SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [Fee Required] For the fiscal year ended June 30, 2002
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 _______
Indicate by check mark if disclosure of delinquent filers, pursuant to Item 405
of Regulation S-K (ss.229.405 of this Chapter), is not contained herein, and
will not be contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
10-K or any amendment to the Form 10-K. [X]
As of September 19, 2002, 73,569,791 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 71,021,571 shares of Common
Stock held by non-affiliates as of such date (based on the closing price per
share on September 19, 2002 as reported on the NASDAQ System) was approximately
$73.9 million. The other outstanding classes do not have a readily determinable
market value.
DOCUMENTS INCORPORATED BY REFERENCE
None
ITEM 1. BUSINESS
GENERAL
FONAR Corporation (the "Company" or "FONAR") is a Delaware corporation
which was incorporated on July 17, 1978. The Company's address is 110 Marcus
Drive, Melville, New York 11747 and its telephone number is (631) 694-2929.
FONAR also maintains a WEB site at www.fonar.com.
FONAR is engaged in the business of designing, manufacturing, selling and
servicing magnetic resonance imaging ("MRI" or "MR") scanners which utilize MRI
technology for the detection and diagnosis of human disease. FONAR introduced
the first MRI scanner in 1980 and is the originator of the iron-core
non-superconductive and permanent magnet technology.
FONAR's iron frame technology made FONAR the originator of "open" MRI
scanners. FONAR introduced the first "open" MRI in 1980. It has concentrated
since on further application of its "open" MRI, introducing the Stand-Up(TM) MRI
scanner, the QUAD(TM) MRI, the Open Sky(TM) MRI and its works in progress MRI
operating room.
The product we are now most vigorously promoting is our Stand-Up(TM) MRI.
The Stand-Up(TM) MRI is unique in the industry in that it allows patients to be
scanned in a fully weight-bearing condition, such as standing, sitting or
bending in any position that causes symptoms. This means that an abnormality or
injury, such as a slipped disk can be visualized where it may not be visualized
with the patient reclining.
Health Management Corporation of America (formerly U.S. Health Management
Corporation and hereinafter sometimes referred to as "HMCA") was formed by the
Company in March 1997 as a wholly-owned subsidiary in order to enable the
Company to expand into the business of providing comprehensive management
services to medical providers. HMCA provides management services, administrative
services, office space, equipment, repair and maintenance service and clerical
and other non-medical personnel to physicians and other medical providers,
including diagnostic imaging centers.
See Note 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 are intended to significantly
improve the Company's competitive position. The Company's products are the
Stand-Up(TM) MRI, the Fonar 360(TM), the QUAD(TM) MRI scanner and the Echo(TM)
MRI scanner.
The Stand-Up(TM) permits, for the first time, MRI diagnoses to be made in
the weight-bearing state. The Stand-Up(TM) is the only MRI scanner which allows
patients to be scanned while standing, sitting or reclining, either horizontally
or at an angle. This means that an abnormality or injury, such as a slipped
disk, will be able to be scanned under full weight-bearing conditions, or, more
often than not, in the position in which the patient experiences pain. An
elevator built into the floor brings the patient to the desired height in the
scanner. An adjustable bed allows the patients to stand, sit or lie on their
backs, sides or stomachs at any angle. In the future the Stand-Up(TM) may also
be useful for MRI directed surgical procedures.
We are vigorously promoting sales of the Stand-Up(TM) which we regard as
our most promising product. The market for the Stand-Up(TM) shows strong
progress. During the fiscal year ended June 30, 2002, we received orders for 20
Stand-Up(TM) MRI scanners. The following chart shows the revenues attributable
to our different model scanners for the fiscal years ended June 30, 2001 and
June 30, 2002. Note that we recognize revenue on a percentage of completion
basis. Accordingly, revenue is recognized as each sub-assembly of a scanner is
manufactured. Consequently the revenues for a fiscal period do not necessarily
relate to orders placed in that period.
Revenues Recognized
Model 2001 2002
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Stand-Up(TM) $1,640,615 $11,089,675
Fonar 360(TM) 0 0
QUAD(TM) $3,043,308 0
Echo(TM) $1,052,182 0
Beta(TM)(used) 0 361,000
The Fonar 360(TM), includes the Open Sky(TM) MRI. The magnet frame is
incorporated into the floor, ceiling and sidewalls of the scan room and is open.
Consequently, physicians and family members can walk inside the magnet to
approach the patient. The Open Sky(TM) version of the Fonar 360(TM) 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(TM) to
give physicians direct 360 access to patients and the availability of MRI
compatible surgical instruments will also enable the Fonar 360(TM), in its
future OR-360(TM) version, to be used for image guided surgery.
The QUAD(TM) MR scanner utilizes a electromagnet and is accessible from
four sides. The QUAD(TM) was the first "open" MRI scanner at high field. The
greater field strength of the QUAD(TM)'S magnet, when enhanced by the
electronics already utilized by the Company's scanners, produces images of a
quality and clarity competitive with high field superconductive magnets. The
QUAD(TM) scanner magnet is the highest field "open MRI" in the industry.
