In addition to the patient comfort, increased throughput and new
applications (such as MRI directed surgery and MRI mammography) made possible by
the QUAD scanners' open design, the QUAD scanners are designed to maximize image
quality through an optimal combination of signal-to-noise (S/N) and
contrast-to-noise (C/N) ratios. The technical improvements realized in the
QUAD's design over its predecessors also include increased image-processing
speed and diagnostic flexibility.
MRI directed surgery (laproscopic surgical procedures) is possible by
the QUAD's ability to supply images to a monitor positioned next to the patient,
enabling a surgeon to view in process surgical procedure from an unlimited
number of vantage points. The marked openness of FONAR's QUAD scanners enables
surgeons to perform a wide range of surgical procedures inside the magnet.
The "QUAD" scanners are unique MR scanners in that four sides are open,
thus allowing access to the scanning area from four vantage points. The
starshaped open design of the QUAD will also make possible a host of new
applications, particularly MRI mammography and MRI directed surgery
(Interventional MRI).
With the QUAD's multi-bed patient handling system, many more short scan
procedures such as those used in breast imaging can be done in a day, allowing
the price of MRI mammography to drop without reducing the scanner's
revenue-generating capacity. At the same time, there is not the painful
compression of the breast characteristic of X-ray mammography.
The principal difference between the QUAD scanners and other open MRI
scanners is in field strength. Other open MRIs operate at significantly lower
magnetic field strengths and, therefore, are unable to produce the amount of MRI
image-producing signal necessary to make high-quality MRI images (measured by
signal-to-noise ratios, S/N).
The QUAD 12000 scanner utilizes a 6000 gauss (.6 Tesla field strength)
iron core electromagnet. The greater field strength of the 6000 gauss magnet,
when enhanced by the electronics already utilized by the Company's scanners,
produces images of a higher quality and clarity than other open MRI scanners.
The QUAD 12000 scanner magnet is the highest field "open MRI" in the industry
and operates at a field strength that is almost two times its closest competitor
(.6 Tesla field strength versus .35 Tesla field strength).
The QUAD scanners are designed to maximize image quality through an
optimal combination of signal-to-noise (S/N) and contrast-to-noise (C/N) ratios.
The technical improvements realized in the QUAD's design over its predecessors
also include increased image-processing speed and diagnostic flexibility.
Maximal S/N is achieved when the direction of the magnetic field and the
direction of the receiving coil axis are perpendicular to one another, as is the
case with the QUAD scanners. The orientation of the magnetic field is vertical
and when combined with any one of FONAR's array of solenoidal (wrap-around)
surface coils, the QUAD 12000, for example, produces as much S/N as a supercon
MRI at twice the field strength. So that prospective buyers can make an accurate
comparison, the number 12,000 is used to describe the S/N equivalency of the
QUAD 12000 to 12,000-gauss superconductive machines.
Several technological advances have been engineered into the QUAD
scanners for extra improvements in S/N, including: new high-S/N Organ
Specific(TM) receiver coils\; new ceramic magnet poles that provide advanced
eddy-current control\; new advanced front-end electronics featuring high-speed,
wide-dynamic-range analog-to-digital conversion and a miniaturized
ultra-low-noise pre-amplifier\; high-speed automatic tuning, bandwidth-optimized
pulse sequences, multi-bandwidth sequences, and off-center FOV imaging
capability.
In addition to the signal-to-noise ratio, however, the factor that must
be considered when it comes to image quality is contrast, the quality that
enables reading physicians to clearly distinguish adjacent, and sometimes
minute, anatomical structures. This quality is measured by contrast-to-noise
ratios (C/N). Unlike S/N, which increases with increasing field strength,
relaxometry studies have shown that C/N peaks in the mid-field range and
actually falls off precipitously at higher field strengths. The QUAD 7000 and
QUAD 12000 scanners operate squarely in the optimum C/N range. In addition, the
Company's works-in-progress, the OR 360, Open Sky MRI and Stand-Up MRI are also
designed to operate with said C/N range.
The QUAD 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, 1280 x 1280-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.
During fiscal 2000, sales of the Company's QUAD scanners accounted for
approximately 8.6% of the Company's total revenues and 66.5% of its medical
equipment segment revenues, as compared to 7% of total revenues and 40% of
medical equipment revenues during fiscal 1999. There were no sales of Ultimate
or Beta scanners in fiscal 2000 and only one sale of a Beta scanner (1% of total
revenues and 6.6% of medical equipment segment revenues) in fiscal 1999.
The Company also offers a low cost open scanner, the Echo, which
operates at a .3 Tesla field strength. The Echo is an open upgraded version of
the Company's former principal product, the Beta MRI scanner, but open on four
sides to provide four directions for patient access instead of two.
The materials and components used in the manufacture of the Company's
products (circuit boards, computer hardware components, electrical components,
steel and plastic) are generally available at competitive prices. The Company
has not had difficulty acquiring such materials.
WORKS IN PROGRESS
The Company's current "works in progress" center around the development
of the Indomitable(TM) and Pinnacle scanners. All of the Company's products and
works-in-progress seek to bring to the public MRI products that are expected to
provide important advances against serious disease.
MRI takes advantage of the nuclear resonance signal elicited from the
body's tissues and the exceptional sensitivity of this signal for detecting
disease. Much of the serious disease of the body occurs in soft tissue. The
principal diagnostic modality currently in use for detecting disease, as in the
case of x-ray mammography, are diagnostic x-rays. X-rays discriminate soft
tissues like healthy breast tissue and cancerous tissue poorly because the x-ray
particle traverses the tissues almost equally thereby rendering the target film
equally exposed by the two tissues and creating healthy and cancerous shadows on
the film that differ very little in brightness. The image contrast between
cancerous and healthy tissue is poor, making the detection of breast cancers by
the x-ray mammogram less than optimal. If microscopic stones
(microcalcifications) are not present to provide the missing contrast the breast
cancer goes undetected. They frequently are not present. The maximum contrast
available by x-ray with which to discriminate disease is 4%. Brain cancers
differ from surrounding healthy brain by only 1.6%.
On the other hand the soft tissue contrasts with which to distinguish
cancers on images by MRI are up to 180%. This is because the nuclear resonance
signals from the body's tissues differ so dramatically. Liver cancer and healthy
liver signals differ by 180%. Thus there is some urgency to bring to market an
MRI based breast scanner that can overcome the x-ray limitation and assure that
mammograms do not miss serious lesions. The added benefit of MRI mammography
relative to x-ray mammography is the elimination of the need for the patient to
disrobe and the painful compression of the breast typical of the x-ray
mammogram. The patient is scanned in her street clothes in MRI mammography.
Moreover MRI mammogram scans the entire chest wall including the axilla for the
presence of nodes which the x-ray mammogram cannot reach.
Among its other uses, the Company envisions that its Open Sky MRI(TM)
scanner will meet the public need for an MRI breast scanner.
In addition there is a need for a treatment modality that can deal
effectively with the diseased tissue once it has been detected.
The Company's Indomitable(TM) scanner will allow patients to be scanned
while standing or reclining. As a result, for the first time, MRI will be able
to be used to show abnormalities and injuries under full weight-bearing
conditions, particularly the spine and joints.
A floor-recessed elevator brings the patient to the height appropriate
for the targeted image region. A custom-built adjustable bed will allow patients
to sit or lie on their backs, sides or stomachs at any angle.
Full-range-of-motion studies of the joints in virtually any direction
will be possible, an especially promising feature for sports injuries. Maximal
flexion cines of the lumbar spine will be achieved under full body weight.
Indomitable(TM) will also be useful for MR-directed surgical procedures
as the surgeon would have unhindered access to the patient with no restrictions
in the vertical direction.
This easy-entry, mid-field-strength scanner should be ideal for trauma
centers where a quick MRI-screening within the first critical hour of treatment
will greatly improve patients' chances for survival and optimize the extent of
recovery.
The Company is seeking approval from the FDA for Indomitable and
submitted an application on August 9, 2000.
The Company is also developing a superconductive version of its open
iron frame magnets, the "Pinnacle" (TM), and has completed construction of a
prototype with a 0.6 Tesla superconductive magnet. The Company's design of its
superconductive magnet anticipated the possibility of making its other products
available as superconducting magnets. Therefore, it is the Company's objective
to make Indomitable(TM) and the Fonar 360 available to FONAR's customers as
either iron-frame resistive models or iron-frame superconductive magnets
depending on customer preference and pricing.
The Pinnacle will have a field strength between 0.6 to 1.0 Tesla and a
18-inch gap vertical field. This MRI scanner will combine the benefits of its
patented iron-frame, vertical field magnet design with a superconducting magnet.
The Company is negotiating with several universities to install and
commence clinical trials of its new products. The Company is working with these
universities to jointly secure research funding for these products.
PRODUCT MARKETING
The principal markets for the Company's scanners are hospitals and
private scanning centers.
Following a two and a half year period of intense research and
development activity to develop and consolidate the features of its MRI
scanners, the Company is now turning its attention from predominantly research
and development to predominantly sales.
The Company intends to increase its sales force and is seeking
experienced medical equipment sales personnel and distributors. The Company will
conduct domestic sales through its own sales personnel and independent sales
representatives and distributors. In foreign markets, the Company plans to
expand its existing network of independent distributors.
In addition, the Company plans to expand its website to include an
interactive "sales desk" for reaching customers and to commence a program for
providing demonstrations of its products to potential customers on an
international basis.
The Company has exhibited its new products at the annual trade show held
by the Radiological Society of North America ("RSNA") in Chicago since November
1995 and plans to attend the RSNA trade show in November 2000 and future years.
The RSNA trade show is held annually and is attended by most manufacturers of
MRI scanners.
The Company is directing its marketing efforts to meet the demand for
both "open" and high field strength MRI scanners. Utilizing a 6000 gauss (0.6
Tesla field strength) iron core electromagnet, the QUAD 12000 scanner magnet is
the highest field "open MRI" in the industry.
The Company also plans to direct its marketing efforts to meeting the
increasing demand for low price MRI. To date, the increased pressure for lower
scanning prices has come largely from preferred provider organizations, health
maintenance organizations and other private sector group plans and stricter
insurance requirements, but government mandated health care reform is also under
consideration.
To meet this demand, the Company has set competitive prices for the QUAD
12000 and QUAD 7000 scanners. In addition to reducing the health care provider's
equipment cost, the QUAD scanners' improved image processing speed and
extra-bed(s) option (allowing patients to be prepped while another patent is
being scanned) would enable the provider to increase patient volume and further
reduce per scan costs.
The reduced per scan costs will enable the Company to promote the QUAD
7000 in particular for short scan procedures such as MRI mammograms. MRI
mammograms have the advantage over traditional x-rays of involving no radiation,
and an MRI breast scan can be taken in most cases through ordinary street
clothes without any painful compression.
The Company also will seek to introduce new MRI applications for the
QUAD scanners such as MRI-directed surgery and head-to-toe MRI preventive
screening.
The Company will also focus its marketing efforts on Indomitable (TM)
which when commercially available will be the first MRI scanner to enable images
and diagnoses to be made of a patient in the weight-bearing state.
The Company is actively seeking to promote foreign sales and has sold
scanners in various foreign countries. Based on indications of interest,
meetings, sales trips abroad and negotiations, the Company is optimistic that
foreign sales will continue to be an important source of revenue.
The Company believes there are and will be significant market
opportunities abroad, particularly in Asia and Eastern Europe.
During the fiscal year ended June 30, 2000, 2.8% of the Company's
revenues were generated by foreign sales, as compared to 3.4% and 4.6% for
fiscal 1999 and 1998 respectively. See "Note 20 to Notes to Consolidated
Financial Statements" for the percentage of foreign sales as in relation to the
Company's total revenues.
SERVICE AND UPGRADES FOR MRI SCANNERS
The Company's customer base of installed scanners has been and will
continue to be an additional source of income, independent of direct sales.
Income is generated from the installed base in two principal areas
namely, service and upgrades. Service and maintenance revenues from the
Company's installed base were approximately $3.7 million in fiscal 1998, $3.1
million in fiscal 1999 and $2.8 million is fiscal 2000. The decreases in fiscal
1999 and 2000 were principally the result of the retirement of old scanners.
The Company anticipates that its new line of 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. For example, new software
packages make possible the reformatting of scanner slices so that a stack of
slices across the large bowel allow one to reconstruct the lumen of the bowel
and through the use of software navigators visually carry out a "fly-thru"
through the bowel searching for polyps and tumors. The procedure eliminates the
unpleasant intubation of the bowel for routine colonoscopy. The procedure is
presently operative using a CT scanner and plans are underway to adopt it for
MRI. Software can be added to current MRI angiograms to synchronize the
angiograms to the cardiac cycle. By doing so the dynamics of blood vessel
filling and emptying can be visualized with cine movies. Such enhancements are
attractive to the end users because they extend the useful life of the equipment
and enable the user to avoid obsolescence and the expense of having to purchase
new equipment.
Service and upgrade revenues are expected to increase as sales of QUAD
scanners and the size of the customer base increases.
RESEARCH AND DEVELOPMENT
During the fiscal year ended June 30, 2000, the Company incurred
expenditures of $5,893,648 ($361,323 of which was capitalized) on research and
development, as compared to $6,647,555 (none of which was capitalized) and
$6,506,995 (none of which was capitalized) incurred during the fiscal years
ended June 30, 1999 and June 30, 1998, respectively.
Research and development activities have focused, in large part, on the
development of the new Fonar 360 and Indomitable MRI(TM) scanners and the
continued development and enhancement of the Company's QUAD MR scanners. The
Fonar 360 (OR 360 and Open Sky MRI), Indomitable MRI and QUAD scanners involve
significant software and hardware development as the new products represented
entirely new hardware design and architecture requiring a complete new operating
software system. The Company's research activity includes developing a multitude
of new features for the QUAD series scanners made possible by the QUAD's high
speed processing power.
BACKLOG
The Company's backlog of unfilled orders at September 1, 2000 was
approximately $2.05 million, as compared to $1.4 million at September 1, 1999.
Of these amounts, approximately $0.45 million and $0.35 million had been paid to
the Company as customer advances as at September 1, 2000 and September 1, 1999,
respectively. Of the backlog amounts at September 1, 1999 and September 1, 2000,
none represented orders from affiliates. It is expected that the existing
backlog of orders will be filled within the current fiscal year. The Company's
contracts generally provide that if a customer cancels an order, the customer's
initial down payment for the MRI scanner is nonrefundable.
PATENTS AND LICENSES
There are currently numerous patents in effect which relate to the
technology and components of the MRI scanners, some of which are registered in
the name of the Company and others which are registered in the name of Dr.
Raymond V. Damadian, the President and principal stockholder of the Company. The
Company believes that these patents, 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. Only one patent, which will expire
in October, 2000, remains subject to this license. No royalties have been paid
to Dr. Damadian under this license.
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. None of the recoveries with respect to the enforcement of this
patent were received by Dr. Damadian.
The Company has significantly enhanced its patent position within the
industry and now possesses a substantial patent portfolio which provides the
Company, under the aegis of United States patent law, "the exclusive right to
make, use and sell" many of the scanner features which FONAR pioneered and which
are now incorporated in most MRI scanners sold by the industry. The Company has
47 patents issued and 32 patents pending. A substantial number of FONAR's
existing patents specifically relate to protecting FONAR's position in the high
field iron frame open MRI market. The patents further enhance Dr. Damadian's
pioneer patent (the 1974 Patent), that initiated the MRI industry and provided
the original invention of MRI scanning.
The Company has entered into a cross-licensing agreement (utilizing
other than FONAR's MRI technology) with another entity to use prior art
developed for nuclear magnetic resonance technology and has entered into a
license to utilize the MRI technology covered by the existing patent portfolio
of a patent holding company. The Company also has patent cross-licensing
agreements with other MRI manufacturers.
PRODUCT COMPETITION
MRI SCANNERS
A majority of the MRI scanners in use in hospitals and outpatient
facilities and at mobile sites in the United States are based on high field air
core magnet technology while the balance are based on open iron frame magnet
technology. In 1998 the size of the MRI market in the United States was
approximately $957 million. The market share of high field air core MRI's was
approximately 57%. In 1999 the size of the MRI market in the United States was
approximately 1.074 billion. FONAR's open iron frame MRI scanners are competing
principally with high field air core scanners. The QUAD 12000 scanner, however,
utilizing a 6,000 gauss (0.6 Tesla field strength) iron core electromagnet, is
the first "open" MR scanner at high field strength. In addition FONAR's
works-in-progress include a superconductive version of its open iron frame
magnets.
FONAR believes that its MRI scanners have significant advantages as
compared to the high field air core scanners of its competitors. These
advantages include:
1. There is no expansive fringe magnetic field. High field air core
scanners require a more expensive shielded room than is required for the iron
frame scanners. The shielded room required for the iron frame scanners is
intended to prevent interference from external radio frequencies.
2. They are more open, quiet and in the case of the QUAD scanners allow
for faster throughput of patients.
3. Their annual operating costs are lower.
4. They can scan the trauma victim, the cardiac arrest patient, the
respirator-supported patient, and premature and newborn babies. This is not
possible with high field air core scanners because their magnetic field
interferes with conventional life-support equipment.
The principal competitive disadvantage of the Company's products is that
they are not "high field strength" (1.0 Tesla +) magnets. As a general
principle, the higher the field strength can produce a faster scan. In some
parts of the body a faster scan can be traded for a clearer picture. Although
the Company believes that the lower cost of its systems plus the benefits of
"openness" provided by its scanners compensate for the lower field strength,
certain customers will still prefer the higher field strength.
FONAR faces competition within the MRI industry from such firms as
General Electric Company\; Picker International, which is a Division of General
Electric Company PLC, of England;\ Philips N.V.\; Toshiba Corporation, Hitachi
Corporation and Siemens A.G. Most competitors have marketing and financial
resources more substantial than those available to the Company and have in the
past, and may in the future, heavily discount the sales price of their scanners.
Such competitors sell both high field air core and iron frame products. FONAR's
current market share of the market for MRI scanners is less than 5%. FONAR
introduced the first "Open MRI" in 1982. "Open MRI" was made possible by FONAR's
introduction of an MRI magnet built on an iron frame. Thus the magnetic flux
generating apparatus of the magnet (magnet coils or permanent magnet bricks) was
built into a frame of steel. The steel frame provided a return path for the
magnetic lines of force and thereby kept the magnetic lines of force contained
within the magnet. This enabled FONAR, from 1982 on, to show that the FONAR
magnet was the only magnet that allowed the patients to stretch out their arms,
the only "open" MRI.
The iron frame, because it could control the magnetic lines of force and
place them where wanted and remove them from where not wanted (such as in the
operating room where surgeons are standing), provided a much more versatile
magnet design than was possible with air core magnets. Air core magnets contain
no iron but consist entirely of turns of current carrying wire. FONAR's patented
work-in-progress superconductive iron frame magnet, however, combines the high
field capability of the air core superconductive magnets with the control and
versatility of the open iron frame magnets, thereby joining the best features of
both designs into a single magnet. Thus the air core superconductive magnets
made by Fonar's large competitors that have dominated the MRI market since 1983
remain the confining "tunnel" design that the public has generally resented.
For an 11 year period, 1983-1994, Fonar's large competitors (with one
exception) generally rejected Fonar's "open" design but by 1994 all (with one
exception) added the iron frame "open" magnet to their MRI product line. In 1997
the sale of iron frame "open" magnets exceeded the sale of traditional air core
superconductive magnets. One principal reason for this market shift, in addition
to patient claustrophobia, is the awareness that the "open" magnet designs
permit access to the patient to perform surgical procedures under MRI image
guidance, a field which is now growing rapidly and is called "interventional
MRI."
Fonar's future OR 360 version of the Fonar 360 explicitly addresses this
growing market reception of MRI guided surgical procedures but is not yet
available as a product. Fonar's Indomitable and QUAD series magnets do also.
Although not enabling a full operating theater as the OR 360 does, the iron
frame "Open" QUAD and Indomitable designs permit ready access to the patient
from four sides and therefore enables a wide range of interventional surgical
procedures such as biopsies and needle or catheter delivered therapies to be
performed under MRI image guidance. The "tunnel" air core superconductive
scanners do not permit access to the patient while the patient is inside the
scanner.
While Fonar's current market share of the domestic MRI market is under
5%, FONAR expects to be a leader in domestic open market for several reasons. In
MRI, scanning speed and image quality is controlled by the strength of the
magnetic field. Fonar's QUAD 12000 scanner operates at almost twice the field
strength of the next highest field strength open magnet available presently,
manufactured by Toshiba (0.6 Tesla vs. 0.35 Tesla). The Company's Fonar 360 and
Indomitable scanners also operate at this field strength. High field MRI
manufacturers convinced the marketplace for FONAR, and the marketplace accepts,
that higher field strength translates directly into superior image quality and
faster scanning speeds. This is the principal reason GE's 1.5 Tesla air core
superconductive scanner achieved market dominance in the MRI market before the
marketplace shifted and registered an increased demand for the iron frame "Open
MRI." No companies possess the Fonar 360 and FONAR possesses the pioneer patents
on "Open MRI" technology.