In addition, the Company offers a low cost, low-field strength open MRI
scanner, the Echo(TM).
The Company's current "works in progress" include the QUAD-S(TM) which
combines many of the features of the QUAD(TM) scanners with a superconducting
magnet. (See "Works in Progress".)
The Company's "works in progress" also include an in-office, weight-bearing
extremities scanner designed for examining the knee, foot, elbow, hand and wrist
under both weight-bearing and non-weight bearing conditions.
Fonar has an internal sales force of approximately 16 persons,
concentrating on domestic sales. Fonar continues to use distributors for its
foreign sales efforts. Fonar has also expanded its website to a full-scale
interactive product information desk for reaching new customers and assisting
existing customers.
In March 1997, FONAR formed Health Management Corporation of America
(formerly U.S. Health Management Corporation and hereinafter sometimes referred
to as "HMCA") as a wholly-owned subsidiary for the purpose of engaging in the
business of providing comprehensive management and administrative services,
office space, equipment, repair and maintenance service for equipment and
clerical and other personnel (other than physicians) to physicians' practices
and other medical providers, including diagnostic centers.
HMCA currently is managing 13 diagnostic imaging centers, four primary care
offices and seven physical therapy and rehabilitation offices practices located
principally in New York State and Florida.
PRODUCTS
The Company's principal products are its Stand-Up(TM) MRI, the Fonar
360(TM), the series and the Echo(TM).
The Stand-Up(TM) MRI is a whole-body open MRI system that enables
positional MRI (pMRI(TM)) applications, such as weight-bearing MRI studies.
Operating at a magnetic field strength of 0.6 Tesla, the scanner is a powerful,
diagnostically versatile and cost-effective Open MRI that provides a broad range
of clinical capabilities and a complete set of imaging protocols.
Patients can be scanned standing, sitting or in any of the conventional
recumbent positions. This multi-positional MRI system accommodates an
unrestricted range of motion for flexion, extension, lateral bending, and
rotation studies of the cervical (upper)and lumbar (lower) spine. Previously
difficult patient scanning positions can be achieved using the system's
MRI-compatible, three-dimensional, motorized patient handling system. Patients,
lying horizontally, are placed into the magnet in the conventional manner. The
system's lift and tilt functions then deliver the targeted anatomical region to
the center of the magnet. The ceiling and floor are recessed to accommodate the
full vertical travel of the table. True image orientation is assured, regardless
of the rotation angle, via computer read-back of the table's position. Spines
and extremities can be scanned in weight-bearing states; brains can be scanned
with patients either standing or sitting.
The Stand-Up(TM) MRI is exceptionally open, making it the most
non-claustrophobic whole-body MRI scanner. Patients can walk into the magnet,
stand or sit for their scans and then walk out. From the patient's point of
view, the magnet's front-open and top-open design provides an unprecedented
degree of comfort because the scanner allows the patient an unobstructed view of
the scanner room from inside the magnet, and there is nothing in front of one's
face or over one's head. The only thing in front of the patient's face during
the scan is the 48" panoramic TV (part of the scanner)the patient views during
the scan. The bed is tilted back five degrees to stabilize a standing patient.
Special coil fixtures, a patient seat, Velcro straps, and transpolar stabilizing
bars are available to keep the patient comfortable and motionless throughout the
scanning process.
Full-range-of-motion studies of the joints in virtually any direction will
be possible, an especially promising feature for sports injuries. Full range of
motion cines, or movies, of the lumbar spine will be achieved under full body
weight.
The Stand-Up(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 Fonar 360(TM) is an enlarged room sized magnet in which the floor,
ceiling and walls of the scan room are part of the magnet frame. 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. Consequently, this scanner allows 360 degree access to the
patient and physicians and family members are able to enter the scanner and
approach the patient.
The Fonar 360(TM) is presently marketed as a diagnostic scanner and is
sometimes referred to as the Open Sky(TM) MRI. In its Open Sky(TM) version, the
Fonar 360(TM) serves as an open patient friendly scanner which allows 360 access
to the patient on the scanner bed.
To optimize the patient-friendly character of the Open Sky(TM) 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-S(TM) MRI scanner, is 0.6 Tesla.
In the future, we may also develop the Fonar 360(TM) to function as an
operating room. We sometimes refer to this contemplated version of the Fonar
360(TM) as the OR-360(TM). In its OR-360(TM) version, which is in the planning
stages, the enlarged room sized magnet and 360 access to the patient afforded by
the Fonar 360(TM) would permit full-fledged surgical teams to walk into the
magnet and perform surgery on the patient inside the magnet. Most importantly
the exceptional quality of the MRI image and its exceptional capacity to exhibit
tissue detail on the image, by virtue of the nuclear resonance signal's
extraordinary capacity to create image contrast, can then be obtained real time
during surgery to guide the surgeon in the surgery. Thus surgical instruments,
needles, catheters, endoscopes and the like can be introduced directly into the
human body and guided to the malignant lesion by means of the MRI image. The
number of inoperable lesions should be greatly reduced by the availability of
this new capability. Most importantly treatment can be carried directly to the
target tissue.