OTHER IMAGING MODALITIES
FONAR's MRI scanners also compete with other diagnostic imaging systems,
all of which are based upon the ability of energy waves to penetrate human
tissue and to be detected by either photographic film or electronic devices for
presentation of an image on a television monitor. Three different kinds of
energy waves - X-ray, gamma and sound - are used in medical imaging techniques
which compete with MRI medical scanning, the first two of which involve exposing
the patient to potentially harmful radiation. These other imaging modalities
compete with MRI products on the basis of specific applications.
X-rays are the most common energy source used in imaging the body and
are employed in three imaging modalities:
1. Conventional X-ray systems, the oldest method of imaging, are
typically used to image bones and teeth. The image resolution of adjacent
structures that have high contrast, such as bone adjacent to soft tissue, is
excellent, while the discrimination between soft tissue organs is poor because
of the nearly equivalent penetration of x-rays.
2. Computerized Tomography ("CT") systems couple computers to x-ray
instruments to produce cross-sectional images of particular large organs or
areas of the body. The CT scanner addresses the need for images, not available
by conventional radiography, that display anatomic relationships spatially.
However, CT images are generally limited to the transverse plane and cannot
readily be obtained in the two other planes (sagittal and coronal). Improved
picture resolution is available at the expense of increased exposure to x-rays
from multiple projections. Furthermore, the pictures obtained by this method are
computer reconstructions of a series of projections and, once diseased tissue
has been detected, CT scanning cannot be focused for more detailed pictorial
analysis or obtain a chemical analysis.
3. Digital radiography systems add computer image processing capability
to conventional x-ray systems. Digital radiography can be used in a number of
diagnostic procedures which provide continuous imaging of a particular area with
enhanced image quality and reduced patient exposure to radiation.
Nuclear medicine systems, which are based upon the detection of gamma
radiation generated by radioactive pharmaceuticals introduced into the body, are
used to provide information concerning soft tissue and internal body organs and
particularly to examine organ function over time.
Ultrasound systems emit, detect and process high frequency sound waves
reflected from organ boundaries and tissue interfaces to generate images of soft
tissue and internal body organs. Although the images are substantially less
detailed than those obtainable with x-ray methods, ultrasound is generally
considered harmless and therefore has found particular use in imaging the
pregnant uterus.
X-ray machines, ultrasound machines, digital radiography systems and
nuclear medicine compete with the MRI scanners by offering significantly lower
price and space requirements. However, FONAR believes that the quality of the
images produced by its MRI scanners is generally superior to the quality of the
images produced by those other methodologies.
GOVERNMENT REGULATION
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 and November 12, 1985. On July 28, 1988, the Magnetic
Resonance Diagnostic Device which includes MR Imaging and MR Spectroscopy was
reclassified by the FDA to Class II status. On June 25, 1992, the Company
received FDA clearance to market the Ultimate Magnetic Resonance Imaging Scanner
as a Class II device. The Company received FDA clearance to market the QUAD 7000
in April 1995 and for the QUAD 12000 in November 1995. On March 16, 2000, the
Company received FDA approval to market the Fonar 360 for diagnostic imaging
(the Open Sky version). On August 9, 2000, the Company applied for FDA approval
for the Stand-Up MRI. The Company anticipates that it will need additional FDA
approvals or clearances for the OR 360 version of the Fonar 360 and Pinnacle MRI
scanners.
The FDA has authority to conduct detailed inspections of manufacturing
plants, to establish "good manufacturing practices" which must be followed in
the manufacture of medical devices, to require periodic reporting of product
defects and to prohibit the exportation of medical devices that do not comply
with the law. The Company is subject to these requirements and has received the
necessary approvals. In addition, the Company needs to obtain any necessary
approvals from the appropriate foreign governmental and other authorities in
connection with its export sales.
Effective November 22, 1985, the Department of Health and Human Services
authorized reimbursement of MRI scans under the Federal Medicare program. In
addition, most private insurance companies have authorized reimbursement for MRI
scans.
Proposed and enacted legislation at the State and Federal levels has
restricted referrals by physicians to medical and diagnostic centers in which
they or their family members have an interest. In addition, regulations have
been adopted by the Secretary of Health and Human Services which provide limited
"safe harbors" under the Medicare Anti-Kickback Statute. These safe harbors
describe payments and transactions which are permitted between an entity
receiving reimbursement under the Medicare program and those having an interest
in or dealings with the entity. Although the Company cannot predict the overall
effect of the adoption of these regulations on the medical equipment industry,
the use and continuation of limited partnerships (where investors may be
referring physicians) to own and operate MRI scanners could be greatly
diminished.
The Company obtains approvals as necessary in connection with the sales
of its products in foreign countries. In some cases, U.S. Food and Drug
Administration approval has been sufficient for foreign sales as well. The
Company's standard practice has been to require either the distributor or the
customer to obtain any such foreign approvals or licenses which may be required.
Commencing in fiscal 1998 export sales to most European countries and
certain other countries have required CE certification (essentially safety
requirements for electrical products). On May 25, 1999, the Company obtained CE
certification. Previously, on April 9, 1999, the Company was approved for ISO
9001 Certification for its Quality Management System. The Quality Management
System is applicable to the design, manufacture, administration of installation
and servicing of magnetic resonance imaging scanner systems.
HEALTH MANAGEMENT CORPORATION OF AMERICA
(PHYSICIAN AND DIAGNOSTIC MANAGEMENT SERVICES BUSINESS)
Health Management Corporation of America (formerly known as U.S. Health
Management Corporation and referred to as "HMCA") was organized by the Company
in March 1997 as a wholly-owned subsidiary for the purpose of engaging in the
business of providing comprehensive management services to physicians' practices
and other medical providers, including diagnostic imaging centers and ancilliary
services. The services provided by the Company include development,
administration, leasing of office space, facilities and medical equipment,
provision of supplies, staffing and supervision of non-medical personnel, legal
services, accounting, billing and collection and the development and
implementation of practice growth and marketing strategies.
Since its formation, HMCA has completed five acquisitions. HMCA became
actively engaged in the physician and diagnostic management services business
through its initial two acquisitions which were consummated effective June 30,
1997. Following these two initial acquisitions, HMCA completed two additional
acquisitions in fiscal 1998 and one additional acquisition in fiscal 1999.
The first acquisition was of a group of several interrelated
corporations, limited liability companies and a partnership engaged in the
business of managing three diagnostic imaging centers and one multi-specialty
practice in New York State. The transaction was effected through a merger
between a wholly-owned subsidiary of HMCA (formed for the purpose of effecting
the transaction) and Affordable Diagnostics, Inc., one of the acquired companies
which immediately prior to the merger had acquired the assets and assumed the
liabilities of the other acquired companies (together, the "Affordable
Companies"). The consideration paid for the Affordable Companies consisted of
2,340,000 shares of the common stock of Fonar.
The business of the Affordable Companies, which is being continued by
HMCA, consisted of providing management, space, equipment, personnel and other
resources to the four managed facilities. The services provided at the
facilities include MRI scans, CAT scans, x-rays, physical rehabilitation, and in
connection with physical rehabilitation, ultra-sound and SSEP/EMG
electromygographic diagnostics. The four managed facilities are located in
Brewster, New York (MRI), Yonkers, New York (MRI and x-ray), Bronx, New York
(MRI and CT) and Riverdale, New York (multi-specialty practice, ultra-sound and
SSEP/EMG electromygographic diagnostics). The assets acquired through the
acquisition include three MRI scanners, one CT scanner, one x-ray machine,
rehabilitation equipment and ultra-sound and electromygographic machines. The
equipment is leased to and used at the managed facilities. In addition, HMCA
consummated the acquisition of an additional MRI scanner pursuant to a contract
entered into prior to the acquisition.
The second completed acquisition was of Raymond V. Damadian, M.D. MR
Scanning Centers Management Company ("RVDC"). Pursuant to the terms of the
transaction, HMCA purchased all of the issued and outstanding shares of stock of
RVDC from Raymond V. Damadian in exchange for 10,000 shares of the Common Stock
of FONAR. Raymond V. Damadian, the principal stockholder, President and Chairman
of the Board of FONAR, was the sole stockholder, director and President of RVDC
immediately prior to the acquisitions. The business of RVDC, which is being
continued by HMCA, was the management of MRI diagnostic imaging centers in New
York, Florida, Georgia and other locations. The assets of RVDC included nine MRI
scanners, office equipment and office furnishings. RVDC also held partnership
interests in three partnerships owning MRI scanning centers.
As a result of these transactions with Dr. Damadian, HMCA has acquired
the business of managing 19 MRI scanning centers. Sixteen of the scanning
centers are managed pursuant to management agreements, and 3 of the centers are
partnerships with RVDC as the general partner. Effective July 1, 1997, HMCA
entered into new management agreements with the centers. Pursuant to the
management agreements, HMCA is providing comprehensive management services,
including administrative services, office facilities, office equipment, supplies
and personnel (except for physicians) to the centers. Service for the centers'
MRI scanning equipment is provided under the management agreements in these
cases. MRI scanning systems are provided to 9 of the centers pursuant to scanner
leases entered into effective July 1, 1997.
All of the facilities previously managed by RVDC are MRI scanning centers.
The third completed acquisition, consummated on January 20, 1998, was an
acquisition of the business and assets of Central Health Care Services
Management Company, LLC (Central Health). Central Health is a management service
organization (MSO) managing a multi-specialty practice in Yonkers, New York. The
assets acquired include therapy and rehabilitation equipment, x-ray equipment,
office equipment and office furnishings. The purchase price of Central Health
was $1,454,160, of which $601,665 was paid in cash, $551,665 by notes, $25,000
by assumptions of liabilities and the balance in shares of Fonar common stock
valued at $275,830.
The fourth completed acquisition, consummated effective March 20, 1998,
was the acquisition of A & A Services, Inc. ("A & A Services"), an MSO managing
four primary care practices in Queens County, New York. A & A Services provides
the practices with management services, office space, equipment, repair and
maintenance service for the equipment and clerical and other non medical
personnel. The office locations for the practices are located in Woodhaven,
Richmond Hill, Corona and Ridgewood in Queens County, New York and account for
over 40,000 primary care patient visits per year. The assets owned by A&A
Services included medical and office equipment and office furnishings. The
purchase price for A&A was $10 million, $4 million of which was paid in cash at
closing and $6 million of which is payable pursuant to promissory notes over a
total of six years from closing. Additional consideration is payable if net
income for the acquired business exceeds $2.3 in any of the five years following
the closing as follows: in each year, 75% of net income between $2.3 million and
$2.8 million; 50% of net income between $2.8 million and $3.5 million and 25% of
net income in excess of $3.5 million.
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. The assets of Dynamic
included therapy and rehabilitation equipment, office equipment and office
furnishings. The purchase price for Dynamic was $11,576,231, consisting of $2.0
million in cash and the balance payable pursuant to promissory notes over an
aggregate period of five years from the closing.
HMCA GROWTH STRATEGY
In addition, HMCA may also pursue acquisitions pursuant to which HMCA
would purchase the assets of physicians' practices. Simultaneously with the
acquisition of the assets, HMCA would enter into agreements with the physicians
(or a professional corporation employing the physicians) pursuant to which HMCA
would lease the use of the assets and provide management services to the
physicians or their professional corporations. The professional corporation
could be either affiliated with HMCA or owned by the selling physicians.
HMCA believes that there are numerous existing medical practices that
could benefit from improved management techniques which would allow the
physicians to spend more time treating patients (thereby increasing their
revenue) and less time being concerned with the day to day tasks of managing the
business. Although the disadvantage to physicians would be the increased
administrative costs in the form of management fees payable to HMCA, the Company
believes the ability of the physicians to spend more time practicing medicine
will more than compensate for these costs.
In addition, expansion plans for HMCA's clients include opening more
offices and expanding existing offices so as to enable practices to treat more
patients more efficiently.
HMCA is seeking to create a network of physicians to participate in
managed care and to promote an expansion of the medical services offered by its
medical practice clients.
HMCA believes that the creation of this network will be particularly
helpful to its clients where capitated fee agreements are negotiated with
insurers since its clients will be able to offer more services from more
locations and thereby obtain a higher capitation rate than they might otherwise
have been able to obtain. Capitated fee arrangements are arrangements with HMO's
whereby the physician or physician practice is paid a fixed monthly fee based on
the age and gender of covered person. The fees vary from HMO to HMO and are
essentially set by the HMO's.
HMCA's growth strategy is intended to enable its medical practice
clients to retain and enhance revenues and to offer patients cost-effective
medical care within an integrated practice offering a broad range of evaluation,
testing, diagnostic, treatment and therapeutic services. In the longer term, as
the network of offices to which it provides its management services grows, HMCA
believes that it will be in an excellent position to attract managed care
contracts for its clients from employers and insurance carriers.
PHYSICIAN AND DIAGNOSTIC MANAGEMENT SERVICES
HMCA's services to the facilities it manages encompass substantially all
of the facilities' operations. These services include:
(1) Offices and Equipment. HMCA provides office space and
equipment to its clients. This includes technologically sophisticated medical
equipment. HMCA also provides improvements to leaseholds, assistance in site
selection and advice on improving, updating, expanding and adapting to new
technology.
(2) Personnel. HMCA staffs all the non-medical positions of its
clients with its own employees, eliminating the client's need to interview,
train and manage non-medical employees, as well as process the necessary tax,
insurance and other documentation relating to employees.
(3) Administrative. HMCA assists in the scheduling of patient
appointments, purchasing of medical supplies and equipment and handling of
reporting, accounting, processing and filing systems. It prepares and files the
physician portions of complex forms to ensure full and timely regulatory
compliance and appropriate cost reimbursement under no-fault insurance and
workers' compensation guidelines.
(4) Billing and Collections. HMCA is responsible for the billing
and collection of revenues from third-party payors including those governed by
no-fault and workers' compensation statutes.
(5) Cost Saving Programs. Based on available volume discounts,
HMCA seeks to obtain favorable pricing for medical supplies, equipment,
pharmaceuticals and other inventory for its clients.
(6) Diagnostic Imaging and Ancillary Services. HMCA can offer
access to diagnostic imaging equipment through diagnostic imaging facilities
managed by it. The Company is expanding the ancillary services offered in its
network to include CT-scans, x-rays, ultrasound, and other ancillary services
useful to its clients.
(7) Marketing Strategies. HMCA is responsible for developing
marketing plans for its clients.
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 specialty practices as well as diagnostic imaging
facilities and other ancillary services. HMCA will seek to promote growth of its
clients' patient and revenue bases by developing a network of medical providers
and assisting its clients in the development of multi-specialty medical
practices.
Marketing activities include locating medical practices which meet the
size, quality and operating parameters set by HMCA. HMCA will focus on
opportunities for expanding the services clients offer and expanding into new
geographic areas. HMCA will also seek to increase the patient volume of clients.
DIAGNOSTIC IMAGING CENTERS AND OTHER ANCILLIARY SERVICES
Diagnostic imaging centers managed by HMCA provide diagnostic imaging
services to patients referred by physicians who are either in private practice
or affiliated with managed care providers or other payor groups. The centers are
operated in a manner which eliminates the admission and other administrative
inconveniences of in-hospital diagnostic imaging services. Imaging services are
performed in an outpatient setting by trained medical technologists under the
direction of interpreting physicians. Following diagnostic procedures, the
images are reviewed by the interpreting physicians who prepare a report of these
tests and their findings. These reports are transcribed by HMCA personnel and
then delivered to the referring physician.
In addition, HMCA is expanding the ancillary services offered in its
network to include CT scans, virtual colonoscopies, x-rays, ultrasound and other
modalities as may be appropriate for the physician practice mix.
HMCA develops marketing programs in an effort to establish and maintain
profitable referring physician relationships and to maximize reimbursement
yields. These marketing approaches identify and target selected market segments
consisting of area physicians with certain desirable medical specialties and
reimbursement yields. Corporate and center managers determine these market
segments based upon an analysis of competition, imaging demand, medical
specialty and payor mix of each referral from the local market. HMCA also
directs marketing efforts at managed care providers.
Managed care providers are becoming an increasingly important factor in
the diagnostic imaging industry. To further its position, HMCA will seek to
expand the imaging modalities offered at its managed centers or to create
networks with other imaging centers. The planned introduction of virtual
colonoscopy at one of the managed centers is considered by HMCA to be one of the
most promising new modalities. The device is used with a CT scanner and enables
the physician to conduct a colonoscopy without using any invasive instruments.
If it proves successful, HMCA will introduce it to other managed centers as
appropriate.
COMPETITION (HMCA)
The physician and diagnostic management services field is highly
competitive. A number of large hospitals have acquired medical practices and
this trend may continue. HMCA expects that more competition will develop. Many
competitors have greater financial and other resources than HMCA.
With respect to the diagnostic imaging centers managed by HMCA, the
outpatient diagnostic imaging industry is highly competitive. Competition
focuses primarily on attracting physician referrals at the local market level
and increasing referrals through relationships with managed care organizations.
HMCA believes that principal competitors for the diagnostic imaging centers are
hospitals and independent or management company-owned imaging centers.
Competitive factors include quality and timeliness of test results, ability to
develop and maintain relationships with managed care organizations and referring
physicians, type and quality of equipment, facility location, convenience of
scheduling and availability of patient appointment times.
GOVERNMENT REGULATION APPLICABLE TO HMCA
Various States prohibit business corporations from practicing medicine.
Consequently, HMCA leases space and equipment to clients and provides clients
with a range of non-medical administrative and managerial services. HMCA does
not engage in the practice of medicine or establish standards of medical
practice or policies for its clients in any such State.
Under the federal Self-Referral Law (the "Stark Law") (which is
applicable to Medicare and Medicaid patients) and the self-referral laws of
various States, certain health practitioners (including physicians,
chiropractors and podiatrists) are prohibited from referring their patients for
the provision of designated health services (including diagnostic imaging and
physical therapy services) to any entity with which they or their immediate
family members have a financial relationship, unless the referral fits within
one of the specific exceptions in the statutes or regulations. Statutory
exceptions under the Stark Law include, among others, direct physician services,
in-office ancillary services rendered within a group practice, space and
equipment rental and services rendered to enrollees of certain prepaid health
plans. Some of these exceptions are also available under the State self-referral
laws.
HMCA's clients generate revenue from patients covered by no-fault
insurance and workers' compensation programs. In the event that changes in these
laws alter the fee structures or methods of providing service, or impose
additional or different requirements, HMCA could be required to modify its
business practices and services in ways that could be more costly to HMCA or in
ways that decrease the revenues which HMCA receives from its clients.
HMCA believes that it is in compliance with applicable Federal, State
and local laws. HMCA does not believe that such laws will have any material
effect on its business.
EMPLOYEES
As of July 1, 2000, the Company employed 568 persons on a full-time and
part-time basis. Of such employees, 13 were engaged in marketing and sales, 43
in research and development, 72 in production, 44 in customer support services,
356 in administration (including 201 on site at facilities and offices managed
by HMCA and 85 performing billing, collection and transcription services for
those facilities) and 40 professional MRI technicians on site at diagnostic
imaging centers managed by HMCA.
<PAGE>
ITEM 2. PROPERTIES
Fonar leases approximately 135,240 square feet of office and plant space
at its principal offices in Melville, New York and at two other locations in
Melville and Farmingdale, New York at a current aggregate annual rental rate of
approximately $834,000, excluding utilities, taxes and other related expenses.
The term of one of the leases extends through 2002 with options to renew up
through 2008 and the term of the other lease extends to the beginning of 2009.
The Company also leases space in Harrisburg, Pennsylvania at a rental of $1350
per month. Management believes that these premises are adequate for its current
needs. HMCA leases approximately 16,850 square feet for its headquarters in
Melville, New York at a current annual rental rate of $369,865. The term of the
lease extends through September, 2009. In addition, HMCA maintains leased office
premises for its clients at approximately 38 site locations having an aggregate
annual rental rate of approximately $1.9 million under leases having various
terms.
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
In January 1998, the Company filed an action against Health South, Inc.,
in the United States District Court for the Eastern District of New York (Civil
Action No. CV-98-0679) alleging infringement of the Company's Multi-Angle
Oblique Imaging Patent (U.S. Patent No. 4,871,966). Health South, Inc. filed a
declaratory judgment counterclaim for non-infringement and invalidity and a
third party claim against a manufacturer of certain of the scanners. The case
was settled with the manufacturer in December, 1999 and with Health South, Inc.
in June, 2000.
There is no material litigation pending, or to its knowledge, threatened
against the Company.
<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 "Small Cap" 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 1997 3.87 2.72 3.94 2.75
October - December 1997 4.03 2.63 4.06 2.66
January - March 1998 3.03 2.38 3.13 2.41
April - June 1998 2.72 1.94 2.75 2.00
July - September 1998 2.47 1.25 2.50 1.31
October - December 1998 1.97 0.97 2.00 1.00
January - March 1999 1.72 1.19 1.78 1.22
April - June 1999 1.41 1.03 1.50 1.09
July - September 1999 1.16 0.91 1.16 0.94
October - December 1999 3.19 0.69 3.25 0.72
January - March 2000 4.91 1.63 4.94 1.66
April - June 2000 3.31 1.44 4.00 1.50
July - September 25 2000 3.44 1.50 3.47 1.81
On September 6, 1999, the Company had approximately 5,387 stockholders
of record of its Common Stock, 12 stockholders of record of its Class B Common
Stock, 4 stockholders of record of its Class C Common Stock and 4,637
stockholders of record of its Class A Non-voting Preferred Stock.
At the present time, the only class of the Company's securities for
which there is a market is the Common Stock.
The Company paid cash dividends in fiscal 1998 and the first three
quarters of fiscal 1999 on monies it received from the enforcement of its
patents. Prior to these dividends, the Company had not paid any cash dividends.
The Company anticipates paying additional dividends on monies it receives from
the enforcement of its patents. Except for these dividends, however, it is
expected that the Company will continue to retain earnings to finance the
development and expansion of its business.
<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, 2000. 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.
<TABLE>
<CAPTION>
As of, or For the Period Ended June 30,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
STATEMENT OF
OPERATIONS
<S> <C> <C> <C> <C> <C>
Revenues $39,073,797 $36,945,044 $ 27,554,357 $17,633,066 $13,915,725
Cost of $30,431,069 $29,391,682 $ 23,841,844 $18,428,574 $14,417,384
revenues
Research and $5,532,325 $ 6,647,555 $ 6,506,995 $ 3,928,035 $ 3,607,703
Development
Expenses
Net Income
(loss) $(10,955,987) $(14,215,763) $ (5,653,086) $56,068,771 $(11,407,444)
Net income
(loss) per $ (.17) $ (.22) $ (.09) $ 1.00 $ (.22)
common share
Weighted 66,304,716 64,071,151 61,175,986 56,097,965 51,516,470
average number
Of shares
outstanding *
BALANCE SHEET
DATA
Working
capital $24,439,609 $37,863,029 $ 54,426,483 $ 62,659,470 $(1,575,857)
(deficit)
Total $84,599,039 $97,648,168 $108,447,780 $ 106,690,561 $28,057,384
assets
Long-term $20,969,186 $24,821,834 $ 16,003,479 $ 4,626,269 $ 4,204,935
debt and
obligations
under capital
leases
Stockholders' $51,284,758 $59,303,773 $72,572,486 $ 73,245,262 $11,412,629
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 and diagnostic management services business.
FONAR's principal MRI products are its Fonar 360, QUAD and Echo(TM) MRI
scanners. Fonar also considers its Stand-Up MRI ("Indomitable(TM)") which has
been submitted to the FDA for approval, to be one of its most promising new
products. The Company believes it is in a position to aggressively seek new
sales. The Fonar 360, QUAD and Indomitable(TM) MRI scanners are highly
competitive and totally new non-claustrophobic scanners not previously available
in the MRI market. At 0.6 Tesla field strength, the QUAD 12000 magnet is the
highest field "Open MRI" in the industry, offering non-claustrophobic MRI
together with high-field image quality for the first time. The Fonar 360 and
Stand-Up MRI share the fundamental technology of the QUAD scanners and also have
a field strength of 0.6 Tesla. The Company's work-in-progress Pinnacle MRI
scanner will combine Fonar's iron frame magnet with a superconducting driver,
and is expected to have a field strength between 0.6 and 1.0 Tesla. The Company
expects vigorous sales from its new products. Fonar also offers the Echo, a low
cost open MRI scanner. (See "Description of Business - Products,
Works-in-Progress and Product Marketing.")
As part of its scanner marketing program, the Company has attended the
industry's annual trade show, RSNA (Radiological Society of North America) since
1995 and plans to do so again in November 2000. The Company believes that it is
uniquely positioned to take advantage of the rapidly expanding "Open MRI"
market, as the manufacturer of the only high-field "Open MRI" in the industry.
The Company expects marked demand for its products since image quality increases
as a direct proportion to magnetic field strength. When commercially available,
Fonar's Stand-Up MRI is expected to be the only MRI capable of producing images
in the weight bearing state. In addition, the Company's new scanners provide
improved image quality and high speed imaging at costs that are significantly
less than the competition and more in keeping with the medical cost reduction
demands being made by our national leaders on behalf of the public.
HMCA generates revenues from providing comprehensive management services
(including development, administration, accounting and billing and collection
services) together with office space, medical equipment, supplies and
non-medical personnel to its clients. Revenues are in the form of management and
leasing fees. HMCA has completed five acquisitions since it was formed in March
1997.
The first acquisition was of a group of companies engaged in the
business of managing three diagnostic imaging centers and one multi-specialty
practice in New York State (the "Affordable Companies"). The second acquisition
was of Raymond V. Damadian, M.D. MR Scanning Centers Management Company
("RVDC"), a company owned by FONAR's principal stockholder, President and
Chairman of the Board, Raymond V. Damadian. The business of RVDC, which is being
continued by HMCA, was the management of MRI diagnostic imaging centers in New
York, Florida, Georgia and other locations. The third acquisition was the
acquisition of the business and assets of Central Health Management Co., LLC
("Central Health") a multi-specialty management service organization (MSO) in
Yonkers, New York. The fourth acquisition was the acquisition of A & A Services,
Inc. ("A & A"), an MSO managing four primary care practices in Queens County,
New York, and the fifth acquisition was the acquisition of Dynamic Health Care
Management, Inc. ("Dynamic"), an MSO managing three multi-specialty physician
practices in Nassau and Suffolk Counties in New York.
In addition, HMCA sponsored the opening of and manages two
multi-specialty facilities. These facilities are located in Orlando, Florida and
Elmhurst, New York.
HMCA did not actively engage in business until after June 30, 1997,
which was the effective date of its acquisitions of the Affordable Companies and
RVDC. As separate businesses, the Affordable Companies had been engaged in
business since 1994 and RVDC had been engaged in business since 1990. For
financial statement presentation the results of operations, assets and
liabilities of the Company and RVDC have been consolidated for prior periods.
The Affordable Companies, Central Health, A & A and Dynamic, have been
consolidated effective as of the dates of their respective acquisitions (June
30, 1997, January 23, 1998, March 20, 1998 and August 20, 1998, respectively).
The Company has assessed the impact of the Year 2000 Issue (Y2K) on its
financial reporting systems and operations. The Year 2000 Issue was the result
of computer programs being written using two digits (rather than four) to define
the applicable year. The Company developed a plan to meet this issue, and
reviewed all in-house computer based systems and its existing customer base of
MRI Scanners. The Company has successfully implemented the Y2K plan and all
systems were upgraded or replaced with little or no impact on operations. Y2K
compliant software was installed on the Company's MRI scanners. The scanners
transitioned to the year 2000 successfully. Costs of addressing these items did
not have a material adverse impact on the Company's financial position.
RESULTS OF OPERATIONS. FISCAL 2000 COMPARED TO FISCAL 1999
In fiscal 2000, the Company experienced a net loss of $11.0 million on
revenues of $39.1 million as compared to net loss of $14.2 million on revenues
of $36.9 million for fiscal 1999.
Revenues attributable to the Company's physician and diagnostic
management services segment (HMCA) increased to $34.0 million in fiscal 2000
from $31.3 million in fiscal 1999. Operating income of $2.5 million was
recognized from the Company's physician and diagnostic management services in
fiscal 2000, as compared to an operating income of $3.1 million in fiscal 1999.
Revenues attributable to the Company's medical equipment segment
declined to $6.2 million in fiscal 2000 from $6.5 million in fiscal 1999,
reflecting lower sales volume in fiscal 2000. Results of operations for the
medical equipment segment improved, however, from a loss of $18.7 million in
fiscal 1999 to a loss of $18.9 million in fiscal 2000.
The Company's consolidated operating loss increased to a loss of $16.4
million for fiscal 2000 from a loss of $15.6 million for fiscal 1999, a further
improvement from the operating loss of $17.6 million for fiscal 1998.
Other income of $1.0 million (principally the net proceeds from the
Company's patent enforcement lawsuits) and investment income of $2.1 million
were recognized by the Company in fiscal 1999 as compared to other income of
approximately $5.6 million (principally the net proceeds from the Company's
patent enforcement lawsuits) and investment income of $1.9 million in fiscal
2000.
Costs of revenues and expenses increased from $52.6 million in fiscal
1999 to $55.5 million in fiscal 2000, reflecting principally the expansion of
the Company's physician and diagnostic management services operations. Costs of
revenue and expenses for the Company's physician and diagnostic management
services increased to $23.6 million in fiscal 2000 from $21.8 million in fiscal
1999. Research and development expenses decreased to $5.5 million in fiscal 2000
as compared to $6.6 million in fiscal 1999.
Overall, costs of revenues and expenses for the Company's medical
equipment segment, however, declined to $24.3 million in fiscal 2000 from $25.1
million in fiscal 1999 reflecting, most significantly, reductions in costs of
product sales ($4.4 million in fiscal 2000 as compared to $4.9 million in fiscal
1999) and an increase in general and administrative expenses ($8.7 million in
fiscal 2000 as compared to $7.7 million in fiscal 1999) and costs of revenue
($7.9 million in fiscal 2000 as compared to $9.5 million in fiscal 1999).
Revenues generated by sales of QUAD MRI scanners were $2.6 million (7%
of total revenues) in fiscal 1999 and $3.2 million (8.4% of total revenues) in
fiscal 2000. Revenues attributable to sales of the Company's Ultimate scanners
during the same period were $0.00.
Sales of Beta scanners were $430,000 in fiscal 1999 (approximately 1%
of total revenues) and $84,255 (approximately 0.2% of total revenues) in fiscal
2000.
Sales to affiliated parties represented approximately 4.5% ($1,752,298)
of the Company's revenues in fiscal 2000, as compared to 0.4% ($150,000) of the
Company's revenues in fiscal 1999.
Gross profit margins on product sales to unrelated parties were negative
(49%) in fiscal 1999 and negative (86.7%) in fiscal 2000. This reflected the
losses on sales of the Company's QUAD scanners. 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 2000 and 1999 by acquiring
approximately $2.1 million and $3.8 million, respectively, worth of new capital
equipment. In addition, the Company expanded its operating capacity by hiring
additional personnel.
Notwithstanding the Company's increased manufacturing activities,
revenues attributable to the Company's medical equipment segment declined to
approximately $6.2 million in fiscal 2000 from approximately $6.5 million in
fiscal 1999. These trends reflected a decline in service revenue from $2.3
million in fiscal 1999 to $1.7 million in fiscal 2000 and a constant level in
product sales in fiscal 2000 ($3.4 million) from fiscal 1999 ($3.4 million). The
decline in service revenue reflects the retirement of old scanners by the
Company's customers. The Company does not expect the decline in revenue to
continue. The Company is enthusiastic about the future of its FONAR 360 product
line and Indomitable(TM) scanners which will bring a new plateau of "openness"
to diagnostic MRI and a new frontier in surgery for performing surgical
treatments using MRI images to guide surgery.
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 2000 the
Company continued its investment in the development of its new MRI scanners,
together with software and upgrades, with an investment of $5,893,648 in
research and development ($361,323 of which was capitalized) as compared to
$6,647,555 (none of which was capitalized) in fiscal 1999. The research and
development expenditure was approximately 116.7% of revenues attributable to the
Company's medical equipment segment (and 15.1% of total revenues) in 2000 and
$102% of medical equipment segment revenues in 1999 (and 18% of total revenues).
The Company has continued its efforts to increase scanner sales in
foreign countries as well as domestically. Based on sales to date, further
indications of interest, meetings, sales trips abroad and negotiations, the
Company is optimistic that foreign sales will continue to prove a significant
source of revenue.
The Company continued to benefit as a result of programs set in motion
in fiscal 1989; namely strict cost containment initiatives and expanding the
corporate business into a greater number of profitable enterprises within and
related to the MRI and medical industries (e.g., physician and diagnostic
management services, customer service, upgrades). As a result of this expansion,
the percentage of the Company's revenue derived from sources other than scanner
sales was approximately 91.4% for fiscal 2000 and 90.9% for fiscal 1999.
During the fiscal year ended June 30, 2000, the Company realized income
of approximately $5.6 million from the settlement of various legal disputes
(essentially its patent infringement actions) as compared to approximately $1.0
million in fiscal 1999.
RESULTS OF OPERATIONS. FISCAL 1999 COMPARED TO FISCAL 1998
In fiscal 1999, the Company experienced a net loss of $14.2 million on
revenues of $36.9 million as compared to a net loss of $5.7 million on revenues
of $27.6 million for fiscal 1998. As a result of HMCA's acquisitions, revenues
attributable to the Company's physician and diagnostic management services
segment (HMCA) increased dramatically, to $31.3 million in fiscal 1999 from
$21.1 million in fiscal 1998. Operating income of $3.1 million was recognized
from the Company's physician and diagnostic management services in fiscal 1999,
as compared to income of $2.7 million in fiscal 1998. Revenues attributable to
the Company's medical equipment segment declined to $6.5 million in fiscal 1999
from $7.8 million in fiscal 1998, reflecting lower sales volume in fiscal 1999.
Results of operations for the medical equipment segment improved, however, from
a loss of $20.3 million in fiscal 1998 to a loss of $18.7 million in fiscal
1999. Other income of $8.6 million (principally the net proceeds from the
Company's patent enforcement lawsuits) and investment income of $3.7 million
were recognized by the Company in fiscal 1998 as compared to other income of
$1.0 million (principally the net proceeds from the Company's patent enforcement
lawsuits) and investment income of $2.1 million in fiscal 1998.
Costs of revenues and expenses increased from $45.1 million in fiscal
1998 to $52.6 million in fiscal 1999, reflecting the expansion of the Company's
physician and diagnostic management services operations and an increase in
research and development in the medical equipment segment. Costs of revenue and
expenses for the Company's physician and diagnostic management services
increased to $21.8 million in fiscal 1999 from $13.7 million in fiscal 1998.
Research and development expenses increased to $6.6 million in fiscal 1999 as
compared to $6.5 million in fiscal 1998.
Overall, costs of revenues and expenses for the Company's medical
equipment segment, however, declined to $25.1 million in fiscal 1999 from $28.1
million in fiscal 1998 reflecting, most significantly, costs of product sales
($4.9 million in fiscal 1999 as compared to $7.8 million in fiscal 1998)
reductions in general and administrative expenses ($7.7 million in fiscal 1999
as compared to $7.5 million in fiscal 1998) and costs of revenue ($8.5 million
in fiscal 1999 as compared to $11.4 million in fiscal 1998).
Revenues generated by sales of QUAD MRI scanners were $4.1 million
(approximately 15% of total revenues) in fiscal 1998 and $2.6 million (7% of
total revenues) in fiscal 1999. Revenues attributable to sales of the Company's
Ultimate scanners during the same period were $0.00.
Sales of Beta scanners were $0.00 in fiscal 1998 and $430,000 in fiscal
1999.
Sales to affiliated parties represented approximately 0.4% ($150,000) of
the Company's revenues in fiscal 1999, as compared to approximately 0.3%
($100,000) in fiscal 1998.
Gross profit margins on product sales to unrelated parties were negative
(98%) in fiscal 1998 and negative (49%) in fiscal 1999. This reflected the
losses on sales of the Company's QUAD scanners.
To reduce the cost of manufacturing its QUAD scanners, the Company
expanded its manufacturing capacity in fiscal 1999 and 1998 by acquiring
approximately $3.8 million and $1.4 million, respectively, worth of new capital
equipment. In addition, the Company expanded its operating capacity by hiring
additional personnel.
Notwithstanding the Company's increased manufacturing activities,
revenues attributable to the Company's medical equipment segment declined to
approximately $6.5 million in fiscal 1999 from approximately $7.8 million in
fiscal 1998. These trends reflected a decline in service revenue from $2.5
million in fiscal 1998 to $2.3 million in fiscal 1999 and a decrease in product
sales in fiscal 1999 ($3.4 million) from fiscal 1998 ($3.9 million).
In fiscal 1999 the Company continued its investment in the development
of its new MRI scanners, together with software and upgrades, with an investment
of $6,647,555 in research and development (none of which was capitalized) as
compared to $6,506,995 (none of which was capitalized) in fiscal 1998. The
research and development expenditure was approximately 102% of revenues
attributable to the Company's medical equipment segment (and 18% of total
revenues) in 1999 and $83.3% of medical equipment segment revenues in 1998 (and
23.6% of total revenues).
During the fiscal year ended June 30, 1999, the Company realized income
of approximately $1.0 million from the settlement of various legal disputes
(essentially its patent infringement actions) as compared to approximately $8.6
million in fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and marketable securities declined from $35.4
million at June 30, 1999 to $23.3 million at June 30, 2000. Principal uses of
cash during fiscal 2000 included capital expenditures of $2.8 million, repayment
of indebtedness and capital lease obligations in the amount of $3.8 million,
purchase of treasury stock of $79,000 and $4.7 million to fund the losses for
the fiscal year.
Marketable securities approximated $11.5 million as of June 30, 2000 as
compared to $20.2 million as of June 30, 1999. From June 30, 1999 to June 30,
2000 the Company reduced its investments in equity securities from approximately
$100,000 to $0, reduced its investments in U.S. Government obligations from
approximately $11.0 million to $10.2 million and reduced its investments in
corporate and government agency bonds from approximately $9.3 million to $1.5
million. This has had the intended effect of reducing the volatility of the
Company's investment portfolio.
Cash used in operating activities for fiscal 2000 approximated $4.7
million. Cash used in operating activities was attributable substantially to the
funding of the net loss for fiscal 2000.
Cash provided by investing activities for fiscal 2000 approximated $5.5
million. The principal source of cash from investing activities during fiscal
2000 consisted of the proceeds from the sale of marketable securities of $8.6
million (less expenditures for property and equipment of approximately $2.8
million).
Cash used in financing activities for fiscal 2000 approximated $4.1
million. The principal uses of cash in financing activities during fiscal 2000
consisted of repayment of principal on long-term debt of approximately $3.8
million.
Total liabilities decreased since June 30, 1999 by approximately $5.0
million to approximately $33.3 million at June 30, 2000. The decrease in
liabilities from June 30, 1999 was attributable to a reduction of approximately
$5.6 million in long-term debt.
As at June 30, 2000, the Company's past due obligations consisted of
approximately $643,534 in past due taxes (various state taxes). 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, 2000, the Company had an unused credit facility with a
bank in the approximate amount of $863,000.
The Company's business plan currently includes an aggressive program for
manufacturing and selling its new line of scanners which are achieving success
in the marketplace. In addition the Company plans, through its subsidiary,
Health Management Corporation of America, to develop and expand its physician
and diagnostic management services) business (See "Description of Business").
The Company believes its present financial resources are sufficient to
achieve the sales, service and production levels necessary to support its
operations.
The Company has developed and begun to implement a new program to
finance a portion of the purchase price of its scanners through a newly formed
subsidiary, Fonar Acceptance Corporation, and to assist the customer in
obtaining the remaining portion of its financing through an independent source
or sources. The new program is intended to increase the overall profitability of
the Company by assisting in the sale of scanners and participating in the
profits derived from financing those sales.
Advances and notes to affiliates and related parties increased by
approximately $597,000 from June 30, 1999 to June 30, 2000. As these are
long-term assets, they tend to reduce the Company's liquidity.
Capital expenditures for each of fiscal 2000 and 1999 approximated $2.8
million and $5.5 million, respectively, and substantially consisted of office
and production equipment.
The Company's business plan initiated in September 1989, had as its
objective the enhancement and stabilization of revenue streams through the
generation of additional income from its installed base of scanners and leasing
programs. In addition, the Company instituted strict cost containment programs.
While continuing to focus on new sources of income, the Company now has
commenced aggressive sales and manufacturing of its new generation of Open MRI
scanners and is reemphasizing MRI Scanner sales. In addition, the Company is
enhancing its revenue by entering into the physician and diagnostic management
services business through its new subsidiary, HMCA.
Cost containment programs continue in force notwithstanding an increase
in costs and expenses resulting from increased manufacturing activity and
marketing of its MRI scanners and the expansion of HMCA's physician and
diagnostic management services business. These programs, which include
increasing the portion of manufacturing conducted on the Company's premises,
have enabled the Company to achieve significantly lower manufacturing costs than
would have otherwise been experienced in the production of its QUAD scanners.
This has enabled the Company to pass on to customers a much needed reduction in
the sales price of MRI scanners.
The Company's plan calls for a continuing emphasis on providing its
customers with enhanced equipment service and maintenance capabilities and
delivering state-of-the-art, innovative and high quality equipment upgrades at
competitive prices. Fees for on-going service and maintenance from the Company's
installed base of scanners were $2.3 million for the year ended June 30, 1999
and $1.7 million for the year ended June 30, 2000 (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, 2000 approximates
$24.4 million, as compared to a working capital surplus of $37.9 million as of
June 30, 1999.
The change in the Company's working capital position resulted primarily
from its investments in new equipment ($2.8 million), note payments on the
purchase prices for HMCA's acquisitions ($3.7 million), its overall operating
losses, and an increase in its current liabilities of $560,099 ($18.4 million as
at June 30, 2000 as compared to $17.8 million as at June 30, 1999.
The Company believes that the above mentioned financial resources will
provide the cash flows needed to achieve the sales, service and production
levels necessary to support its operations. In addition, the Company is
exploring other financing alternatives which may become available as the success
of the previously described programs accelerates.
<PAGE>
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET
RISK
The Company has investments in fixed rate instruments. None of the
fixed rate instruments in which the Company invests extend beyond June 30, 2005.
Below is a tabular presentation of the maturity profile of the fixed rate
instruments held by the Company at June 30, 2000.