A Neurosurgeon, for example, has direct access to the patient's head while
the patient is lying in the scanner and can perform image guided neurosurgery in
this magnet. The unimpeded access in the space above the patient is also useful
for surgical access, positioning of life support devises, neuro-surgical
microscopes and anaesthetic gases. It should be noted that these procedures have
not yet been performed in the scanner, although they are promising
possibilities.
With current treatment methods, therapy must always be restricted in the
doses that can be applied to the malignant tissue because of the adverse effects
on the healthy tissues. Thus chemotherapies must be limited at the first sign of
toxic side effects. The same is the case with radiation therapy. The Company
expects that with the OR-360(TM) treatment agents may be administrated directly
to the malignant tissue through small catheters or needles allowing much larger
doses of chemotherapy, x-rays, laser ablation, microwave, or if to be applied
directly and exclusively to the malignant tissue with more effective results.
Since the procedure of introducing a treatment needle or catheter under image
guidance will be minimally invasive the procedure can be readily repeated should
metastases occur elsewhere, with minimum impact on the patient beyond a
straightforward needle injection.
The presence of the MRI image during treatment will enable the operator to
make assessments during treatment if his treatment is being effective.
The interventional OR-360(TM) version of the Fonar 360(TM) is still in the
planning stages. There is not a prototype. A separate FDA submission for the
interventional 360 has not been made as yet and might not be necessary in that
it was not required of other MRI manufacturers in similar situations. We note
that other manufacturers have incorporated the use of their imaging machine for
use in interventional procedures without separate FDA submissions.
The QUAD(TM) MRI scanner utilizes a 6000 gauss (0.6 Tesla) iron core
electromagnet and is accessible from four sides. The QUAD-S(TM) was the first
"open" MRI scanner at high field.
In addition to the patient comfort, increased throughput and new
applications (such as MRI directed surgery and MRI breast imaging) made possible
by the QUAD(TM) scanner's open design, the QUAD(TM) is 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(TM)'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(TM)'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 openness of FONAR's QUAD(TM) scanner enables
surgeons to perform a wide range of surgical procedures inside the magnet.
Four sides are open on the QUAD(TM), thus allowing access to the scanning
area from four vantage points. With the QUAD(TM)'s multi-bed patient handling
system, many more short scan procedures such as those used in breast imaging can
be done in a day, allowing the price of MRI breast imaging to drop without
reducing the scanner's revenue-generating capacity. At the same time, there is
not the painful compression of the breast characteristic of X-ray mammography.
The Stand-Up(TM) MRI, Fonar 360(TM) and QUAD(TM) scanners share much of the
same fundamental technology and offer the same speed, precision and image
quality. These scanners initiated the new market segment of high-field open MRI
in which the Fonar Stand-Up(TM) is one of the market leaders. High-field open
MRIs operate at significantly higher magnetic field strengths and, therefore,
produce more of the MRI image-producing signal needed to make high-quality MRI
images (measured by signal-to-noise ratios, S/N).
The Stand-Up(TM) MRI, Fonar 360(TM) and QUAD(TM) scanners utilize a 6000
gauss (0.6 Tesla field strength) iron core electromagnet. The greater field
strength of the 6000 gauss magnet, as compared to lower field open MRI scanners
that operate at 3,000 gauss (0.3 Tesla) when enhanced by the electronics already
utilized by the Company's scanners, produces images of higher quality and
clarity. Fonar's 0.6 Tesla open scanner magnets are among the highest field
"open MRI" magnets in the industry. One open scanner was recently introduced at
0.7 Tesla field strength and differs negligibly from Fonar's 0.6 Tesla scanners.
The Stand-Up(TM), Fonar 360(TM) and QUAD(TM) 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
scanners' design over their lower field predecessors also include increased
image-processing speed and diagnostic flexibility.
Several technological advances have been engineered into the Stand-Up(TM)
MRI, Fonar 360(TM) and QUAD(TM) scanners for extra improvements in S/N,
including: new high-S/N Organ Specific(TM) receiver coils\; 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 Stand-Up(TM) MRI, Fonar 360(TM) and
QUAD(TM) scanners operate squarely in the optimum C/N range.
The Stand-Up(TM) MRI, Fonar 360(TM) and QUAD(TM) provide various features
allowing for versatile diagnostic capability. For example, SMART(TM) scanning
allows for same-scan customization of up to 63 slices, each slice with its own
thickness, resolution, angle and position. This is an important feature for
scanning parts of the body that include small-structure sub-regions requiring
finer slice parameters. There's also Evolving Images(TM), Multi-Angle Oblique
(MAO)(TM) imaging, and oblique imaging.