INTEREST RATE SENSITIVITY
PRINCIPAL AMOUNT BY EXPECTED MATURITY
WEIGHTED AVERAGE INTEREST RATE
Date Investments in Fixed Rate Weighted Average
Instruments Interest Rate
6/30/01 4,156,967 6.0%
6/30/02 2,514,105 6.5%
6/30/03 3,378,037 7.0%
6/30/04 1,446,141 6.1%
6/30/05 253,734 7.1%
Total: 11,748,984
Fair Value
at 6/30/00 11,484,176
All of the Company's revenue, expense and capital purchasing activities
are transacted in United States dollars.
See Note 11 to the Company's Financial Statements for information on
long term debt.
<PAGE>
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FONAR CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Page No.
-------
INDEPENDENT AUDITORS' REPORT F2
CONSOLIDATED BALANCE SHEETS F3 - F5
At June 30, 2000 AND 1999
CONSOLIDATED STATEMENTS OF OPERATIONS F6
For the Three Years Ended June 30, 2000, 1999 and 1998
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY F7 - F12
For the Three Years Ended June 30, 2000, 1999 and 1998
CONSOLIDATED STATEMENTS OF CASH FLOWS F13 - F14
For the Three Years Ended June 30, 2000, 1999 and 1998
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F15 - F52
SELECTED FINANCIAL DATA (*)
For the Five Years Ended June 30, 2000
(*) 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, 2000 and 1999, 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, 2000. 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, 2000 and 1999, and the
consolidated results of their operations and cash flows for each of the years
in the three-year period ended June 30, 2000, in conformity with generally
accepted accounting principles.
During each of the years in the three-year period ended June 30, 2000, a
significant portion of the Company's revenues was from related parties (see
Notes 2, 3, 5, 8 and 20).
/S/ TABB, CONIGLIARO & McGANN, P.C.
New York, New York
September 25, 2000
F2
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
------
June 30,
---------------------------
2000 1999
------------ ------------
Current Assets
Cash and cash equivalents $11,810,519 $15,175,804
Marketable securities 11,484,176 20,197,698
Accounts receivable, net 14,388,662 13,936,734
Costs and estimated earnings in excess of
billings on uncompleted contracts 968,159 1,463,450
Inventories 3,536,169 4,237,778
Investment in sales-type lease with related
party 57,832 -
Prepaid expenses and other current assets 604,059 701,433
------------ ------------
Total Current Assets 42,849,576 55,712,897
Restricted Cash 5,000,000 5,000,000
Property and Equipment - Net 11,227,454 11,442,493
Advances and Notes to Related Parties,
Net of discounts and allowance for
doubtful accounts of $904,000 at June 30,
2000 and 1999 1,158,998 1,434,689
Investment in Sales-Type Lease with Related
Party 872,603 -
Notes Receivable, Net of allowance for
doubtful accounts of $477,456 at June 30,
2000 and 1999 500,810 24,796
Excess of Cost Over Net Assets of
Businesses Acquired, Net of accumulated
amortization of $2,716,859 and $1,498,166
at June 30, 2000 and 1999, respectively 21,656,990 22,875,683
Other Intangible Assets, Net 1,035,924 888,992
Other Assets 296,682 268,618
------------ ------------
Total Assets $84,599,037 $97,648,168
============ ============
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
June 30,
---------------------------
2000 1999
------------ ------------
Current Liabilities
Current portion of debt
and capital leases $ 6,224,727 $ 4,474,293
Accounts payable 1,738,847 2,401,926
Other current liabilities 8,966,929 9,920,991
Customer advances 582,551 95,518
Income taxes payable 896,913 957,140
------------ ------------
Total Current Liabilities 18,409,967 17,849,868
------------ ------------
Long-term Debt and Capital Leases,
Less Current Maturities 14,744,459 20,347,541
Other Liabilities 138,338 131,629
------------ ------------
14,882,797 20,479,170
------------ ------------
Minority Interest 21,515 15,357
------------ ------------
Commitments, Contingencies and Other
Matters (Notes 1, 2, 3, 5, 10, 11,
12, 14,17 and 19)
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
(Continued)
June 30,
-------------------------------
2000 1999
------------ ------------
Stockholders' Equity
Common stock - $.0001 par value; authorized
- 60,000,000 shares; issued -
56,604,735 and 53,998,906 shares at June
30, 2000 and 1999, respectively;
outstanding - 56,315,471 and 53,793,042
shares at June 30, 2000 and 1999,
respectively $ 5,631 $ 5,378
Class B common stock (10 votes per share) -
$.0001 par value; authorized - 4,000,000
shares; issued and outstanding - 4,211
and 5,211 shares at June 30, 2000 and 1999,
respectively - -
Class C common stock (25 votes per share) -
$.0001 par value; authorized - 10,000,000
shares; issued and outstanding - 9,562,824
shares at June 30, 2000 and 1999 956 956
Class A non-voting preferred stock - $.0001
par value; authorized - 8,000,000 shares;
issued and outstanding - 7,836,286 shares
at June 30, 2000 and 1999 784 784
Preferred stock - $.001 par value;
authorized - 10,000,000 shares; issued
and outstanding - none - -
Paid-in capital in excess of par value 98,581,757 95,385,863
Accumulated other comprehensive income (264,808) (203,106)
Accumulated deficit (44,816,824) (33,860,837)
Notes receivable from stockholders (1,338,005) (1,226,148)
Unearned compensation (213,374) (206,878)
Treasury stock - 289,264 and 205,864 shares
of common stock at June 30, 2000 and 1999,
respectively (671,359) (592,239)
------------ ------------
Total Stockholders' Equity 51,284,758 59,303,773
------------ ------------
Total Liabilities and Stockholders' Equity $ 84,599,037 $ 97,648,168
============ ============
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30,
------------------------------------------
2000 1999 1998
------------ ------------ -----------
Revenues
Product sales - net $ 1,606,229 $ 3,380,467 $ 3,937,726
Product sales - related parties
- net 1,752,298 - -
Service and repair fees - net 1,692,537 2,301,488 2,520,637
Management and other fees -
related parties - net 34,022,733 31,263,089 21,095,994
------------ ------------ -----------
Total Revenues - Net 39,073,797 36,945,044 27,554,357
------------ ------------ -----------
Costs and Expenses
Costs related to product sales 2,849,046 4,931,803 7,800,569
Costs related to product sales
- related parties 1,573,870 - -
Costs related to service and
repair fees 2,396,609 2,697,695 2,373,808
Costs related to management and
other fees - related parties 23,611,544 21,762,184 13,667,467
Research and development 5,532,325 6,647,555 6,506,995
Selling, general and administrative 16,211,414 14,383,842 12,489,539
Compensatory element of stock
issuances for selling, general
and administrative expenses 1,929,706 275,242 1,108,362
Provision for bad debts 177,162 628,836 929,786
Amortization of excess of cost
over net assets of businesses
acquired 1,218,693 1,225,942 272,224
------------ ------------ -----------
Total Costs and Expenses 55,500,369 52,553,099 45,148,750
------------ ------------ -----------
Loss from Operations (16,426,572) (15,608,055) (17,594,393)
Interest Expense (1,710,188) (2,051,290) (728,327)
Investment Income 1,919,744 2,110,780 3,708,938
Other Income, Principally Gain on
Litigation Awards 5,575,375 1,043,119 8,610,035
Minority Interests in Income
of Partnerships (270,669) (300,235) (146,890)
------------ ------------ -----------
Loss Before Provision for Taxes (10,912,310) (14,805,681) (6,150,637)
Provision (Benefit) for Income Taxes 43,677 (589,918) (497,551)
------------ ------------ -----------
Net Loss $(10,955,987) $(14,215,763) $ (5,653,086)
============ ============ ===========
Basic and Diluted Net Loss Per Share$ (.17) $ (.22) $ (.09)
===== ===== =====
Weighted Average Number of Shares
Outstanding 66,304,716 64,071,151 61,175,986
========== ========== ==========
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, 2000
<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, 1999 $ - 53,793,042 $ 5,378 $ 956 $ 784 $95,385,863 $ (592,239) $(1,226,148)
Net loss - - - - - - - -
Other comprehensive income,
net of tax:
Unrealized losses on
securities arising
during the year, net
of tax - - - - - - - -
Less: Reclassification
adjustment for (gains)
losses included in net
loss - - - - - - - -
Exercise of Stock Options 1.13 389,000 39 455,780 - (391,250)
Purchase of common stock .95 - - - - - (79,120) -
Stock issued to employees
under stock bonus plans 2.00 193,523 20 - - 396,662 - -
Issuance of stock in
settlement of liabilities 1.51 490,000 49 - - 742,323 - -
Shares returned in
cancellation of notes
receivable - - - - - - - -
Issuance of stock under
consulting contracts 1.07 1,429,574 143 - - 1,539,378 - -
Issuance of stock for
acquisition of Central
Health Care 3.19 19,332 2 - - 61,751 - -
Net reduction in notes
receivable from
stockholders - - - - - - - 279,393
Amortization of unearned
compensation - - - - - - - -
Conversion of Class B
common stock to Class A
common stock - 1,000 - - - - - -
---------- -------- -------- --------- ----------- ---------- ------------
BALANCE - JUNE 30, 2000 56,315,471 $ 5,631 $ 956 $ 784 $98,581,757 $ (671,359) $(1,338,005)
========== ======== ======== ========= =========== ========== ============
</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, 2000
<TABLE>
<CAPTION>
Accumulated
Other Comprehensive
Unearned Comprehensive Accumulated Income
Compensation Income Deficit Total (Loss)
------------ ------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance - June 30, 1999 $(206,878) $ (203,106) $(33,860,837) $59,303,773
Net loss - - (10,955,987) (10,955,987) $(10,955,987)
Other comprehensive income,
net of tax:
Unrealized losses on
securities arising
during the year, net
of tax - (47,830) - (47,830) (47,830)
Less: Reclassification
adjustment for (gains)
losses included in net
loss - (13,872) - (13,872) (13,872)
Exercise of stock options - - - 64,569 -
Purchase of common stock - - - (79,120) -
Stock issued to employees
under stock bonus plans - - - 396,682 -
Issuance of stock in
settlement of liabilities - - - 742,372 -
Shares returned in
cancellation of notes
receivable - - - - -
Issuance of stock under
consulting contracts (726,962) - - 812,599 -
Issuance of stock for
acquisition of Central
Health Care - - - 61,753 -
Net reduction in notes
receivable from
stockholders - - - 279,393 -
Amortization of unearned
compensation 720,466 - - 720,466 -
Conversion of Class B
common stock to Class A
common stock - - - - -
----------- ----------- ------------ ----------- ------------
BALANCE - JUNE 30, 2000 $ (213,374) $ (264,808) $(44,816,824) $51,284,758 $(11,017,689)
=========== =========== ============ =========== ============
</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, 1999
<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, 1998 $ - 52,954,465 $ 5,294 $ 956 $ 784 $94,502,717 $ (395,445) $(1,854,450)
Net loss - - - - - - - -
Other comprehensive income,
net of tax:
Unrealized losses on
securities arising
during the year, net
of tax - - - - - - - -
Less: Reclassification
adjustment for losses
included in net loss - - - - - - - -
Purchase of common stock 2.03 - - - - - (196,794) -
Stock issued to employees
under stock bonus plans 1.54 161,180 16 - - 206,267 - -
Issuance of stock in
settlement of liabilities - 463,161 47 - - 664,609 - -
Shares returned in
cancellation of notes
receivable - (190,000) (19) - - (539,357) - 539,376
Issuance of stock under
consulting contracts 1.37 202,018 20 - - 275,817 - -
Issuance of stock for
acquisition of Central
Health Care 1.37 202,018 20 - - 275,810 - -
Net change in notes
receivable from
stockholders - - - - - - - 88,926
Amortization of unearned
compensation - - - - - - - -
Conversion of Class B
common stock to Class A
common stock - 200 - - - - - -
---------- -------- -------- --------- ----------- ---------- ------------
BALANCE - JUNE 30, 1999 53,793,042 $ 5,378 $ 956 $ 784 $95,385,863 $ (592,239) $(1,226,148)
========== ======== ======== ========= =========== ========== ============
</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, 1999
<TABLE>
<CAPTION>
Accumulated
Other Comprehensive
Unearned Comprehensive Accumulated Income
Compensation Income Deficit Total (Loss)
------------ ------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance - June 30, 1998 $ - $ (42,296) $(19,645,074) $72,572,486
Net loss - - (14,215,763) (14,215,763) $(14,215,763)
Other comprehensive income,
net of tax:
Unrealized losses on
securities arising
during the year, net
of tax - (194,647) - (194,647) (194,647)
Less: Reclassification
adjustment for losses
included in net loss - 33,837 - 33,837 33,837
Purchase of common stock - - - (196,794)
Stock issued to employees
under stock bonus plans - - - 206,283
Issuance of stock in
settlement of liabilities - - - 664,656
Shares returned in
cancellation of notes
receivable - - - -
Issuance of stock under
consulting contracts (275,837) - - -
Issuance of stock for
acquisition of Central
Health Care - - - 275,830
Net change in notes
receivable from
stockholders - - - 88,926
Amortization of unearned
compensation 68,959 - - 68,959
Conversion of Class B
common stock to Class A
common stock - - - -
----------- ----------- ------------ ----------- ------------
BALANCE - JUNE 30, 1999 $ (206,878) $ (203,106) $(33,860,837) $59,303,773 $(14,376,573)
=========== =========== ============ =========== ============
</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, 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 stock
option plan .37 3,125 1 - - 1,171 - -
Issuance of stock in
settlement of liabilities 2.75 236,345 23 - - 650,641 - -
Shares issued under 1997
non-statutory plan - 2,600 1 - - 19,836 - -
Issuance of stock under
consulting contracts 2.79 223,030 22 - - 622,754 - -
Additional consideration
related to acquisition
of Affordable
Diagnostics, Inc. 1.60 576,000 57 - - 923,385 - -
Issuance of stock in
substitution for
4,909,767 warrants - 2,226,343 222 - - (40) - -
Net change in notes
receivable from
stockholders - - - - - - - 64,146
Amortization of unearned
compensation - - - - - - - -
Class A preferred stock
retired - - - - (1) - - -
---------- -------- --------- --------- ----------- ---------- -----------
BALANCE - JUNE 30, 1998 52,954,465 $ 5,294 $ 956 $ 784 $94,502,717 $(395,445) $(1,854,450)
========== ======== ========= ========= =========== ========== ===========
</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, 1998
<TABLE>
<CAPTION>
Accumulated
Other Comprehensive
Unearned Comprehensive Accumulated Income
Compensation Income Deficit Total (Loss)
------------ ------------- ------------ ----------- -------------
<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 stock
option plan - - - 1,172
Issuance of stock in
settlement of liabilities - - - 650,664
Shares issued under 1997
non-statutory plan - - - 19,837
Issuance of stock under
consulting contracts - - - 622,776
Additional consideration
related to acquisition
of Affordable
Diagnostics, Inc. - - - 923,442
Issuance of stock in
substitution for
4,909,767 warrants - - - 182
Net change in notes
receivable from
stockholders - - - 64,146
Amortization of unearned
compensation 1,096,000 - - 1,096,000
Class A preferred stock
retired - - - (1)
----------- ------------ ------------ ----------- ------------
BALANCE - JUNE 30, 1998 $ - $ (42,296) $(19,645,074) $72,572,486 $ (5,695,382)
=========== ============ ============ =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-12
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30,
------------------------------------------
2000 1999 1998
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(10,955,987) $(14,215,763) $ (5,653,086)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Minority interest in income of
partnerships 270,669 300,235 146,890
Depreciation and amortization 4,670,473 4,657,819 2,917,603
Gain on sale of equipment - (53,573) -
Imputed interest on deferred
payment obligations 397,521 482,716 27,000
Provision for bad debts 177,162 628,836 929,786
Compensatory element of stock
issuances 1,929,706 275,242 1,108,362
Stock issued in settlement of
current liabilities 742,372 664,656 639,715
Liabilities assumed by
purchaser on sale of
subsidiary (824,394) - -
Deferred income taxes - (793,794) (2,500,000)
(Increase) decrease in
operating assets, net:
Receivable from litigation
award - - 77,223,460
Accounts and notes
receivable (1,105,104) (2,747,268) (3,911,903)
Costs and estimated
earnings in excess of
billings on uncompleted
contracts 495,291 (629,835) (814,750)
Inventories 701,609 (724,156) (73,113)
Sales-type lease
receivable-related party (935,000) - -
Principal payments received
on sales-type lease -
related party 4,565 - -
Prepaid expenses and other
current assets 97,374 (415,468) 123,708
Other assets (3,064) 239,817 (270,830)
Receivables and advances
to related parties 275,691 65,425 578,511
Increase (decrease) in
operating liabilities,
net:
Accounts payable (434,425) 372,374 (175,483)
Other current
liabilities (674,669) 56,758 (1,998,835)
Customer advances 487,033 (574,213) (94,671)
Billings in excess of
costs and estimated
earnings on
uncompleted contracts - (31,032) (161,900)
Other liabilities 6,709 17,966 12,722
Income taxes payable (60,227) 2,498 802,449
------------ ----------- -----------
NET CASH (USED IN) PROVIDED
BY OPERATING ACTIVITIES (4,736,695) (12,420,760) 68,855,635
------------ ------------ -----------
See accompanying notes to consolidated financial statements.
F-13
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30,
-------------------------------------------
2000 1999 1998
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in marketable securities $ 8,651,820 $ (106,676) $(20,294,129)
Expenditures for acquisitions - (2,651,665) (4,025,000)
Purchases of property and equipment,
net of capital lease obligations
of $215,086, $741,663 and
$1,391,304 for the years ended
June 30, 2000, 1999 and 1998,
respectively (2,807,264) - -
Costs of capitalized software
development (361,323) (4,774,603) (2,785,795)
Cost of patents and copyrights - (19,686) (19,114)
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 5,483,233 (7,552,630) (27,124,038)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank borrowings - - 5,000,000
Restricted cash for collateral of
bank loan - - (5,000,000)
Repayment of borrowings and
capital lease obligations (3,750,205) (2,097,596) (2,260,424)
Proceeds from exercise of stock
options and warrants 64,569 - 1,353
Repayments of notes receivable in
connection with shares issued
under stock option and bonus
plans - - 600,493
Dividends paid - (3,909,366) (3,945,701)
Purchase of common stock (79,120) (196,794) -
Distributions to holders of
minority interests (347,067) (398,754) (237,114)
------------ ------------ ------------
NET CASH USED IN FINANCING
ACTIVITIES (4,111,823) (6,602,510) (5,841,393)
------------ ------------ ------------
(DECREASE) INCREASE IN CASH (3,365,285) (26,575,900) 35,890,204
CASH - BEGINNING OF YEAR 15,175,804 41,751,704 5,861,500
------------ ------------ ------------
CASH - END OF YEAR $ 11,810,519 $ 15,175,804 $ 41,751,704
============ ============ ============
See accompanying notes to consolidated financial statements.
F-14
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 1 - DESCRIPTION OF BUSINESS
FONAR Corporation (the "Company" or "FONAR") is a Delaware corporation
which was incorporated on July 17, 1978. FONAR is engaged in the
research, development, production and marketing of medical scanning
equipment which uses principles of Magnetic Resonance Imaging ("MRI") for
the detection and diagnosis of human diseases. In addition to deriving
revenues from the direct sale of MRI equipment, revenue is also generated
from its installed base of customers through its service and upgrade
programs.
Health Management Corporation of America ("HMCA") was organized by the
Company in March 1997 as a wholly-owned subsidiary in order to enable the
Company to expand into the business of providing comprehensive management
services to physicians' practices and other medical providers, including
diagnostic imaging centers and ancillary services. The services provided
by the Company include development, administration, leasing of office
space, facilities and medical equipment, provision of supplies, staffing
and supervision of non-medical personnel, legal services, accounting,
billing and collection and the development and implementation of practice
growth and marketing strategies.
HMCA entered the physician and diagnostic management services business
through the consummation of two acquisitions effective June 30, 1997, two
acquisitions, which were consummated during fiscal 1998, and one
acquisition consummated in August of 1998. The acquired companies in all
cases were actively engaged in the business of managing medical
providers. The medical providers are diagnostic imaging centers,
principally MRI scanning centers, multi-specialty practices and primary
care practices.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of FONAR
Corporation and its majority and wholly-owned subsidiaries and
partnerships. 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.
F-15
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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, 2000, all securities covered by SFAS No. 115 were
designated as available for sale. Accordingly, these securities are
stated at fair value, with unrealized gains and losses reported in
comprehensive income. Realized gains and losses on sales of investments,
as determined on a specific identification basis, are included in the
Consolidated Statement of Operations.
Inventories
-----------
Inventories consist of purchased parts, components and supplies, as well
as work-in-process, and are stated at the lower of cost (materials, labor
and overhead determined on the first-in, first-out method) or market.
Property and Equipment
----------------------
Property and equipment procured in the normal course of business is
stated at cost. Property and equipment purchased in connection with an
acquisition is stated at its estimated fair value, generally based on an
appraisal. Property and equipment is being depreciated for financial
accounting purposes using the straight-line method over the shorter of
their estimated useful lives, generally five to seven years, or the term
of a capital lease, if applicable. Leasehold improvements are being
amortized over the shorter of the useful life or the remaining lease
term. Upon retirement or other disposition of these assets, the cost and
related accumulated depreciation of these assets are removed from the
accounts and the resulting gains or losses are reflected in the results
of operations. Expenditures for maintenance and repairs are charged to
operations. Renewals and betterments are capitalized.
Excess of Cost Over Net Assets of Businesses Acquired
-----------------------------------------------------
The excess of the purchase price over the fair market value of net assets
of businesses acquired is being amortized using the straight-line method
over 20 years.
F-16
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Other Intangible Assets
-----------------------
1) Capitalized Software Development Costs
Certain software development costs incurred subsequent to the
establishment of the software's technological feasibility and completion
of the research and development on the product hardware, in which it is
to be used, are required to be capitalized. Capitalization ceases when
the product is available for general release to customers, at which time
amortization of capitalized costs begins. Amortization is calculated on
the straight-line basis over 5 years.
2) Patents and Copyrights
Amortization is calculated on the straight-line basis over 17 years.
Long-Lived Assets
-----------------
The Company periodically assesses the recoverability of long-lived
assets, including property and equipment, intangibles and excess of cost
over net assets of businesses acquired, when there are indications of
potential impairment, based on estimates of undiscounted future cash
flows. The amount of impairment is calculated by comparing anticipated
discounted future cash flows with the carrying value of the related
asset. In performing this analysis, management considers such factors as
current results, trends, and future prospects, in addition to other
economic factors.
Revenue Recognition
-------------------
Revenue on sales contracts for scanners is recognized under the
percentage-of-completion method. The Company manufactures its scanners
under specific contracts that provide for progress payments. Production
and installation take approximately six months. The percentage of
completion is determined by the ratio of costs incurred to date on
completed sub-assemblies to the total estimated cost for each scanner.
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.
F-17
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition (Continued)
-------------------
Revenue under management and lease contracts is recognized based upon
contractual agreements for management services rendered by the Company
and leases of medical equipment under various long-term agreements with
related medical providers (the "PC's"). The PC's are primarily owned by
Raymond V. Damadian, M.D., President and Chairman of the Board of FONAR.
The Company's agreements with the PC's stipulate fees for services
rendered and equipment leased, are primarily calculated on activity based
efforts at pre-determined rates per unit of activity. All fees are
re-negotiable at the anniversary of the agreements and each year
thereafter.
Research and Development Costs
------------------------------
Research and development costs are charged to expense as incurred. The
costs of materials and equipment that are acquired or constructed for
research and development activities, and have alternative future uses
(either in research and development, marketing or production), are
classified as property and equipment and depreciated over their estimated
useful lives. Certain software development costs are capitalized. See
property and equipment and intangible assets (capitalized software
development costs) sections of this note.
Advertising Costs
-----------------
Advertising costs are expensed as incurred.
Income Taxes
------------
Deferred tax liabilities and assets are determined based on the
difference between the financial statement carrying amounts and tax bases
of assets and liabilities using enacted tax rates in effect in the years
in which the differences are expected to reverse.
Product Warranty
----------------
The Company provides currently for the estimated cost to repair or
replace products under warranty provisions in effect at the time of
installation (generally for one year).
Customer Advances
-----------------
Cash advances and progress payments received on sales orders are
reflected as customer advances until such time as revenue recognition
begins.
F-18
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Per Share Data
--------------
Net income (loss) per common and common equivalent share has been
computed based on the weighted average number of common shares and common
stock equivalents outstanding during the year. No effect has been given
to options outstanding under the Company's Stock Option Plans as no
material dilutive effect would result from the exercise of these items.
During fiscal 1998, the Company retroactively adopted Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No.
128"), which requires companies to present basic earnings per share and
diluted earnings per share. No adjustments were required as a result of
this adoption.
Cash and Cash Equivalents
-------------------------
The Company considers all short-term highly liquid investments with a
maturity of three months or less when purchased to be cash or cash
equivalents.
At June 30, 2000, the Company had cash deposits of approximately
$12,161,117 in excess of federally insured limits.
Restricted Cash
---------------
At June 30, 2000 and 1999, $5,000,000 of cash has been pledged as
collateral on an outstanding bank loan and has been classified as
restricted cash on the accompanying balance sheet.
Fair Value of Financial Instruments
-----------------------------------
The financial statements include various estimated fair value information
at June 30, 2000, 1999 and 1998, 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.
F-19
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Value of Financial Instruments (Continued)
-----------------------------------
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 provides proforma net income and proforma
earnings per share disclosures for employee stock option grants, as if the
fair-value-based method defined in SFAS No. 123 had been applied. The Company
has elected to continue to apply the provisions of APB Opinion No. 25 and
provide the proforma disclosure provisions of SFAS No. 123.
Comprehensive Income
--------------------
In November 1997, Statement of Financial Accounting Standard No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130"), was issued which establishes standards
for reporting and displaying comprehensive income in a full set of financial
statements. SFAS No. 130 defines comprehensive income as changes in equity of a
business enterprise during the periods presented, except for transactions
resulting from investments by an owner and distribution to an owner. SFAS No.
130 does not require a company to present a statement of comprehensive income if
no items are present. The Company adopted SFAS No. 130 during fiscal 1998.
Computer Software
-----------------
Effective July 1, 1998, the Company adopted the provisions of SOP 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use", which revises the accounting for software development costs and
requires the capitalization of certain costs. No adjustments were required as a
result of this adoption.
F-20
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Reclassifications
-----------------
Certain prior year balances have been reclassified to conform with the current
year presentation.
NOTE 3 - ACQUISITIONS
Affordable Diagnostics, Inc.
----------------------------
On June 30, 1997, the Company's wholly-owned subsidiary consummated the merger
of the assets, liabilities and operations of Affordable Diagnostics, Inc.
("Affordable"), a New York corporation, which managed and operated three
diagnostic imaging centers and managed one multi-specialty practice in the Bronx
and Westchester, New York. The merger was consummated pursuant to a Merger
Agreement ("Agreement") effective June 30, 1997, by and among HMCA's
wholly-owned subsidiary, HMCM, Inc. ("HMCM"). Pursuant to the agreement, HMCM
acquired all of the assets and liabilities of Affordable through the issuance of
1,764,000 shares of the Company's common stock, valued at $3,630,312, and an
additional 576,000 shares of the Company's common stock were issued in June of
1998 valued at $923,442. The additional 576,000 shares were issued in connection
with a one-year earnout provision, which was achieved during fiscal 1998.
The merger was accounted for as a purchase, under which the purchase price was
allocated to the acquired assets and assumed liabilities based upon fair values
at the date of the merger. The excess of the purchase price over the fair value
of the net assets acquired amounted to approximately $3,719,000 and is being
amortized on a straight-line basis over 20 years. The accompanying consolidated
financial statements include the operations of Affordable from the date of the
acquisition (June 30, 1997).
Concurrent with the above described transactions, HMCM entered into consulting
agreements with the shareholders of Affordable. Under such agreements, 400,000
registered shares of FONAR's common stock, valued at $1,096,000, were issued
pursuant to one year consulting agreements with HMCM. The entire $1,096,000 was
charged to operations during the year ended June 30, 1998.
Acquisition of RVDC
-------------------
Effective June 30, 1997, FONAR's wholly-owned subsidiary, HMCA, acquired Raymond
V. Damadian, M.D. MR Scanning Centers Management Company ("RVDC") and two
affiliates, by purchasing all of the issued and outstanding shares of RVDC from
Dr. Damadian for 10,000 shares of the common stock of FONAR. The business of
RVDC, continued by HMCA, was the management of MRI diagnostics imaging centers
in New York, Florida and Georgia.
The Company has accounted for the acquisition in a manner similar to the
pooling-of-interests method due to Dr. Damadian's control over both the Company
and RVDC.
F-21
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 3 - ACQUISITIONS (Continued)
Central Health Care Management Service, Inc.
-------------------------------------------
On January 23, 1998, a wholly-owned subsidiary of HMCA acquired the business and
assets of Central Health Care Management Services, Inc. ("Central"), a
management service organization ("MSO"), operating in Westchester County, New
York. The purchase price was determined based on a multiple of the net positive
cash flow from the acquired business over the succeeding twelve-month period.
The purchase price was determined to be $1,454,160, $601,665 payable in cash,
$551,665 payable in notes, assumption of liabilities aggregating $25,000, and
the balance payable in shares of common stock of FONAR valued at $275,830.
The acquisition was accounted for as a purchase, under which the purchase price
was allocated to the acquired assets and assumed liabilities, based upon fair
values at the date of the acquisition. The excess of the purchase price over the
fair value of the net assets acquired amounted to $1,254,160 and is being
amortized on a straight-line basis over 20 years. The accompanying consolidated
financial statements include the operations of Central from the date of the
acquisition (January 23, 1998).
In April of 1999, HMCA entered into consulting agreements with the former
shareholders of Central. Under such agreements, 202,018 registered shares of
FONAR's common stock, valued at $275,837, were issued pursuant to consulting
agreements covering the one-year period commencing April 1999. For the period
ended June 30, 2000, $206,878 was charged to operations related to these
agreements.
A&A Services, Inc.
------------------
On March 20, 1998, the Company's physician and diagnostic management subsidiary,
HMCA, consummated the acquisition of the common stock of A&A Services, Inc.
("A&A"), a New York corporation, which manages four primary care practices in
Queens, New York.
Pursuant to the A&A agreements, HMCA acquired all of the common stock of A&A for
$4,000,000 in cash, a note payable for $4,000,000 bearing interest at 6.0% per
annum, payable in 16 equal quarterly installments of interest and principal,
commencing March of 1999, a note payable for $1,293,000, bearing interest at
6.0% per annum, payable in 60 equal monthly installments of principal and
interest, commencing April 20, 1998, a deferred payment obligation face amount
of $2,000,000 and a contingent payment based on the acquired operations
achieving certain earnings objectives over the five-year period following the
acquisition date.
The promissory notes are collateralized by all of the assets of the acquired
operations and are guaranteed by FONAR.
The acquisition was accounted for as a purchase, under which the purchase price
was allocated to the acquired assets and assumed liabilities based upon fair
values at the date of the acquisition. The excess of the purchase price over the
fair value of the net assets acquired amounted to approximately $10,448,000 and
is being amortized on a straight-line basis over 20 years. The accompanying
consolidated financial statements include the operations of A&A from the date of
the acquisition.
F-22
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 3 - ACQUISITIONS (Continued)
A&A Services, Inc. (Continued)
------------------
Subject to the acquired business achieving certain earnings objectives over the
five-year period following the date of acquisition, additional monies would be
due to the sellers. The contingent additional purchase price is not determinable
as of June 30, 2000 and, accordingly, has not been included in the allocated
purchase price in light of the contingent nature of the arrangement. If the
earnings objectives are ultimately achieved, the additional purchase price will
be recorded as additional goodwill subject to amortization over the stated
period. No additional payments were due under the earnout provision for the
years ended June 30, 2000 and 1999.
Dynamic Health Care Management, Inc.
------------------------------------
On August 20, 1998, the Company's physician and diagnostic management
subsidiary, HMCA, consummated the acquisition of the common stock of Dynamic
Health Care Management, Inc. ("Dynamic"), a New York corporation, which manages
three physician practices on Long Island, New York. The practices consist of
internal medicine, physiatry and physical rehabilitation.
Pursuant to the Dynamic agreements, HMCA acquired all of the common stock of
Dynamic for $2,000,000 in cash, a note payable for $1,216,230 bearing interest
at 7.5% per annum, payable in sixty monthly installments, commencing one month
following the closing date, a note payable for $2,870,000 bearing interest at
7.5% per annum payable in three annual installments of principal and interest
commencing one year after the closing date, and promissory notes face amount of
$5,490,000, payable in thirty-six monthly installments of principal and
interest, commencing two years after the closing date.
The promissory notes are collateralized by all of the assets of the acquired
operations and are guaranteed by the Company.
The acquisition was accounted for as a purchase, under which the purchase price
was allocated to the acquired assets and assumed liabilities based upon fair
values at the date of the acquisition. The excess of the purchase price over the
fair value of the net assets acquired amounted to $8,951,907 and is being
amortized on a straight-line basis over 20 years. The accompanying consolidated
financial statements include the operations of Dynamic from the date of
acquisition, August 20, 1998.
F-23
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 4 - MARKETABLE SECURITIES
The following is a summary of marketable securities at June 30, 2000 and 1999:
2000
-------------------------------------------
Unrealized
Holding Fair Market
Cost Loss Value
----------- ---------- -----------
U.S. Government Obligations $10,198,273 $ (210,045) $ 9,988,228
Corporate and government
agency bonds 1,550,711 (54,763) 1,495,948
----------- --------- -----------
$11,748,984 $ (264,808) $11,484,176
=========== ========== ===========
1999
-------------------------------------------
Unrealized
Holding Fair Market
Cost Loss Value
----------- ---------- -----------
U.S. Government Obligations $11,023,733 $ (18,302) $11,005,431
Corporate and government
agency bonds 9,277,071 (184,304) 9,092,767
Equity securities including
mutual stock funds 100,000 (500) 99,500
----------- ---------- -----------
$20,400,804 $ (203,106) $20,197,698
=========== ========== ===========
All debt securities are due within five years. Of the cost at June 30, 2000,
$4,156,967 is due within one year.
NOTE 5 - ACCOUNTS RECEIVABLE, NET
Accounts receivable, net is comprised
of the following:
2000 1999
----------- -----------
Receivable from equipment sales $ 2,379,609 $ 1,727,535
Receivables from related PC's 14,937,136 15,486,059
Allowance for doubtful accounts
and contractual allowances (2,928,083) (3,276,860)
----------- -----------
$ 14,388,662 $ 13,936,734
=========== ===========
The Company's customers are concentrated in healthcare industry.
The Company's receivable from the related PC's substantially consists of fees
outstanding under management agreements, service contracts and lease agreements
with related PC's. Payment of the outstanding fees is based on collection by the
PC's of fees from third party medical reimbursement organizations, principally
insurance companies and health management organizations.
F-24
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 5 - ACCOUNTS RECEIVABLE, NET (Continued)
Collection by the Company of its accounts receivable may be impaired by the
uncollectibility of medical fees from third party payors, particularly insurance
carriers covering automobile no-fault and workers compensation claims due to
longer payment cycles and rigorous informational requirements. Approximately
40%, 33% and 25%, respectively, of the PC's 2000, 1999 and 1998 net revenues
were derived from no-fault and personal injury protection claims. The Company
considers the aging of its accounts receivable in determining the amount of
allowance for doubtful accounts. The Company takes all legally available steps,
including legally prescribed arbitrations, to collect its receivables. Credit
losses associated with the receivables are provided for in the consolidated
financial statements and have historically been within management's
expectations.
Net revenues from the related PC's accounted for approximately 87%, 85% and 77%
of the consolidated net revenues for the years ended June 30, 2000, 1999 and
1998, respectively.
NOTE 6 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND CUSTOMER
ADVANCES
1) Information relating to uncompleted contracts as of June 30, 2000 and 1999 is
as follows:
As of June 30,
----------------------------
2000 1999
--------- ----------
Costs incurred on uncompleted
contracts $ 829,441 $2,522,153
Estimated earnings 138,718 847,047
--------- ----------
968,159 3,369,200
Less: Billings to date - 1,905,750
--------- ----------
$968,159 $1,463,450
========= ==========
F-25
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
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,
---------------------------
2000 1999
-------- ----------
Costs and estimated earnings in
excess of billings on
uncompleted contracts $968,159 $1,463,450
Billings in excess of costs and
estimated earnings on
uncompleted contracts - -
-------- ----------
$968,159 $1,463,450
======== ==========
2) Customer advances consist of the following:
As of June 30,
---------------------------
2000 1999
-------- ----------
Total advances from customers $582,551 $2,001,268
Less: Advances from customers
on contracts under
construction - 1,905,750
-------- ----------
$582,551 $ 95,518
======== ==========
NOTE 7 - INVENTORIES
Inventories included in the accompanying consolidated balance sheets consist of:
As of June 30,
---====----------------------
2000 1999
---------- ----------
Purchased parts, components and
supplies $2,916,753 $3,677,568
Work-in-process 619,416 560,210
---------- ----------
$3,536,169 $4,237,778
========== ==========
F-26
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 8 - INVESTMENT IN SALES-TYPE LEASE WITH RELATED PARTY
The Company entered into a $935,000 lease agreement with a related party for an
MRI scanner which is considered a sales-type lease. The lease is payable in 60
monthly installments of $12,356 each, plus at the end of the 60-month lease, the
lessee can elect to continue the lease for an additional five years, at a
monthly payment of $12,356, including interest at 10% per annum, or pay a lump
sum of $581,544. The Company's investment in sales-type lease as at June 30,
2000 and 1999 is as follows:
As of June 30,
------------------------------
2000 1999
---------- ----------
Net minimum lease payments
receivable $1,310,548 $ -
Less: Unearned income 380,113 -
---------- ----------
Net Investment in
Sales-type Lease $930,435 $ -
========== ==========
Current portion $ 57,832 $ -
Non-current portion 872,603 -
---------- ----------
$930,435 $ -
========== ==========
Future minimum lease payments are as follows:
Years Ended
June 30,
-----------
2001 $ 57,832
2002 63,888
2003 70,578
2004 77,969
2005 660,168
--------
$930,435
========
NOTE 9 - PROPERTY AND EQUIPMENT
Property and equipment, at cost, less accumulated depreciation and amortization,
at June 30, 2000 and 1999, is comprised of:
As of June 30,
--------------------------
2000 1999
----------- -----------
Diagnostic equipment under
lease $ 1,263,181 $ 1,155,039
Diagnostic equipment 6,776,653 7,325,433
Research, development and
demonstration equipment 7,217,601 5,671,375
Machinery and equipment 6,106,145 6,122,494
Furniture and fixtures 3,181,390 3,159,797
Equipment under lease 2,364,088 2,331,423
Leasehold improvements 2,572,728 2,151,819
----------- -----------
29,431,786 27,917,380
Less: Accumulated depreciation
and amortization 18,204,332 16,474,887
----------- -----------
$11,227,454 $11,442,493
=========== ===========
Depreciation and amortization of property and equipment for the years ended June
30, 2000, 1999 and 1998 was $3,237,384, $3,139,585 and $2,243,535, respectively.
The equipment under lease has a net book value of $1,285,760 and $2,018,490 at
June 30, 2000 and 1999, respectively.
F-27
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 10 - OTHER INTANGIBLE ASSETS
Other intangible assets, net of accumulated amortization, at June 30, 2000 and
1999 are comprised of:
As of June 30,
-----------------------
2000 1999
---------- ----------
Capitalized software development
costs $1,560,941 $1,199,618
Patents and copyrights 1,125,808 1,125,808
---------- ----------
2,686,749 2,325,426
Less: Accumulated amortization 1,650,825 1,436,434
---------- ----------
$1,035,924 $888,992
========== ==========
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, 2000, 1999
and 1998 was $214,391, $292,295 and $401,984, respectively, of which $148,167,
$208,098 and $238,474, respectively, relate to amortization expense for software
development costs.
NOTE 11 - CAPITAL STOCK
Common Stock
------------
Cash dividends payable on the common stock shall, in all cases, be on a per
share basis, one hundred twenty percent (120%) of the cash dividend payable on
shares of Class B common stock and three hundred sixty percent (360%) of the
cash dividend payable on a share of Class C common stock. In addition, as
revised pursuant to a legal settlement agreement on April 29, 1997, a special
cash dividend shall be payable in an amount equal to 3-1/4% on first $10
million, 4-1/2% on next $20 million, and 5-1/2% on amounts in excess of $30
million of the amount of any cash awards or settlements received by the Company
in connection with the enforcement by the Company of United States Patent No.
3,789,832 (Apparatus and Method of Detecting Cancer in Tissue). Pursuant to such
dividend entitlement, the Company recorded an obligation of $2,551,146, or
approximately $.05 per share of common stock, during fiscal 1997, which was paid
during 1998 and 1999.
F-28
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 11 - CAPITAL STOCK (Continued)
Class B Common Stock
--------------------
Class B common stock is convertible into shares of common stock on a one-for-one
basis. Class B common stock has 10 votes per share. During the year ended June
30, 2000, 1,000 shares of Class B common stock were converted to common stock
leaving 4,211 of such shares outstanding as of June 30, 2000.
Class C Common Stock
--------------------
On April 3, 1995, the shareholders ratified a proposal creating a new Class C
common stock and authorized the exchange offering of three shares of Class C
common stock for each share of the Company's outstanding Class B common stock.
The Class C common stock has 25 votes per share, as compared to 10 votes per
share for the Class B common stock and one vote per share for the common stock.
The Class C common stock was offered on a three-for-one basis to the holders of
the Class B common stock. Although having greater voting power, each share of
Class C common stock has only one-third of the rights of a share of Class B
common stock to dividends and distributions. Class C common stock is convertible
into shares of common stock on a three-for-one basis. During the year ended June
30, 1996, approximately 3.2 million shares of Class B common stock were
converted to Class C common stock.