The console for these scanners includes a mouse-driven, multi-window
interface for easy operation and a 19-inch, 1280 x 1024-pixel, 20-up,
high-resolution image monitor with features such as electronic magnifying glass
and real-time, continuous zoom and pan.
The Company also offers a low cost open scanner, the Echo(TM), which
operates at a .3 Tesla field strength. The Echo(TM) is an open upgraded version
of the Company's former principal product, the Beta(TM) MRI scanner, but open on
four sides to provide four directions for patient access instead of two.
Prior to the introduction of the Stand-Up(TM) MRI, Fonar 360(TM) and
QUAD(TM) scanners, the Ultimate(TM) 7000 scanner, introduced in 1990, was the
Company's principal product. The Ultimate(TM) 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 2002, sales of the Company's QUAD(TM) scanners accounted for
none of the Company's revenues, as compared to 7.2% of the Company's total
revenues and 29% of its medical equipment segment revenues in fiscal 2001.
During fiscal 2002, sales of the Company's Stand-Up(TM) scanners accounted for
approximately 24.7% of total revenues and 68.7% of medical equipment revenues,
as compared to 3.9% of total revenues and 15.5% of medical equipment revenues in
fiscal 2001. Sales of Echo(TM) scanners accounted for 0% of total revenues and
0% of medical equipment revenues in fiscal 2002 as compared to 2.5% of total
revenues and 10% of medical equipment revenues in fiscal 2001.
There were no sales of Beta(TM) scanners in fiscal 2001, but 1% of total
revenues and 2.1% of medical equipment revenues in fiscal 2002 were derived from
the sale of a refurbished Beta(TM) scanner.
The materials and components used in the manufacture of the Company's
products (circuit boards, computer hardware components, electrical components,
steel and plastic) are generally available at competitive prices. The Company
has not had difficulty acquiring such materials.
WORKS-IN-PROGRESS
All of the Company's products and works-in-progress seek to bring to the
public MRI products that are expected to provide important advances against
serious disease.
MRI takes advantage of the nuclear resonance signal elicited from the
body's tissues and the exceptional sensitivity of this signal for detecting
disease. Much of the serious disease of the body occurs in soft tissue. The
principal diagnostic modality currently in use for detecting disease, as in the
case of x-ray mammography, are diagnostic x-rays. X-rays discriminate soft
tissues like healthy breast tissue and cancerous tissue poorly because the x-ray
particle traverses the tissues almost equally thereby rendering the target film
equally exposed by the two tissues and creating healthy and cancerous shadows on
the film that differ very little in brightness. The image contrast between
cancerous and healthy tissue is poor, making the detection of breast cancers by
the x-ray mammogram less than optimal. If microscopic stones
(microcalcifications) are not present to provide the missing contrast the breast
cancer goes undetected. They frequently are not present. The maximum contrast
available by x-ray with which to discriminate disease is 4%. Brain cancers
differ from surrounding healthy brain by only 1.6%.
On the other hand the soft tissue contrasts with which to distinguish
cancers on images by MRI are up to 180%. This is because the nuclear resonance
signals from the body's tissues differ so dramatically. Liver cancer and healthy
liver signals differ by 180%. Thus there is some urgency to bring to market an
MRI based breast scanner that can overcome the x-ray limitation and assure that
mammograms do not miss serious lesions. The added benefit of MRI mammography
relative to x-ray mammography is the elimination of the need for the patient to
disrobe and the painful compression of the breast typical of the x-ray
mammogram. The patient is scanned in her street clothes in MRI mammography.
Moreover MRI mammogram scans the entire chest wall including the axilla for the
presence of nodes which the x-ray mammogram cannot reach.
The Company views its Stand-Up(TM) MRI as the ideal mammography machine as
it permits the patient to be seated for the examination and be easily accessed
for an MR image guided breast biopsy when needed.
The Company is developing a superconductive version of its open iron frame
magnets, the "QUAD-S(TM)", a 0.6 Tesla superconductive magnet. The QUAD-S(TM)
will have a field strength between 0.6 to 1.0 Tesla and a 18-inch gap vertical
field. This MRI scanner will combine the benefits of its open non claustrophobic
patented iron-frame, vertical field magnet design with the high field strength
of a superconducting magnet. The Company received FDA approval for the
QUAD-S(TM) in June, 2001.
In addition, the Company's works in progress include an in-office weight
bearing extremities scanner which will be able to be used to examine the knee,
foot, elbow, hand and wrist. This scanner will allow scans to be performed in
under both weight- bearing and non-weight-bearing conditions.
PRODUCT MARKETING
The principal markets for the Company's scanners are hospitals and private
scanning centers.
Fonar's internal sales force is approximately 16 persons. Our internal
sales force handles the domestic market while we continue to use independent
distributors for foreign markets. In addition to its internal domestic sales
force, Fonar and G.E. Medical, a division of General Electric, have entered into
an arrangement pursuant to which G.E. Medical will act as independent
distributor for Fonar's Stand-Up(TM) MRI scanner.
In addition, the Company has expanded its website to include an interactive
product information desk for reaching customers. The Company plans to commence a
program for providing demonstrations of its products to potential customers on
an international basis.
The Company has exhibited its new products at the annual trade show held by
the Radiological Society of North America ("RSNA") in Chicago since November
1995 and plans to attend the RSNA trade show in November 2002 and future years.
The RSNA trade show is held annually and is attended by most manufacturers of
MRI scanners.
The Company is directing its marketing efforts to meet the demand for both
"open" and high field strength MRI scanners. Fonar plans to devote its principal
efforts to marketing the Stand-Up(TM) MRI, which is the only scanner in the
industry that has the unique capability of scanning patients under
weight-bearing conditions. In addition the Company will continue to market its
Fonar 360(TM), QUAD(TM) and Echo(TM) MRI scanners. Utilizing a 6000 gauss (0.6
Tesla field strength) iron core electromagnet, the Stand-Up(TM) MRI, Fonar
360(TM) and QUAD(TM) scanner magnets are among the high field "open MRI"
scanners in the industry.
The Company also will seek to introduce new MRI applications for its
scanners such as MRI-directed surgery and head-to-toe MRI preventive screening.
Fonar's areas of operations are principally in the United States. During
the fiscal year ended June 30, 2002, 3.5% of the Company's revenues were
generated by foreign sales, as compared to 0%, 2.8% and 3.4% for fiscal 2001,
2000 and 1999 respectively.
The Company is seeking to promote foreign sales and has sold scanners in
various foreign countries. Foreign sales, however, have not yet proved to be a
significant source of revenue.
SERVICE AND UPGRADES FOR MRI SCANNERS
The Company's customer base of installed scanners has been and will
continue to be an additional source of income, independent of direct sales.
Income is generated from the installed base in two principal areas namely,
service and upgrades. Service and maintenance revenues from the Company's
external installed base were approximately $1.7 million in fiscal 2000, $2.0
million in fiscal 2001 and $2.2 million in fiscal 2002.
The Company anticipates that its new line of scanners will result in
upgrades income in future fiscal years. The potential for upgrades income
originates in the versatility and productivity of the MRI technology. New
medical uses for the technology are constantly being discovered. New features
can often be added to the scanner by the implementation of little more than
versatile new software packages. For example, software can be added to current
MRI angiograms to synchronize the angiograms to the cardiac cycle. By doing so
the dynamics of blood vessel filling and emptying can be visualized with movies.
Such enhancements are attractive to the end users because they extend the useful
life of the equipment and enable the user to avoid obsolescence and the expense
of having to purchase new equipment. At the present time, however, upgrade
revenue is not significant. Upgrade revenues were approximately, $36,000 in
fiscal 2000, $0 in fiscal 2001 and $386,898 in fiscal 2002.
Service and upgrade revenues are expected to increase as sales of scanners
and the size of the customer base increases.
RESEARCH AND DEVELOPMENT
During the fiscal year ended June 30, 2002, the Company incurred
expenditures of $5,955,394 ($855,612 of which was capitalized) on research and
development, as compared to $6,621,225 ($754,804 of which was capitalized) and
$5,893,648($361,323 of which was capitalized) incurred during the fiscal years
ended June 30, 2001 and June 30, 2000, respectively.
Research and development activities have focused principally, on the
development and enhancement of the new Stand-Up(TM) and Fonar 360(TM) MRI
scanners and its new extremities scanner. The Stand-Up(TM) MRI and Fonar 360(TM)
involve significant software and hardware development as the new products
represent entirely new hardware designs and architecture requiring a new
operating software. The Company's research activity includes developing a
multitude of new features for the upright scanning made possible by the high
speed processing power of its scanners. In addition, the Company's research and
development efforts include the development of new software, such as its
"Sympulse" (TM) software and hardware upgrade and the designing of new receiver
surface coils for the Stand-Up(TM) MRI.
BACKLOG
The Company's backlog of unfilled orders at July 1, 2002 was approximately
$25.5 million, as compared to $10.8 million at July 1, 2001. Of these amounts,
approximately $7.7 million and $1.6 million had been paid to the Company as
customer advances as at July 1, 2002 and July 1, 2001, respectively. Of the
backlog amounts at July 1, 2002 and July 1, 2001, $6.9 and $4.4 million
respectively represented orders from affiliates. It is expected that the
existing backlog of orders will be filled within the current fiscal year. The
Company's contracts generally provide that if a customer cancels an order, the
customer's initial down payment for the MRI scanner is nonrefundable.
PATENTS AND LICENSES
The Company currently has numerous patents in effect which relate to the
technology and components of the MRI scanners. The Company believes that these
patents, and the know-how it developed, are material to its business.
Dr. Damadian granted an exclusive world-wide license to the Company to
make, use and sell apparatus covered by certain domestic and foreign patents in
his name relating to MRI technology. No patents covered by this license are in
effect any longer.