Class A Non-Voting Preferred Stock
----------------------------------
On April 3, 1995, the shareholders ratified a proposal consisting of the
creation of a new class of Class A non-voting preferred stock with special
dividend rights and the declaration of a stock dividend on the Company's common
stock consisting of one share of Class A non-voting preferred stock for every
five shares of common stock. The stock dividend was payable to holders of common
stock on October 20, 1995. Class A non-voting preferred stock issued pursuant to
such stock dividend approximates 7.8 million shares.
The Class A non-voting preferred stock is entitled to a special dividend equal
to 3-1/4% of first $10 million, 4-1/2% of next $20 million and 5-1/2% on amount
in excess of $30 million of the amount of any cash awards or settlements
received by the Company in connection with the enforcement of five of the
Company's patents in its patent lawsuits, less the revised special dividend
payable on the common stock with respect to one of the Company's patents.
Pursuant to such dividend entitlement, the Company recorded an obligation of
$5,086,695, or $.65 per share of Class A preferred stock, during fiscal 1997 and
$217,226, or $.03 per share of Class A preferred stock, during fiscal 1996.
During fiscal 1998 and 1999, these dividend obligations were paid.
F-29
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 11 - CAPITAL STOCK (Continued)
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.
Options
-------
The Company has stock option plans which provide for the awarding of incentive
and non-qualified stock options to employees, directors and consultants who may
contribute to the success of the Company. The options granted vest either
immediately or ratably over a period of time from the date of grant, typically
three or four years, at a price determined by the Board of Directors or a
committee of the Board of Directors, generally the fair value of the Company's
common stock at the date of grant. The options must be exercised within ten
years from the date of grant.
Stock option share activity and weighted average exercise prices under these
plans and grants for the years ended June 30, 2000, 1999 and 1998 were as
follows:
Weighted
Average
Number of Exercise
Shares Price
--------- --------
Outstanding, June 30, 1997 185,860 $ 4.62
Granted 556,200 2.99
Exercised (559,325) 2.98
Forfeited - -
-------- ------
Outstanding, June 30, 1998 182,735 4.62
Granted 205,000 1.23
Exercised - -
Forfeited - -
-------- ------
Outstanding, June 30, 1999 387,735 4.62
Granted 413,000 1.52
Exercised (374,000) 1.15
Forfeited - -
-------- ------
Outstanding, June 30, 2000 426,735 $ 2.83
======== ======
Exercisable at:
June 30, 1998 182,735 $ 4.62
June 30, 1999 387,735 $ 4.62
June 30, 2000 426,735 $ 2.83
F-30
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 11 - CAPITAL STOCK (Continued)
Options (Continued)
-------
The exercise price for options outstanding as of June 30, 2000 ranged from $0.75
to $5.00.
On March 10, 1997, HMCA adopted the 1997 Incentive Stock Option Plan, pursuant
to which HMCA authorized the issuance of up to 2,000,000 shares (as adjusted for
the 8,000-for-1 stock split effective December 15, 1998) of the common stock of
HMCA. Options to purchase 1,600,000 shares at an option price of $0.10 per share
(as adjusted) were granted on March 10, 1997. One half of the options granted
will not become exercisable unless and until the earlier of such time as HMCA
successfully completes a public offering of its securities, or HMCA recognizes
at least $10,000,000 in revenues for two consecutive fiscal quarters. The
remainder of the options will not become exercisable until one year thereafter.
The options will expire on March 9, 2007. No options have vested as of June 30,
2000.
On December 16, 1998, HMCA adopted the 1998 Non-Statutory Stock Option Plan,
pursuant to which HMCA authorized the issuance of up to 500,000 shares of the
common stock of HMCA. Options to purchase 500,000 shares at an option price of
$1.00 per share were granted on December 16, 1998. The options granted will not
become exercisable unless and until such time as HMCA successfully completes a
public offering of its securities. The options will expire on December 15, 2008.
No options have vested as of June 30, 2000.
On December 16, 1998, HMCA adopted the 1998 Incentive Stock Option Plan,
pursuant to which HMCA authorized the issuance of up to 2,000,000 shares of the
common stock of HMCA. Options to purchase 670,000 shares at an option price of
$1.00 per share were granted on December 16, 1998. 470,000 of the options
granted will not become exercisable unless and until such time as HMCA
successfully completes a public offering of its securities, and 200,000 of the
options will not become exercisable until one year thereafter. The options will
expire on December 15, 2008. No options have vested as of June 30, 2000.
F-31
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 11 - CAPITAL STOCK (Continued)
Options (Continued)
-------
Stock option share activity and weighted average exercise prices under the HMCA
plans and grants for the three years ended June 30, 2000, 1999 and 1998 were as
follows:
Weighted
Average
Number of Exercise
Shares Price
--------- ---------
Outstanding - June 30, 1998 and
1997 1,600,000 $ .10
Granted - June 30, 1999 1,170,000 1.00
--------- -----
Outstanding - June 30, 2000 and
1999 2,770,000 $ .48
========= =====
Exercisable at June 30, 2000,
1999 and 1998 - $ -
========= =====
The Company accounts for its stock option plans under APB Opinion No. 25, under
which no compensation cost has been recognized. Had compensation cost for these
plans been determined consistent with FASB Statement No. 123, the Company's net
loss and loss per share would have been effected for the years ended June 30,
2000, 1999 or 1998 as follows:
2000 1999 1998
------------ ------------ ------------
Net Loss:
As reported $ 10,955,987 $ 14,215,763 $5,653,086
Proforma $ 11,059,237 $ 14,256,763 $5,908,938
Loss Per Share:
As reported $0.17 $0.22 $0.09
Proforma $0.17 $0.22 $0.10
The fair value of the options granted under all plans is estimated at $0.23,
$0.20 and $0.46, respectively, on the date of grant using the Black-Scholes
option-pricing model based on the following assumptions for the years ended June
30, 2000, 1999 and 1998:
All Plans:
Dividend yield 0%
Expected volatility 33%
Expected life (years) 1
The risk-free interest rates were based upon a rate with maturity equal to
expected term. U.S. Treasury instruments were utilized. The weighted average
interest rate amounted to 5.0%.
F-32
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 11 - CAPITAL STOCK (Continued)
Stock Bonus Plans
-----------------
On May 9, 1997 and April 1, 1995, the Board of Directors adopted Stock Bonus
Plans. Under the terms of the Plans, 5,000,000 shares of common stock were
reserved for issuance and stock bonuses may be awarded no later than May 8, 2007
for the 1997 Plan and March 31, 2005 for the 1995 Plan. During fiscal 2000, 1999
and 1998, 2,148,429, 826,359 and 849,205 shares, respectively, were issued under
the stock bonus plans, of which 234,677, 161,180 and 4,300 shares, respectively,
were charged to operations as compensation expense, 490,000, 463,161 and 621,875
shares, respectively, were issued in settlement of liabilities, 19,332, -0- and
10,600 shares, respectively, were issued in exchange for notes, 1,403,420,
202,018 and 223,030 shares, respectively, were issued in connection with
consulting agreements, and 1,000, -0- and -0- shares, respectively, were issued
upon conversion of Class B to Class A common stock.
F-33
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 12 - LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASES
Long-term debt, notes payable and capital leases consist of the following:
June 30,
---------------------------
2000 1999
----------- -----------
Construction loan converted into a capital
lease obligation during August 1998. The
obligation requires equal monthly payments
aggregating $13,097, including interest at
13.2% per annum, through August 2003. The
obligation is collateralized by the related
equipment. $ 387,580 $ 494,030
Promissory note payable to a bank,
collateralized by $5 million certificate of
deposit, requiring monthly payments of
interest only, at a variable rate based on
the bank's prime rate (7.22% at June 30,
2000) with payment of the entire principal
due on March 20, 2003. 5,000,000 5,000,000
Note payable to the former shareholders of
A&A Services, Inc. The note calls for 16
quarterly payments of $300,044, including
interest at a rate of 6%, commencing March
20, 1999. The note is collateralized by all
of the assets of the acquired business and
guaranteed by FONAR. 2,767,060 3,763,565
Note payable to the former shareholder of A&A
Services, Inc. The note calls for 60 equal
monthly installments of principal and
interest of $25,000, including interest at a
rate of 6% per annum, commencing April 20,
1998. The note is collateralized by all of
the assets of the acquired business and
guaranteed by FONAR. 758,788 1,005,180
F-34
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 12 - LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASES (Continued)
June 30,
---------------------------
2000 1999
----------- -----------
Note payable calling for monthly payments of
$9,034, including interest at a rate of
8.875% through July 2002. The loan is
collateralized by equipment located in
Ellwood, Pennsylvania. $ 205,262 $ 290,984
Note payable to the former shareholders of
Dynamic Health Care Management, Inc. The note
calls for three annual payments of principal,
including interest at a rate of 6%,
commencing August 20, 1999. The note is
collateralized by all of the assets of the
acquired business and guaranteed by FONAR. 1,877,776 2,807,742
Note payable to the former shareholders of
Dynamic Health Care Management, Inc. The note
calls for monthly installments of principal
and interest of $65,417 for the first eight
installments, followed by $16,667 for the
remaining 52 installments. The installments
include interest at a rate of 7.5% per annum.
The note is collateralized by all of the
assets of the acquired business and
guaranteed by FONAR. 564,341 717,327
F-35
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 12 - LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASES (Continued)
June 30,
-------------------------
2000 1999
----------- ----------
Deferred payment obligation, aggregating
$5,490,000, payable to the former
shareholders of Dynamic Health Care
Management, Inc. The obligation is payable
over three years, commencing August 20, 2000,
with interest at 7.5% per annum. The
obligation has been recorded, net of discount
of $739,324, representing the value of the
two-year interest-free provision of this
obligation. A $100,000 principal payment was
made in November 1998. The obligation is
collateralized by all of the assets of the
acquired business and guaranteed by FONAR. $ 5,337,913 $ 5,025,392
Deferred payment obligation, aggregating
$2,000,000, payable to the former shareholder
of A&A Services, Inc. The obligation is
payable over four years, commencing December
20, 2000, with interest at 6% per annum. The
obligation has been recorded, net of a
discount of $220,000, representing interest
imputed at a rate of 6% over two years. The
obligation is collateralized by all of the
assets of the acquired business and
guaranteed by FONAR. 2,000,000 1,915,000
F-36
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 12 - LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASES (Continued)
June 30,
-------------------------
2000 1999
----------- -----------
Four promissory notes payable to the former
shareholders of Central health Care
Management Services, LLC. Each note calls for
two equal annual installments of $11,458,
plus interest at prime rate, plus 2%, per
annum (11.50% at June 30, 2000), commencing
April 2000. The obligations under each note
are guaranteed by FONAR. $ 68,749 $ 91,665
Four promissory notes payable to the former
shareholders of Central Health Care
Management Services, LLC. Each note calls for
two equal annual installments of $57,500,
plus interest at prime rate, plus 2% per
annum (11.50% at June 30, 2000), commencing
March 2000. The obligations under each note
are guaranteed by FONAR. 283,247 460,000
Capital lease requiring monthly payments of
$12,595, including interest at a rate of 9%
through October 1, 2002. The loan is
collateralized by related equipment. 247,824 392,848
Capital lease dated October 13, 1995 -
$513,692, due $11,173 per month, commencing
October 1995, including interest of 11% for
60 months. The lease is collateralized by the
related equipment. 183,243 266,942
Capital lease dated June 4, 1996 - $412,550,
due $8,972 per month, commencing July 1996,
including interest of 11% for 60 months. The
lease is collateralized by the related
equipment. 174,407 253,31
F-37
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 12 - LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASES (Continued)
June 30,
---------------------------
2000 1999
----------- -----------
Capital lease obligations requiring monthly
payments, aggregating $24,750, including
interest at 13.15%. $ - $ 430,890
Other (including capital leases for property
and equipment) 1,112,996 1,906,957
----------- -----------
20,969,186 24,821,834
6,224,727 4,474,293
Less: Current maturities ----------- -----------
$14,744,459 $20,347,541
=========== ===========
The maturities of long-term debt, including debt in arrears, over the next five
years and thereafter are as follows:
Years Ended
June 30,
-----------
2001 $ 6,224,727
2002 6,066,441
2003 8,401,334
2004 247,760
2005 28,924
-----------
$20,969,186
===========
F-38
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 13 - INCOME TAXES
Components of the provision (benefit) for income taxes are as follows:
2000 1999 1998
---------- ---------- ----------
Current:
Federal $ - $ - $1,700,000
State 43,677 203,876 302,449
-------- ---------- ----------
43,677 203,876 2,002,449
-------- ---------- ----------
Deferred:
Federal - (659,794) (2,500,000)
State - (134,000) -
-------- ---------- ----------
- (793,794) (2,500,000)
-------- ---------- ----------
Totals $ 43,677 $ (589,918) $ (497,551)
======== ========== ==========
A reconciliation of the federal statutory income tax rate to the Company's
effective tax rate as reported is as follows:
2000 1999 1998
-------- -------- --------
Taxes at federal
statutory rate (34.0)% (34.0)% (34.0)%
State and local
income taxes, net
of federal benefit .4 0.3 3.3
Permanent differences 1.1 0.8 1.7
Unutilized net
operating losses and
tax credits 32.9 28.9 20.9
----- ----- -----
Effective income tax
rate 0.4% (4.0)% (8.1)%
===== ===== =====
F-39
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 13 - INCOME TAXES (Continued)
As of June 30, 2000, the Company has net operating loss carryforwards of
approximately $26,240,000 that will be available to offset future taxable
income. Of these carryforwards, $15,500,000 and $10,740,000 expire on June 30,
2018 and 2019, respectively. Additionally, for federal income tax purposes, the
Company has tax credit carryforwards aggregating $2,016,760, which are accounted
for under the flow through method. The tax credit carryforwards expire as
follows:
June 30:
2005 $202,017
2006 101,334
2007 258,200
2008 172,207
2016 70,145
2017 402,590
2018 432,195
2019 378,072
----------
$2,016,760
==========
In addition, for New York State income tax purposes, the Company has tax credit
carryforwards aggregating $1,120,000, which are accounted for under the
flow-through method. The tax credit carryforwards expire during the years 2006
to 2015.
Significant components, tax effected, of the Company's deferred tax assets and
liabilities at June 30, 2000 and 1999 are as follows:
2000 1999
---------- ----------
Deferred tax assets:
Allowance for doubtful accounts $1,022,807 $ 868,094
Non-deductible accruals 621,067 737,444
Net operating carryforwards 9,896,000 5,600,000
Tax credits 3,136,906 3,066,761
Inventory capitalization for
tax purposes 84,000 148,000
---------- ----------
14,760,780 10,420,299
Valuation allowance (13,924,203) (9,221,699)
---------- ----------
Net deferred tax assets 836,577 1,198,600
---------- ----------
Deferred tax liabilities:
Fixed assets and depreciation 661,019 1,107,776
Capitalized software costs 175,558 90,824
---------- ----------
Gross deferred tax liabilities 836,577 1,198,600
---------- ----------
Net deferred tax liabilities $ - $ -
========== ==========
The net change in the valuation allowance for deferred tax assets increased by
approximately $4,702,504.
F-40
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 14 - OTHER CURRENT LIABILITIES
Included in other current liabilities are the following:
2000 1999
----------- -----------
Unearned revenue on service
contracts $ 775,032 $ 702,406
Accrued bonus 729,546 1,187,742
Accrued payroll taxes 282,158 443,830
Accrued interest 259,224 237,270
Accrued salaries and commissions 870,663 955,500
Accrued professional fees 653,102 561,938
Litigation judgements 2,440,037 2,478,794
Excise and sales taxes 1,847,805 1,789,039
Other 1,109,362 1,564,472
----------- -----------
$ 8,966,929 $ 9,920,991
=========== ===========
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.
Future minimum lease commitments consisted of the following at June 30, 2000:
Facilities
Year Ended and
June 30, Equipment Capital
---------- ----------- -----------
2001 $ 2,842,411 $ 1,125,425
2002 2,795,293 468,376
2003 2,456,311 320,786
2004 2,263,351 63,097
2005 1,419,919 32,637
Thereafter 5,057,702 -
----------- -----------
Total minimum obligations $16,834,987 2,010,321
===========
Less: Amount representing
interest 251,821
-----------
Present value of net minimum
lease obligations $ 1,758,500
===========
Rent expense for operating leases approximated $3,235,075, $3,266,289 and
$2,382,000 for the three years ended June 30, 2000, 1999 and 1998, respectively.
F-41
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 15 - COMMITMENTS AND CONTINGENCIES (Continued)
Litigation
----------
On March 4, 1996, the Company filed an action against Toshiba Corporation,
Toshiba America Medical Systems, Inc., Toshiba American MRI, Inc. and others
alleging infringement of four of its MRI patents. In May 1998, FONAR and Toshiba
amicably resolved the litigation and FONAR received a monetary payment from
Toshiba. Other terms of the settlement are confidential.
In January 1998, the Company filed an action against Health South, Inc. ("Health
South"), in the United States District Court of New York alleging infringement
of the Company's Multi-Angle Oblique Imaging Patent (U.S. Patent No. 4,871,966).
Health South filed a declaratory judgement counterclaim for non-infringement and
invalidity and a third party claim against a manufacturer of certain of its
scanners. The case was settled with the manufacturer in December 1999 and with
Health South in June, 2000. The terms of the settlement are confidential.
On August 4, 1998, Beal Bank filed a notice of motion for summary judgement
against Melville Magnetic Resonance Imaging, P.C. ("Melville Magnetic") and the
Company. The motion for summary judgement seeks to recover $733,855, plus
accrued interest of $221,809, for payment of a bank loan executed by Melville
Magnetic and guaranteed by the Company. In April 1999, a summary judgement was
granted against Melville Magnetic and the Company, as a guarantor on the loan.
The court's decision is currently under appeal. Included in accrued liabilities
at June 30, 1999 and 2000 is $650,000 related to the judgement.
License Agreement and Self-Insurance
------------------------------------
The Company has license agreements with two separate companies, which require
the Company to pay a royalty on the Company's future sales of certain NMR
imaging apparatus. Royalty expense charged to operations for the years ended
June 30, 2000, 1999 and 1998 approximated $36,000, $50,000 and $47,000,
respectively.
The Company is self-insured with respect to product liability. During the fiscal
years ended June 30, 2000, 1999 and 1998, no material claims arose.
F-42
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 15 - COMMITMENTS AND CONTINGENCIES (Continued)
Management Contracts
--------------------
In connection with the acquisition of Affordable Diagnostics, Inc. HMCA entered
into a management agreement with the former President of Affordable effective
July 1, 1997. The agreement provides for a base fee of $52,000 per year for a
5-year period, commencing July 1, 1997, and 60,000 shares of HMCA's common stock
valued at $60,000, as signing bonuses. In addition, an additional 240,000 shares
of HMCA's common stock are issuable to the consultant provided certain financial
hurdles are met over the 5-year term of the agreement. As of June 30, 2000, no
additional shares have been earned under the agreement.
F-43
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 15 - COMMITMENTS AND CONTINGENCIES (Continued)
Employment Agreements
---------------------
On March 20, 1998, an affiliate of HMCA entered into two employment agreements
with the former owners of A&A. Each agreement provides for a base annual salary
of $150,000 for the first five years and $315,000 per annum for each year
thereafter and shall be increased by 5% per annum up to a minimum base salary of
$500,000 per annum. Additionally, each agreement provides for a bonus commencing
in the sixth year of the contract, contingent upon meeting certain thresholds of
net income. The employment agreements expire fifteen years from March 20, 1998.
On August 20, 1998, an affiliate of HMCA entered into two employment agreements
with the former owners of Dynamic. Each agreement provides for base compensation
of $150,000 during the first year with annual cost of living increases for the
first five years. Each agreement also provides for an increase in base
compensation of $100,000 per annum commencing in the sixth year. In addition,
the agreements provide for bonus compensation contingent upon pretax earnings of
Dynamic. The employment agreements expire ten years from August 20, 1998.
Minimum annual payments, excluding bonuses, incentives and cost of living
increases under these contracts are as follows:
Years Ended
June 30,
-----------
2001 $ 652,000
2002 652,000
2003 682,500
2004 1,096,666
2005 1,190,000
Thereafter 3,833,334
----------
$8,106,500
==========
Employee Benefit Plans
----------------------
The Company has a non-contributory 401(k) plan (the "Plan"). The Plan covers all
non-union employees who are at least 21 years of age with no minimum service
requirements. There were no employer contributions to the Plan for the years
ended June 30, 2000, 1999 and 1998.
The shareholders of the Company approved the 2000 employee stock purchase plan
("ESPP") at the Company's annual shareholders' meeting in April, 2000. The ESSP
provides for eligible employees to acquire common stock of the Company at a
discount not to exceed 15%. The plan has not been put into effect as of June 30,
2000.
F-44
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 16 - OTHER INCOME (EXPENSE) AND SUPPLEMENTARY PROFIT AND LOSS DATA
Other income consists of:
For the Years Ended June 30,
-------------------------------------
2000 1999 1998
----------- ---------- ----------
Royalties $ 920,000 $ 42,000 $ 714,000
Other income (expense) 93,425 32,950 (61,382)
Gain on sale of
subsidiary 1,021,950 - -
Gain on settlement of
various legal
disputes and other
claims 3,540,000 1,618,169 7,957,417
Litigation provision - (650,000) -
----------- ---------- ----------
$ 5,575,375 $1,043,119 $8,610,035
=========== ========== ==========
In October 1999, the Company sold the stock of its subsidiary, Medical SNI.
Medical SNI, based in Haifa, Israel, designs and develops products for the
medical imaging and archiving industry. The effects of the sale include the
removal of liabilities of approximately $1 million and a pretax gain of
$1,021,950. The Company has a non-exclusive, perpetual, royalty-free worldwide
license to use and sublicense the then existing technology.
Advertising expense approximated $2,140,000, $2,191,000 and $651,000 for the
years ended June 30, 2000, 1999 and 1998, respectively. Maintenance and repair
expenses totalled approximately $758,000, $491,000 and $224,000 for the years
ended June 30, 2000, 1999 and 1998, respectively. Royalty expenses approximated
$36,000, $49,000 and $47,000 for the years ended June 30, 2000, 1999 and 1998,
respectively. Amortization of intangible assets was approximately $1,433,000,
$1,518,000 and $674,000 for the years ended June 30, 2000, 1999 and 1998,
respectively.
F-45
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 17 - SUPPLEMENTAL CASH FLOW INFORMATION
During the years ended June 30, 2000, 1999 and 1998, the Company paid
$1,596,931, $1,768,481 and $343,418 for interest, respectively. During the years
ended June 30, 2000, 1999 and 1998, the Company paid $20,144, $201,388 and
$1,202,449 for income taxes, respectively.
During the years ended June 30, 1999 and 1998, the Company acquired the assets
and assumed the liabilities of various entities. The transactions had the
following non-cash impact on the balance sheets:
1999 1998
---------- ----------
Accounts receivable $1,900,000 $600,000
Equipment 60,000 300,000
Other assets - -
Intangibles 9,356,067 12,221,442
Accrued liabilities 1,000,000 (1,100,000)
Notes payable to sellers (9,388,572) (7,073,000)
Capital lease obligation - -
Other liabilities - -
Deferred taxes payable - -
Equity (275,830) (923,442)
---------- ----------
Net Cash Used for
Acquisitions $2,651,665 $4,025,000
========== ==========
Non-Cash Transactions
---------------------
During the year ended June 30, 2000:
a) The Company issued 490,000 shares of common stock in settlement of current
liabilities aggregating $742,372.
b) Property and equipment, costing $215,086, was acquired under a capital lease
obligation.
c) In connection with the sale of its foreign subsidiary, the Company issued a
note payable aggregating $115,000.
d) The Company issued 19,332 shares of its common stock, valued at $61,753, in
connection with the repayment of long-term debt incurred with the acquisition of
Central.
F-46
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 17 - SUPPLEMENTAL CASH FLOW INFORMATION (Continued)
Non-Cash Transactions (Continued)
---------------------
During the year ended June 30, 1999:
a) The Company issued 463,161 shares of common stock in settlement of current
liabilities aggregating $664,656.
b) Property and equipment costing $741,663 was acquired under a capital lease
obligation.
c) The Company sold equipment to a related party costing $96,427 in
consideration of a note receivable aggregating $150,000.
d) The Company converted a current liability aggregating $303,000 to long-term
debt.
e) The Company issued 202,018 shares of its common stock valued at $275,830 in
connection with the acquisition of Central.
f) The Company issued 202,018 shares of its common stock valued at $275,837,
pursuant to consulting contracts with the former shareholders of Central.
During the year ended June 30, 1998:
a) The Company issued 236,345 shares of its common stock in settlement of
current liabilities aggregating $632,386.
b) The Company issued 576,000 shares of its common stock valued at $923,442 as
additional contingent consideration related to acquisition of Affordable
Diagnostics, Inc.
c) The Company issued 385,530 shares of its common stock to employees in
satisfaction of accrued liabilities incurred during the fiscal year ended June
30, 1997 aggregating $1,147,906.
d) Accrued interest aggregating $146,330 was reclassified to long-term debt
pursuant to a debt restructuring agreement.
e) Equipment costing $800,000 was reclassified from Costs and Estimated Earnings
in Excess of Billings on Uncompleted Contracts to Property and Equipment.
f) The Company purchased $1,391,304 of machinery and equipment under capital
leases.
F-47
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
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.
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. In June of 1997, the payment terms
for the outstanding balance of $344,766 were restructured to provide for 60
equal monthly payments (including interest at the rate of 10% per annum) of
$7,325 each, commencing July 1997. The balance due under this note as of June
30, 2000 was $158,745.
Effective December 1, 1993, RVDC assigned its purchase option under the lease to
Daytona Beach Magnetic Resonance Imaging, P.A., a Florida professional
association of which Raymond V. Damadian is the sole shareholder, Director and
President ("Daytona Beach Center") and the Daytona Beach Center exercised the
option and purchased the scanner from the Company for a purchase price of
$1,416,717.
In May 1999, the payment terms for the outstanding balance of $1,001,507 were
restructured to provide for 84 equal monthly payments (including interest at the
rate of 10% per annum) of $16,626.20 each, commencing May 1999. The balance due
under this note as of June 30, 2000 was $924,451.
During 1994, Melville MRI, P.C. ("Melville Center"), a New York professional
corporation of which Raymond V. Damadian is the sole shareholder, Director and
President, purchased an MRI scanner from the Company for a purchase price of
$1,011,431. Of the purchase price, $900,000 is to be paid by the assumption and
payment of the Company's indebtedness to the lender secured by the scanner
pursuant to a note bearing interest at 14% per annum and providing for 60
monthly payments of $20,700 each. The remaining $111,431 of the purchase price
was to be paid concurrently with the payments to the lender. The payment terms
for the principal balance, plus accrued interest (in the aggregate amount of
$139,290), were restructured to provide for 60 equal monthly payments (including
interest at the rate of 10% per annum) of $2,959.50 each, commencing July 1998.
The balance due under this note as of June 30, 2000 was $91,719.
F-48
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 19 - ADVANCES AND NOTES TO RELATED PARTIES (Continued)
During 1994, Deerfield Magnetic Resonance Imaging P.A. ("Deerfield Center"), a
Florida professional association, of which Raymond V. Damadian is the sole
shareholder, Director and President, purchased an MRI scanner from the Company
for a purchase price of $962,185. The Deerfield Center paid the remaining
balance due under the note during fiscal 1998.
Canarsie MRI Associates ("Canarsie"), a joint venture partnership of which MRI
Specialties, Inc. ("Specialties") is an owner, is party to a service agreement
for its scanner with the Company at an annual fee of $70,000. Timothy Damadian,
the Treasurer of FONAR and President of HMCA, is the sole stockholder, director
and president of Specialties.
Pompano MRI Associates ("Pompano"), a joint venture partnership of which
Guardian MRI, Inc. ("Guardian") is an owner, is a party to a service agreement
for its scanner with the Company at an annual fee of $70,000. Timothy Damadian,
the Treasurer of FONAR and President of HMCA, is a stockholder, Director and
President of Pompano.
As at June 30, 2000 and 1999, the aggregate indebtedness of Specialties and
Canarsie to the Company was $12,629 and $25,720, respectively, and the aggregate
indebtedness of Guardian and Pompano to the Company was $17,667 and $29,682,
respectively.
NOTE 20 - SEGMENT AND RELATED INFORMATION
Effective July 1, 1998, the Company adopted the provisions of SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information". SFAS No.
131 establishes standards for the way public enterprises report information
about operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in interim
financial reports issued to stockholders. The information for 1998 has been
restated from the prior year's presentation in order to conform to the 1999
presentation.
The Company operates in two industry segments - manufacturing and the servicing
of medical equipment and management of physician practices, including diagnostic
imaging services.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. All intersegment sales are
market-based. The Company evaluates performance based on income or loss from
operations.
F-49
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 20 - SEGMENT AND RELATED INFORMATION (Continued)
Summarized financial information concerning the Company's reportable segments is
shown in the following table:
Physician
Management
Medical Equipment Services Totals
----------------- ------------ ------------
Fiscal 2000:
Net sales from external
customers $ 5,051,064 $ 34,022,733 $ 39,073,797
Intersegment net sales $ 1,227,075 $ - $ 1,227,075
Operating (loss) income $(18,904,534) $ 2,477,962 $(16,426,572)
Depreciation and amortization $ 1,817,547 $ 2,638,529 $ 4,456,076
Compensatory element of stock
issuances $ 926,421 $ 1,003,285 $ 1,929,706
Total identifiable assets $ 43,045,691 $ 41,553,346 $ 84,599,037
Capital expenditures $ 2,081,551 $ 940,795 $ 3,022,346
Fiscal 1999:
Net sales from external
customers $ 5,681,955 $ 31,263,089 $ 36,945,044
Intersegment net sales $ 845,834 - $ 845,834
Operating (loss) income $(18,730,341) $ 3,122,286 $(15,608,055)
Depreciation and amortization $ 1,847,216 $ 2,810,603 $ 4,657,819
Compensatory element of stock
issuances $ 190,851 $ 84,391 $ 275,242
Total identifiable assets $ 56,310,557 $ 41,337,611 $ 97,648,168
Capital expenditures $ 4,180,447 $ 1,299,392 $ 5,479,839
Fiscal 1998:
Net sales from external
customers $ 6,458,363 $ 21,095,994 $ 27,554,357
Intersegment net sales $ 1,349,186 - $ 1,349,186
Operating (loss) income $(20,292,707) $ 2,698,314 $(17,594,393)
Depreciation and amortization $ 1,415,783 $ 1,501,820 $ 2,917,603
Compensatory element of stock
issuances $ 12,362 $ 1,096,000 $ 1,108,362
Total identifiable assets $ 79,235,791 $ 29,211,989 $108,447,780
Capital expenditures $ 1,889,450 $ 2,287,398 $ 4,176,848
Export Sales
------------
The Company's areas of operations are principally in the United States. The
Company had export sales of medical equipment amounting to 2.8%, 3.4% and 4.6%
of consolidated net revenues for the years ended June 30, 2000, 1999 and 1998,
respectively.
F-50
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 20 - SEGMENT AND RELATED INFORMATION (Continued)
Export Sales (Continued)
------------
The sales were made principally to the following locations:
2000 1999 1998
---- ---- ----
Korea - - 1.8%
Spain 2.8% 3.2% -
Saudi Arabia - .2 2.8
---- ---- ----
2.8% 3.4% 4.6%
==== ==== ====
The Company does not have any material assets outside of the United States.
Concentration of Credit Risk
----------------------------
Net revenues from related parties accounted for approximately 92%, 85% and 77%
of the consolidated net revenues for the years ended June 30, 2000, 1999 and
1998, respectively. Accounts receivable due from related parties approximated
83% and 88% of the consolidated accounts receivable as of June 30, 2000 and
1999, respectively.(NOTE 5)
NOTE 21 - PROFORMA INFORMATION (UNAUDITED)
The Company's consolidated financial statements for the year ended June 30, 1998
do not include the results of operations of A&A Services, Inc. for the period
July 1, 1997 through March 20, 1998 and Dynamic for the year ended June 30,
1998, and the consolidated financial statements for the year ended June 30, 1999
do not include the results of operations of Dynamic for the period July 1, 1998
through August 20, 1998. The following summarizes the unaudited proforma results
of operations for the years ended June 30, 1999 and 1998, assuming the foregoing
acquisition had occurred on June 30, 1999 and 1998 (in thousands, except per
share data):
1999 1998
----------- -----------
(Unaudited) (Unaudited)
Revenue, net $ 37,624 $ 36,747
Loss from operations $ (15,447) $ (16,367)
Loss before income taxes $ (14,344) $ (4,777)
Basic and diluted net
loss per share $(.22) $(.08)
F-51
<PAGE>
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 22 - SUBSEQUENT EVENTS
The Company received approximately $9 million during August of 2000 in
connection with the licensing of its technology.
During September 2000, the Company entered into a sales-type lease with a
related party for an MRI scanner totalling $935,000. The lease is payable in 60
monthly payments of $12,356 each, plus at the end of the 60-month lease, the
lessee can elect to continue the lease for an additional five years, at a
monthly payment of $12,356, including interest at 10% per annum, or pay a lump
sum of $581,544.
F-52
<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. 64 President, Chairman
of the Board and a Director
Timothy R. Damadian 36 Treasurer of FONAR; President of
HMCA
David B. Terry 53 Vice President and Secretary
Claudette J.V. Chan 63 Director
Robert J. Janoff 73 Director
Charles N. O'Data 64 Director
Raymond V. Damadian, M.D. has been the Chairman of the Board and
President of FONAR since its inception. Dr. Damadian was employed by the State
University of New York, Downstate Medical Center, New York, as an Associate
Professor of Biophysics from 1967 until September 1979. Dr. Damadian received an
M.D. degree in 1960 from Albert Einstein College of Medicine, New York, and a
B.S. degree in mathematics from the University of Wisconsin in 1956. In
addition, Dr. Damadian conducted post-graduate work at Harvard University, where
he studied extensively in the fields of physics, mathematics and electronics.
Dr. Damadian is the author of numerous articles and books on the nuclear
magnetic resonance effect in human tissue, which is the theoretical basis for
the FONAR MRI scanners. Dr. Damadian is a 1988 recipient of the National Medal
of Technology and in 1989 was inducted into the National Inventors Hall of Fame,
for his contributions in conceiving and developing the application of magnetic
resonance technology to medical applications including whole body scanning and
diagnostic imaging. Dr. Damadian is the director of HMCA.
Timothy R. Damadian has been Treasurer of FONAR since December 1998 and
President of HMCA since its formation in March 1997. Mr. Damadian served as a
field service technician for FONAR, after graduating from Suburban Technical
School in 1982, where he studied digital computer technology. Mr. Damadian
became Director of Manufacturing in October 1989 and was promoted to Vice
President of Operations of FONAR in July 1992, in which position he served until
December, 1998. Timothy Damadian is the son of Raymond V. Damadian and nephew of
David Terry and Claudette Chan.
David B. Terry is the Vice President of Administration and Secretary of
the Company. Mr. Terry has been serving as Vice President since December 1998
and as Secretary since May, 1990. Previously, he served as Treasurer from May
1990 to December, 1998, as Secretary from July 1978 through June 1987 and as
Treasurer from August 1981 through June 1987. From July 1978 through June 1987,
he was also a Director of the Company. Between July 1987 and January 1990, Mr.
Terry was a co-owner and actively engaged in the business of Carman-Terry
Realty, a real estate brokerage firm. In January 1990, Mr. Terry resumed his
employment with the Company. Mr. Terry is the brother-in-law of Raymond V.
Damadian and uncle of Timothy R. Damadian.
Claudette J.V. Chan has been a Director of FONAR since October 1987.
Mrs. Chan has been employed since 1992 by Raymond V. Damadian, M.D. MR Scanning
Centers Management Company as "site inspector," in which capacity she is
responsible for supervising and implementing standard procedures and policies
for MRI scanning centers. From 1989 to 1994 Mrs. Chan was employed by St.
Matthew's and St. Timothy's Neighborhood Center, Inc., as the director of
volunteers in the "Meals on Wheels" program, a program which cares for the
elderly. In approximately 1983, Mrs. Chan formed the Claudette Penot Collection,
a retail mail-order business specializing in women's apparel and gifts, of which
she was the President until she stopped operating the business in approximately
1989. Mrs. Chan practiced and taught in the field of nursing until 1973, when
her son was born. She received a bachelor of science degree in nursing from
Cornell University in 1960. Mrs. Chan is the sister of Raymond V. Damadian and
aunt of Timothy R. Damadian.
Robert J. Janoff has been a Director of FONAR since February, 1989. Mr.
Janoff has been a self-employed New York State licensed private investigator for
more than thirty-five years and was a Senior Adjustor in Empire Insurance Group
for more than 15 years until retiring from that position on July 1, 1997. Mr.
Janoff also served, from June 1985 to June 1991, as President of Action Data
Management Strategies, Ltd., a supplier of computer programs for use by
insurance companies. Mr. Janoff is a member of the Board of Directors of Harmony
Heights of Oyster Bay, New York, which is a nonprofit residential school for
girls with learning disabilities.
Charles N. O'Data has been a Director of FONAR since February, 1998.
From 1968 to 1997, Mr. O'Data was the Vice President for Development for Geneva
College, a liberal arts college located in western Pennsylvania. In that
capacity, he acted as the College's chief investment officer. His
responsibilities included management of the College's endowment fund and fund
raising. In July 1997, Mr. O'Data retired from Geneva College after 36 years of
service to assume a position of National Sales Executive for SC Johnson
Company's Professional Markets Group (a unit of SC Johnson Wax), and specialized
in healthcare and education sales, a position he held until the spring of 1999.
Mr. O'Data acts an independent financial consultant to various entities,
including Pittsburgh National Bank. Mr. O'Data served on the board of the
Medical Center, Beaver, a 500 bed acute care facility, for 22 years, three as
the Board Chair. He founded The Beaver County Foundation, a Community
Foundation, in 1992, and serves as its President. Mr. O'Data is a graduate of
Geneva College, where he received a B.S. degree in Economics in 1958. Mr. O'Data
is listed as a finance associate in the Middle States Association, Commission on
Higher Education. The commission is the formal accrediting body for higher
education in the eastern region of the country. In this capacity he valuates 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 2000 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 2000.
I. SUMMARY COMPENSATION TABLE
Long Term Compensation
------------------------------------
Annual Compensation | Awards |Payouts| |
------------------------------------------------------------------------------
(a) (b) (c) (d) (e) | (f) (g) | (h) | (i) |
Name Other | | | All |
and Annual| Restricted | | Other |
Principal Compen-| Stock Options| LTIP |Compen-|
Position Salary Bonus sation | Award(s) SARs |Payouts|sation |
2 Year ($) ($) ($) | ($) (#) | ($) | ($) |
------------------------------------------------------------------------------
Raymond V . 2000 $86,799.97 - - | - - | - | - |
Damadian, 1999 $86,799.96 - - | - - | - | - |
President 1998 $84,218.10 - - | - - | - | - |
& CEO | | | |
------------------------------------------------------------------------------
II. OPTION/SAR GRANTS IN LAST FISCAL YEAR
Potential Realizable
Value at Assumed
Annual Rates of Alternative
Stock Price to (f) and
Individual Appreciation for (g): Grant
Grants Option Term Date Value
------ ----------- -----------
(a) (b) (c) (d) (e) (f) (g) (h)
% of Total
Options/
SARs
Options/ Granted to Exercise Grant
SARs Employees or Expir- Date
Granted in Fiscal Base Price ation Present
Name (#) Year ($/Sh) Date 5% ($) 10% ($) Value$
-------- -------- ---------- ---------- ------ ------ --------- --------
Raymond V.
Damadian, 0 - - - - - -
President
& CEO
-----------------------------------------------------------------------------
III. OPTION/SAR EXERCISES AND YEAR-END VALUE TABLE
Aggregated Options/SAR Exercises in Last Fiscal Year, and FY-End Option/
Sar Value
------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
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
------------------------------------------------------------------------------
Raymond V. 0 - 0 -
Damadian,
President
and CEO
EMPLOYEE COMPENSATION PLANS
FONAR's 1993 Incentive Stock Option Plan, adopted on March 26, 1993, is
intended to qualify as an incentive stock option plan under Section 422A of the
Internal Revenue Code of 1954, as amended. The 1993 Incentive Stock Option Plan
permits the issuance of stock options covering an aggregate of 1,500,000 shares
of Common Stock of FONAR. The options have an exercise price equal to the fair
market value of the underlying stock on the date the option is granted, are
nontransferable, are exercisable for a period not exceeding ten years and expire
upon the voluntary termination of employment. The 1993 Stock Option Plan will
terminate on March 25, 2003. As of June 30, 2000, options to purchase 311,830
shares of Common Stock were available for future grant under the plan.
FONAR's 1997 Nonstatutory Stock Option Plan, adopted on May 9, 1997,
permits the issuance of stock options covering an aggregate of 5,000,000 shares
of Common Stock of FONAR. The options may be issued at such prices and upon such
terms and conditions as are determined by FONAR. The 1997 Nonstatutory Stock
Option Plan will terminate on May 8, 2007. As of June 30, 2000, options to
purchase 4,572,400 shares of Common Stock of FONAR were available for future
grant.
FONAR's 1997 Stock Bonus Plan, adopted on May 9, 1997, permits FONAR to
issue an aggregate of 5,000,000 shares of Common Stock of FONAR as a bonus or
compensation. FONAR selects the persons to whom bonus stock will be issued, the
number of shares to be awarded and such other terms and conditions as it deems
advisable. The 1997 Stock Bonus Plan will terminate on May 8, 2007. As of June
30, 2000, 2,013,344 shares of Common Stock of FONAR were available for future
grant.
HMCA's 1997 Incentive Stock Option Plan, adopted on March 10, 1997, is
intended to qualify as an incentive stock option plan under Section 422A of the
Internal Revenue Code of 1954, as amended. The 1997 Incentive Stock Option Plan
permits the issuance of stock options covering an aggregate of 2,000,000 shares
of Common Stock of HMCA. The options have an exercise price equal to the fair
market value of the underlying stock on the date the option is granted, are
nontransferable, are exercisable for a period not exceeding ten years and expire
upon the voluntary termination of employment. The exercisability of the options
granted to date is contingent upon the successful completion by HMCA of a public
offering of its securities or the recognition by HMCA of at least $10 million in
revenues for at least two consecutive fiscal quarters. The 1997 Stock Option
Plan will terminate on March 9, 2007. As of June 30, 1999, options to purchase
400,000 shares of HMCA Common Stock were available for future grant under the
plan.