One of the patents, issued in the name of Dr. Damadian and covered by said
license, was United States patent No. 3,789,832, Apparatus and Method for
Detecting Cancer in Tissue (the "1974 Patent"). The development of the Beta(TM)
3000 was based upon the 1974 Patent, and Management believes that the 1974
Patent was the first of its kind to utilize MR to scan the human body and to
detect cancer. The 1974 Patent was extended beyond its original 17-year term and
expired in February, 1992. None of the recoveries with respect to the
enforcement of this patent were received by Dr. Damadian.
Historically, the patent for multiple angle oblique imaging generated
significant revenues in connection with the enforcement and settlement of our
patent litigations. As a result of these litigations and settlements, our
competitors are now entitled to use this technology as well. This patent will
expire in 2006.
The Company has significantly enhanced its patent position within the
industry and now possesses a substantial patent portfolio which provides the
Company, under the aegis of United States patent law, "the exclusive right to
make, use and sell" many of the scanner features which FONAR pioneered and which
are now incorporated in most MRI scanners sold by the industry. The Company has
68 patents issued and approximately 50 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 68 issued patents expire at
various times between June 23, 2004 and November 25, 2018.
The Company has entered into a cross-licensing agreement (utilizing other
than FONAR's MRI technology) with another entity to use prior art developed for
nuclear magnetic resonance technology and has entered into a license to utilize
the MRI technology covered by the existing patent portfolio of a patent holding
company. The Company also has patent cross-licensing agreements with other MRI
manufacturers.
PRODUCT COMPETITION
MRI SCANNERS
A majority of the MRI scanners in use in hospitals and outpatient
facilities and at mobile sites in the United States are based on high field air
core magnet technology while the balance are based on open iron frame magnet
technology. In 2000, the size of the MRI market in the United States was
approximately $1.041 billion. In 2001, the size of the MRI market in the United
States was approximately $1.202 billion. FONAR's open iron frame MRI scanners
are competing principally with high-field air core scanners. FONAR's open MRI
scanners, however, utilizing a 6,000 gauss (0.6 Tesla field strength) iron core
electromagnet, were the first "open" MR scanners 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(TM) scanners allow
for faster throughput of patients.
3. Their annual operating costs are lower.
4. They can scan the trauma victim, the cardiac arrest patient, the
respirator-supported patient, and premature and newborn babies. This is not
possible with high- field air core scanners because their magnetic field
interferes with conventional life-support equipment.
The principal competitive disadvantage of the Company's products is that
they are not "high field strength" (1.0 Tesla +) magnets. As a general
principle, the higher field strength can produce a faster scan. In some parts of
the body a faster scan can be traded for a clearer picture. Although the Company
believes that the lower cost of its systems plus the benefits of "openness"
provided by its scanners compensate for the lower field strength, certain
customers will still prefer the higher field strength.
FONAR faces competition within the MRI industry from such firms as General
Electric Company; Marconi Medical (formerly Picker International), Philips N.V.,
Toshiba Corporation, Hitachi Corporation and Siemens A.G. Most competitors have
marketing and financial resources more substantial than those available to the
Company and have in the past, and may in the future, heavily discount the sales
price of their scanners. Such competitors sell both high field air core and iron
frame products. FONAR's current market share of the United States market for MRI
scanners is slightly less than 1.0%. FONAR introduced the first "Open MRI" in
1982. "Open MRI" was made possible by FONAR's introduction of an MRI magnet
built on an iron frame. Thus the magnetic flux generating apparatus of the
magnet (magnet coils or permanent magnet bricks) was built into a frame of
steel. The steel frame provided a return path for the magnetic lines of force
and thereby kept the magnetic lines of force contained within the magnet. This
enabled FONAR, from 1982 on, to show that the FONAR magnet was the only magnet
that allowed the patients to stretch out their arms, the only "open" MRI.
The iron frame, because it could control the magnetic lines of force and
place them where wanted and remove them from where not wanted (such as in the
operating room where surgeons are standing), provided a much more versatile
magnet design than was possible with air core magnets. Air core magnets contain
no iron but consist entirely of turns of current carrying wire. FONAR's patented
work-in-progress superconductive iron frame magnet, however, combines the high
field capability of the air core superconductive magnets with the control and
versatility of the open iron frame magnets, thereby joining the best features of
both designs into a single magnet. Thus the air core superconductive magnets
made by Fonar's large competitors that have dominated the MRI market since 1983
remain the confining "tunnel" design that the public has generally resented.
For an 11 year period from 1983-1994, Fonar's large competitors (with one
exception) generally rejected Fonar's "open" design but by 1994 all (with one
exception) added the iron frame "open" magnet to their MRI product line. 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(TM) version of the Fonar 360(TM) explicitly addresses
this growing market reception of MRI guided surgical procedures but is not yet
available as a product. Fonar's Stand-Up(TM) and QUAD(TM) magnets do also.