HMCA's 1998 Incentive Stock Option Plan, adopted on December 16, 1998,
is intended to qualify as an incentive stock option plan under Section 422A of
the Internal Revenue Code of 1954, as amended. The 1998 Incentive Stock Option
Plan permits the issuance of stock options covering an aggregate of 2,000,000
shares of Common Stock of HMCA. The options have an exercise price equal to the
fair market value of the underlying stock on the date the option is granted, are
nontransferable, are exercisable for a period not exceeding ten years and expire
upon the voluntary termination of employment. The excessability of the options
granted to date is contingent upon the successful completion by HMCA of a public
offering of its securities. The 1998 Stock Option Plan will terminate on
December 15, 2008. As of June 30, 1999, options to purchase 1,330,000 shares of
HMCA Common Stock were available for future grant under the plan.
HMCA's 1998 Nonstatutory Stock Option Plan, adopted on December 16,
1998, permits the issuance of stock options covering an aggregate of 500,000
shares of Common Stock of HMCA. The options may be issued at such prices and
upon such terms and conditions as are determined by HMCA. The exercisability of
the options granted to date is contingent upon the successful completion by HMCA
of a public offering of its securities. The 1998 Nonstatutory Stock Option Plan
will terminate on December 15, 2008. As of June 30, 1999, options to purchase
100,000 shares of Common Stock were available for future grant.
<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 6, 2000.
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 4.39%
Class C Stock 9,561,174 99.98%
Class A Preferred 477,328 6.09%
Claudette Chan
Director
Common Stock 2,648 *
Class A Preferred 800 *
Robert J. Janoff
Director
Common Stock 50,000 *
Class A Preferred 1,999 *
Charles N. O'Data
Director
Common Stock 700 *
All Officers and Directors
as a Group (6 persons) (2)
Common Stock 2,522,469 4.45%
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. MRI Scanning Centers Management
Company, a Delaware corporation of which Dr. Damadian was the sole stockholder,
director and President ("RVDC"), purchased and leased scanners from FONAR to
establish a network of professional corporations operating MRI scanning centers
("Centers"), including the Macon Center, in New York, Florida, Georgia and other
locations. Dr. Damadian was the owner, director and President of each of these
professional corporations. RVDC provided the necessary management and the
scanners to the Centers, although in certain situations, a Center would acquire
the scanner directly from FONAR.
ACQUISITION OF RVDC.
Effective June 30, 1997, FONAR's wholly-owned subsidiary, Health
Management Corporation of America ("HMCA"), formerly known as U.S. Health
Management Corporation, acquired RVDC by purchasing all of the issued and
outstanding shares of RVDC from Dr. Damadian for 10,000 shares of the Common
Stock of FONAR. The transactions can be rescinded by Dr. Damadian, however, in
the event of a change of control in FONAR or the bankruptcy of FONAR. In
connection with the transaction, FONAR granted RVDC a nonexclusive royalty free
license to FONAR's patents and software. These licenses may be terminated by
FONAR in the event of the bankruptcy of RVDC or a change in control of RVDC.
In connection with and immediately prior to the sale of RVDC to HMCA,
certain leases and sales of scanners to RVDC were terminated. The scanners were
then leased directly to the Centers at which they were installed pursuant to new
scanner leases between HMCA and the Centers.
NEW AGREEMENTS WITH HMCA.
Effective July 1, 1997, immediately following the effective date of the
acquisition of RVDC by HMCA, all previous management arrangements between RVDC
and the Centers were terminated and new management agreements were entered into
by the Centers and HMCA ("Management Agreements").
Pursuant to the Management Agreements, HMCA is providing comprehensive
management and administrative services and office facilities, including billing
and collection of accounts, payroll and accounts payable processing, supplies
and utilities to the Centers. Under the Management Agreements, HMCA provides
service through FONAR for the scanners at the Centers, eliminating the need for
the Centers to have separate service agreements for their scanners. In total, 15
of the Centers previously managed by RVDC and three additional Centers opened
after the acquisition, have Management Agreements with HMCA.
With respect to the scanners at 9 of the 18 Centers, the lease or sales
agreement between RVDC (or the Center in some cases) and FONAR were terminated.
In substitution for the previous arrangements, HMCA, effective as of July 1,
1997, entered into new scanner leases ("Scanner Leases") with these Centers
pursuant to which the scanners are provided to the Centers.
The fees to HMCA under both the Management Agreements and the Scanner
Leases are on a per scan basis.
During the fiscal year ended June 30, 2000 the net revenues from the
Centers owned by Dr. Damadian were approximately $17.2 million.
Effective December 1, 1993, one of the Centers, Albany Magnetic
Resonance Imaging, P.C. (the "Albany Center"), a Georgia professional
corporation of which Raymond V. Damadian is the sole shareholder, director and
President, purchased the scanner being utilized at its site from the Company for
a purchase price of $1,128,844. Of the purchase price, $574,077 was paid by the
assumption and payment of the Company's indebtedness to the lender secured by
the scanner. Such indebtedness to the lender was retired pursuant to a new
equipment finance lease between the lender and the Albany Center, guaranteed by
the Company, providing for 18 monthly payments of $35,000 each. Following
payment of the lease, the remaining $554,767 of the purchase price due to the
Company was required to be paid pursuant to a promissory note, with interest at
10% per annum, over an 18 month term (17 payments of $35,000 each and one final
payment of $2,454.08). In June, 1997, the payment terms for the outstanding
balance of $344,766 were restructured to provide for 60 equal monthly payments
(including interest at the rate of 10% per annum) of $7,325.27 each commencing
July, 1997.
Effective December 1, 1993, Daytona Beach Magnetic Resonance Imaging,
P.A. (the "Daytona Beach Center"), a Florida professional association of which
Raymond V. Damadian is the sole shareholder, director and President, purchased
the scanner being utilized at its site from the Company for a purchase price of
$1,416,717. Of the purchase price, $328,044 was paid by the assumption and
payment of the Company's indebtedness to the lender secured by the scanner. Such
indebtedness to the lender was retired pursuant to a new equipment finance lease
between the lender and the Daytona Beach Center, guaranteed by the Company,
providing for 18 monthly payments of $20,000 each. The remaining $1,088,673 of
the purchase price due to the Company was required to be paid pursuant to a
promissory note, with interest at 10% per annum. In May, 1999, the payment terms
for the outstanding balance of $1,001,507 were restructured to provide for 84
equal monthly payments (including interest at the rate of 10% per annum) of
$16,626.20 each commencing May 1999.
Melville MRI, P.C. (the "Melville Center"), a New York professional
corporation of which Raymond V. Damadian is the sole shareholder, director and
President, purchased the scanner being utilized at its site from the Company for
a purchase price of $1,011,431.12. Of the purchase price, $900,000 is to be paid
by the assumption and payment of the Company's indebtedness to the lender
secured by the scanner pursuant to a note bearing interest at 14% per annum and
providing for 60 monthly payments of $20,700 each. The remaining $111,431.12 of
the purchase price was to be paid concurrently with the payments to the lender.
The payment terms for the principal balance, plus accrued interest (in the
aggregate amount of $139,290) were restructured to provide for 60 equal monthly
payments (including interest at the rate of 10% per annum) of $2,959.50 each
commencing July, 1998.
ACQUISITION OF THE AFFORDABLE COMPANIES.
Effective June 30, 1997, HMCA acquired a group of several interrelated
corporations, limited liability companies and a partnership engaged in managing
three diagnostic imaging centers and one multi-specialty practice in New York
State (the "Affordable Companies") pursuant to a series of transactions
concluding with a merger between a wholly-owned subsidiary of HMCA and
Affordable Diagnostics, Inc. Concurrently with the acquisition, Raymond V.
Damadian purchased three New York professional corporations to which the
Affordable Companies were providing their services under several agreements. Dr.
Damadian is the sole stockholder, director and President of these professional
corporations (the "Affordable Professional Corporations"). During the fiscal
year ended June 30, 2000, the net revenues from the Affordable Professional
Corporations were approximately $2.8 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,
2000, the net revenues from the A & A Professional Corporations were $4.0
million.
ACQUISITION OF DYNAMIC HEALTH CARE MANAGEMENT
Effective August 20, 1998, HMCA acquired Dynamic Health Care
Management, Inc. ("Dynamic"), an MSO managing three physician practices in
Nassau and Suffolk Counties on Long Island, New York. Concurrently with the
acquisition, Raymond V. Damadian purchased two professional service corporations
under contract with Dynamic (the "Dynamic Professional Corporations"). During
the fiscal year ended June 30, 2000, the net revenues from the Dynamic
Professional Corporations were $7.3 million.
HMCA performs management services for Superior Medical
Services, P.C. ("Superior"), a New York professional corporation of which
Raymond V. Damadian is the sole stockholder, director and President. Superior
conducts multi-specialty practices at locations in Yonkers, Elmont, Elmhurst and
Riverdale, New York. During the fiscal year ended June 30, 2000, the net
revenues from Superior were $2.6 million.
Pursuant to an agreement dated March 31, 1993, RVDC agreed to purchase
the Company's general partnership interest (approximately 92% of the
partnership) in a partnership owning and operating an MRI scanning center in
Bensonhurst (Brooklyn), New York. Robert Janoff, a director of the Company, is a
limited partner in the partnership. The partnership is also party to a service
agreement with the Company. The current annual rate is $50,000 for the one year
service contract from July 1, 2000 to July 30, 2001. The rate in effect during
the prior year was also $50,000.
Pursuant to an agreement dated September 30, 1993, AMD sold its
interests in a partnership operating an MRI scanning center in Melbourne,
Florida to Melbourne Magnetic Resonance Imaging, P.A. (the "Melbourne
Facility"), for a purchase price of $150,000. The purchase price is payable,
with interest at 10% per annum, over a period of fifteen months commencing
September 1, 1995 as follows: $13,500 per month for the first fourteen months
and $1,185.60 for the fifteenth month. The Melbourne Facility is a Florida
professional corporation of which Raymond V. Damadian is the sole stockholder,
director and President. The partnership is presently inactive.
Pursuant to an agreement dated September 30, 1993, AMD sold to Dade
County MRI, P.A. its interests in a partnership which had formerly operated an
MRI scanning center in Miami, Florida. The purchase price of $100,000 is
payable, with interest at 10% per annum,in sixty (60) equal consecutive monthly
installments of principal and interest (including interest accrued from
September 30, 1993), commencing 90 days after the scanner is placed in service.
The partnership is presently inactive. Dade County MRI, P.A. is a Florida
professional association of which Raymond V. Damadian is the sole stockholder,
director and President.
Pursuant to a sales agreement dated April 1, 1996, RVDC agreed to
purchase an MRI scanner with certain upgrades from the Company which RVDC then
contributed to Orlando MRI Associates, Limited Partnership (the "Orlando
Partnership"), a limited partnership. The Orlando Partnership is utilizing the
scanner at a site located in Orlando, Florida. The sales agreement provides for
a purchase price of $400,000 payable in installments as follows: (1) $40,000
down payment within thirty (30) days of execution and (2) $360,000 in 84 monthly
installments of $5,611.04 each (inclusive of interest at 8% per annum) pursuant
to a promissory note executed by RVDC upon acceptance of the scanner. The
Orlando Partnership is party to a service agreement for its scanner with the
Company at an annual fee of $50,000 for the period from April 8, 2000 through
April 7, 2001. The price in effect for the prior year from April 8, 1999 through
April 7, 2000 was also $50,000. Timothy Damadian, the Treasurer of FONAR and
President of HMCA, is a limited partner in Orlando.
Pursuant to an agreement dated March 1, 1999, Dublin Magnetic Resonance
Imaging, P.C., ("Dublin"), a Georgia professional corporation which Raymond V.
Damadian is the sole stockholder, director and President, agreed to lease a used
Fonar Beta 3000M Mobile MRI Scanner from the Company at a monthly rental of
$4,840.08 commencing on September 1, 1999 and continuing for thirty-six (36)
months. At the conclusion of the lease period Dublin will have the option to
purchase the scanner for a price of $1.00.
Pursuant to an agreement dated December 1, 1999, Damadian MRI in Garden
City, P.C. ("Garden City") a New York professional corporation of which Raymond
V. Damadian is the sole stockholder, director and President, agreed to lease a
Fonar QUAD 12000 MRI Scanner from the Company for a term of five years at a
monthly rental of $12,356.09. Upon the conclusion of the five year term, Garden
City may elect to purchase the scanner for $581,544.42 or extend the lease for
an additional five year period at the same monthly rental. If the lease term is
extended, then Garden City will have the option to purchase the scanner at the
end of the second five year period for a purchase price of $1.00. The term of
the lease commenced on June 12, 2000 upon acceptance of the scanner. Payments
are due on the twelfth of the month commencing June 12, 2000.
Pursuant to an agreement dated February 1, 2000, Deerfield Magnetic
Resonance Imaging, P.A. ("Deerfield"), a Florida professional association of
which Raymond V. Damadian is the sole stockholder, director and President,
agreed to lease a Fonar QUAD 12000 MRI Scanner from the Company for a term of
five years at a monthly rental of $12,356.09. Upon the conclusion of the five
year term, Deerfield may elect to purchase the scanner for $581,544.42 or extend
the lease for an additional five year period at the same monthly rental. If the
lease term is extended, then Deerfield will have the option to purchase the
scanner at the end of the second five year period for a purchase price of $1.00.
The term of the lease commenced on July 18, 2000 upon the acceptance of the
scanner. Lease payments are due on the first of the month, commencing August 1,
2000.
Canarsie MRI Associates ("Canarsie"), a joint venture partnership of
which MRI Specialties, Inc. ("Specialties") is an owner, is party to a service
agreement for its scanner with the Company at an annual fee of $70,000 for the
period from September 1, 2000 through August 31, 2001. The price in effect
during the prior year from September 1, 1999 to August 31, 2000 was also
$70,000. Timothy Damadian, the Treasurer of FONAR and President of HMCA, is the
sole stockholder, director and President of Specialties.
Pompano MRI Associates ("Pompano"), a joint venture partnership of
which Guardian MRI, Inc. ("Guardian") is an owner, is party to a service
agreement for its scanner with the Company at an annual fee of $70,000 for the
period from October 1, 1999 through September 30, 2000. The price in effect
during the prior year from October 1, 1998 through September 30, 1999 was also
$70,000. Timothy Damadian, the Treasurer of FONAR and President of HMCA, is a
stockholder, director and officer of Guardian.
As at June 30, 2000, the indebtedness of Canarsie to the Company was
$22,476 and the aggregate indebtedness of Pompano to the Company was $18,550.
<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, 2000 and 1999.
Consolidated Statements of Operations for the Three Years Ended June
30, 2000, 1999 and 1998.
Consolidated Statements of Stockholders' Equity for the Three Years
Ended June 30, 2000, 1999 and 1998.
Consolidated Statements of Cash Flows for the Three Years Ended June
30, 2000, 1999 and 1998.
Notes to Consolidated Financial Statements.
Information required by schedules called for under Regulation S-X is
either not applicable or is included in the consolidated financial
statements or notes thereto.
b) REPORTS ON FORM 8-K
None.
c) EXHIBITS
3.1 Certificate of Incorporation, as amended, of the Company incorporated
herein by reference to Exhibit 3.1 to the Registrant's registration statement on
Form S-1,Commission File No. 33-13365.
3.2 Article Fourth of the Certificate of Incorporation, as amended, of the
Company incorporated by reference to Exhibit 4.1 to the Registrant's
registration statement on Form S-8, Commission File No. 33-62099.
3.3 By-Laws, as amended, of the Company incorporated herein by reference to
Exhibit 3.2 to the Registrant's registration statement on Form S-1, Commission
File No. 33-13365.
4.1 Specimen Common Stock Certificate incorporated herein by reference to
Exhibit 4.1 to the Registrant's registration statement on Form S-1, Commission
File No. 33-13365.
4.2 Specimen Class B Common Stock Certificate incorporated herein by
reference to Exhibit 4.2 to the Registrant's registration statement on Form S-1,
Commission File No. 33-13365.
10.1 License Agreement between FONAR and Raymond V. Damadian incorporated
herein by reference to Exhibit 10 (e) to Form 10-K for the fiscal year ended
June 30, 1983, Commission File No. 0-10248.
10.2 1983 Nonstatutory Stock Option Plan incorporated herein by reference to
Exhibit 10 (a) to Form 10-K for the fiscal year ended June 30, 1983, Commission
File No. 0-10248, and amendments thereto dated as of March 7, 1984 and dated
August 22, 1984, incorporated herein by referenced to Exhibit 28 (a) to Form
10-K for the year ended June 30, 1984, Commission File No. 0-10248.
10.3 1984 Incentive Stock Option Plan incorporated herein by reference to
Exhibit 28 (c) to Form 10-K for the year ended June 30, 1984, Commission File
No. 0-10248.
10.4 1986 Nonstatutory Stock Option Plan incorporated herein by reference to
Exhibit 10.7 to Form 10-K for the fiscal year ended June 30, 1986, Commission
File No. 0-10248.
10.5 1986 Stock Bonus Plan incorporated herein by reference to Exhibit 10.8
to Form 10-K for the fiscal year ended June 30, 1986, Commission File No.
0-10248.
10.6 1986 Incentive Stock Option Plan incorporated herein by reference to
Exhibit 10.9 to Form 10-K for the fiscal year ended June 30, 1986, Commission
File No. 0-10248.
10.7 Lease Agreement, dated as of August 18, 1987, between FONAR and Reckson
Associates incorporated herein by reference to Exhibit 10.26 to Form 10-K for
the fiscal year ended June 30, 1987, Commission File No. 0-10248.
10.8 1993 Incentive Stock Option Plan incorporated herein by reference to
Exhibit 28.1 to the Registrant's registration statement on Form S-8, Commission
File No. 33-60154.
10.9 1993 Non-Statutory Stock Option Plan incorporated herein by reference
to Exhibit 28.2 to the Registrant's registration statement on Form S-8,
Commission File No. 33-60154.
10.10 1993 Stock Bonus Plan incorporated herein by reference to Exhibit 28.3
to the Registrant's registration statement on Form S-8, Commission File No.
33-60154.
10.11 1994 Non-Statutory Stock Option Plan incorporated herein by reference
to Exhibit 28.1 to the Registrant's registration statement on Form S-8,
Commission File No. 33-81638.
10.12 1994 Stock Bonus Plan incorporated herein by reference to Exhibit 28.2
to the Registrant's registration statement on Form S-8, Commission File No.
33-81638.
10.13 1995 Non-Statutory Stock Option Plan incorporated herein by reference
to Exhibit 28.1 to the Registrant's registration statement on Form S-8,
Commission File No. 33-62099.
10.14 1995 Stock Bonus Plan incorporated herein by reference to Exhibit 28.2
to the Registrant's registration statement on Form S-8, Commission File No.
33-62099.
10.15 1997 Non-Statutory Stock Option Plan incorporated herein by reference
to Exhibit 28.1 to the Registrant's registration statement on Form S-8,
Commission File No.: 333-27411.
10.16 1997 Stock Bonus Plan incorporated herein by reference to Exhibit 28.2
to the Registrant's registration statement on Form S-8, Commission File No:
333-27411.
10.17 Stock Purchase Agreement, dated July 31, 1997, by and between U.S.
Health Management Corporation, Raymond V. Damadian, M.D. MR Scanning Centers
Management Company and Raymond V. Damadian, incorporated herein by reference to
Exhibit 2.1 to the Registrant's Form 8-K, July 31, 1997, commission File No:
0-10248.
10.18 Merger Agreement and Supplemental Agreement dated June 17, 1997 and
Letter of Amendment dated June 27, 1997 by and among U.S. Health Management
Corporation and Affordable Diagnostics Inc. et al., incorporated herein by
reference to Exhibit 2.1 to the Registrant's 8-K, June 30, 1997, Commission File
No: 0-10248.
10.19 Stock Purchase Agreement dated March 20, 1998 by and among Health
Management Corporation of America, FONAR Corporation, Giovanni Marciano, Glenn
Muraca et al., incorporated herein by reference to Exhibit 2.1 to the
Registrant's 8-K, March 20, 1998, Commission File No: 0-10248.
10.20 Stock Purchase Agreement dated August 20, 1998 by and among Health
Management Corporation of America, FONAR Corporation, Stuart Blumberg and Steven
Jonas, incorporated herein by reference to Exhibit 2 to the Registrant's 8-K,
September 3, 1998, Commission File No. 0-10248.
21. Subsidiaries of the Registrant. See Exhibits.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FONAR CORPORATION
Dated: October 20, 2000
By: /s/ Raymond Damadian
Raymond V. Damadian, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Raymond Damadian Chairman of the October 20, 2000
Raymond V. Damadian Board of Directors,
President and a
Director (Principal
Executive Officer)
/s/ Claudette J.V. Chan Director October 20, 2000
Claudette J.V. Chan
/s/ Robert J. Janoff Director October 20, 2000
Robert J. Janoff
/s/ Charles N. O'Data Director October 20, 2000
Charles N. O'Data