Although not enabling a full operating theater as the OR-360(TM) does, the iron
frame "Open" QUAD(TM) 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 the MRI market is under
1.0%, FONAR expects to be a leader in domestic open MRI market for several
reasons. In MRI, scanning speed and image quality is controlled by the strength
of the magnetic field. Fonar's Stand-Up(TM), Fonar 360(TM) and QUAD(TM) scanners
operate at 0.6 Tesla, which make them among the highest field strength open MRI
scanners. Furthermore, the Stand-Up(TM) MRI is the only MRI which allows
patients to be scanned under weight-bearing conditions. 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. No companies possess the Stand-Up(TM) MRI or Fonar
360(TM) scanners, and FONAR possesses the pioneer patents on "Open MRI"
technology.
OTHER IMAGING MODALITIES
FONAR's MRI scanners also compete with other diagnostic imaging systems,
all of which are based upon the ability of energy waves to penetrate human
tissue and to be detected by either photographic film or electronic devices for
presentation of an image on a television monitor. Three different kinds of
energy waves - X-ray, gamma and sound - are used in medical imaging techniques
which compete with MRI medical scanning, the first two of which involve exposing
the patient to potentially harmful radiation. These other imaging modalities
compete with MRI products on the basis of specific applications.
X-rays are the most common energy source used in imaging the body and are
employed in three imaging modalities:
1. Conventional X-ray systems, the oldest method of imaging, are typically
used to image bones and teeth. The image resolution of adjacent structures
that have high contrast, such as bone adjacent to soft tissue, is
excellent, while the discrimination between soft tissue organs is poor
because of the nearly equivalent penetration of x-rays.
2. Computerized Tomography ("CT") systems couple computers to x-ray
instruments to produce cross-sectional images of particular large organs or
areas of the body. The CT scanner addresses the need for images, not
available by conventional radiography, that display anatomic relationships
spatially. However, CT images are generally limited to the transverse plane
and cannot readily be obtained in the two other planes (sagittal and
coronal). Improved picture resolution is available at the expense of
increased exposure to x-rays from multiple projections. Furthermore, the
pictures obtained by this method are computer reconstructions of a series
of projections and, once diseased tissue has been detected, CT scanning
cannot be focused for more detailed pictorial analysis or obtain a chemical
analysis.
3. Digital radiography systems add computer image processing capability to
conventional x-ray systems. Digital radiography can be used in a number of
diagnostic procedures which provide continuous imaging of a particular area
with enhanced image quality and reduced patient exposure to radiation.
Nuclear medicine systems, which are based upon the detection of gamma
radiation generated by radioactive pharmaceuticals introduced into the body, are
used to provide information concerning soft tissue and internal body organs and
particularly to examine organ function over time.
Ultrasound systems emit, detect and process high frequency sound waves
reflected from organ boundaries and tissue interfaces to generate images of soft
tissue and internal body organs. Although the images are substantially less
detailed than those obtainable with x-ray methods, ultrasound is generally
considered harmless and therefore has found particular use in imaging the
pregnant uterus.
X-ray machines, ultrasound machines, digital radiography systems and
nuclear medicine compete with the MRI scanners by offering significantly lower
price and space requirements. However, FONAR believes that the quality of the
images produced by its MRI scanners is generally superior to the quality of the
images produced by those other methodologies.
GOVERNMENT REGULATION
FDA Regulation
The Food and Drug Administration in accordance with Title 21 of the Code of
Federal Regulations regulates the manufacturing and marketing of FONAR's MRI
scanners. The regulations can be classified as either pre-market or post-market.
The pre-market requirements include obtaining marketing clearance, proper device
labeling, establishment registration and device listing. Once the products are
on the market, FONAR must comply with post-market surveillance controls. These
requirements include the Quality Systems (QS) regulation, also known as Good
Manufacturing Practices or GMPs, and Medical Device Reporting (MDR) regulations.
The QS regulation is a quality assurance requirement that covers the design,
packaging, labeling and manufacturing of a medical device. The MDR regulation is
an adverse event-reporting program.
Classes of Products
Under the Medical Device Amendments of 1976 to the Federal Food, Drug and
Cosmetic Act, all medical devices are classified by the FDA into one of three
classes. A Class I device is subject only to certain controls, such as labeling
requirements and manufacturing practices; a Class II device must comply with
certain performance standards established by the FDA; and a Class III device
must obtain pre-market approval from the FDA prior to commercial marketing.
FONAR's products are Class II devices. Class I devices are subject to the
least regulatory control. They present minimal potential for harm to the user
and are often simpler in design than Class II or Class III devices. Class I
devices are subject to "General Controls" as are Class II and Class III devices.
General Controls include:
1. Establishment registration of companies which are required to register
under 21 CFR Part 807.20, such as manufacturers, distributors, re-packagers and
re-labelers. 2. Medical device listing with FDA of devices to be marketed. 3.
Manufacturing devices in accordance with the Good Manufacturing Practices (GMP)
regulation in 21 CFR Part 820. 4. Labeling devices in accordance with labeling
regulations in 21 CFR Part 801 or 809. 5. Submission of a Premarket Notification
[510(k)] before marketing a device.
Class II devices are those for which general controls alone are
insufficient to assure safety and effectiveness, and existing methods are
available to provide such assurances. In addition to complying with general
controls, Class II devices are also subject to special controls. Special
controls may include special labeling requirements, guidance documents,
mandatory performance standards and post-market surveillance.
The Company received approval to market its Beta(TM) 3000 and Beta(TM)
3000M scanners as Class III devices on September 26, 1984 and November 12, 1985.
On July 28, 1988, the Magnetic Resonance Diagnostic Device which includes MR
Imaging and MR Spectroscopy was reclassified by the FDA to Class II status.
Consequently, Fonar's products are now classified as Class II products. On June
25, 1992, Fonar received FDA clearance to market the Ultimate(TM) Magnetic
Resonance Imaging Scanner as a Class II device. Fonar received FDA clearance to
market the QUAD(TM) 7000 in April 1995 and the QUAD(TM) 12000 in November 1995.
On March 16, 2000, Fonar received FDA clearance to market the Fonar 360(TM) for
diagnostic imaging (the Open Sky(TM) version)and on October 3, 2000 received FDA
clearance for the Stand-Up(TM) MRI. The Company received FDA clearance for the
QUAD-S(TM) on June 6, 2001 . The Company anticipates that it may need FDA
clearance for the OR-360(TM) version of the Fonar 360(TM).
Premarketing Submission
Each person who wants to market Class I, II and some III devices intended
for human use in the U.S. must submit a 510(k) to FDA at least 90 days before
marketing unless the device is exempt from 510(k) requirements. A 510(k) is a
pre-marketing submission made to FDA to demonstrate that the device to be
marketed is as safe and effective, that is, substantially equivalent (SE), to a
legally marketed device that is not subject to pre-market approval (PMA).
Applicants must compare their 510(k) device to one or more similar devices
currently on the U.S. market and make and support their substantial equivalency
claims.
The FDA is committed to a 90-day clearance after submission of a 510(k),
provided the 510(k) is complete and there is no need to submit additional
information or data.
The 510(k) is essentially a brief statement and description of the product.
As Fonar's scanner products are Class II products, there are no pre-market data
requirements and the process is neither lengthy nor expensive.
An investigational device exemption (IDE) allows the investigational device
to be used in a clinical study pending FDA clearance in order to collect safety
and effectiveness data required to support the Premarket Approval (PMA)
application or a Premarket Notification [510(k)] submission to the FDA. Clinical
studies are most often conducted to support a PMA.
For the most part, however, Fonar has not found it necessary to utilize
IDE's. The standard 90 day clearance for our new MRI scanner products classified
as Class II products makes the IDE unnecessary, particularly in view of the time
and effort involved in compiling the information necessary to support an IDE.
Quality System Regulation
The Quality Management System is applicable to the design, manufacture,
administration of installation and servicing of magnetic resonance imaging
scanner systems. The FDA has authority to conduct detailed inspections of
manufacturing plants, to establish Good Manufacturing Practices which must be
followed in the manufacture of medical devices, to require periodic reporting of
product defects and to prohibit the exportation of medical devices that do not
comply with the law.
Medical Device Reporting Regulation
Manufacturers must report all MDR reportable events to the FDA. Each
manufacturer must review and evaluate all complaints to determine whether the
complaint represents an event which is required to be reported to FDA. Section
820.3(b) of the Quality Systems regulation defines a complaint as, "any written,
electronic or oral communication that alleges deficiencies related to the
identity, quality, durability, reliability, safety, effectiveness, or
performance of a device after it is released for distribution."
A report is required when a manufacturer becomes aware of information that
reasonably suggests that one of their marketed devices has or may have caused or
contributed to a death, serious injury, or has malfunctioned and that the device
or a similar device marketed by the manufacturer would be likely to cause or
contribute to a death or serious injury if the malfunction were to recur.
Malfunctions are not reportable if they are not likely to result in a
death, serious injury or other significant adverse event experience.
A malfunction which is or can be corrected during routine service or device
maintenance still must be reported if the recurrence of the malfunction is
likely to cause or contribute to a death or serious injury if it were to recur.
Fonar has established and maintains written procedures for implementation
of the MDR regulation. These procedures include internal systems that:
provide for timely and effective identification, communication and
evaluation of adverse events;
provide a standardized review process and procedures for determining
whether or not an event is reportable; and
provide procedures to insure the timely transmission of complete reports.
These procedures also include documentation and record keeping requirements
for:
information that was evaluated to determine if an event was reportable;
all medical device reports and information submitted to the FDA;
any information that was evaluated during preparation of annual
certification report(s); and
systems that ensure access to information that facilitates timely follow up
and inspection by FDA.
FDA Enforcement
FDA may take the following actions to enforce the MDR regulation:
FDA-Initiated or Voluntary Recalls
Recalls are regulatory actions that remove a hazardous, potentially
hazardous, or a misbranded product from the marketplace. Recalls are also used
to convey additional information to the user concerning the safe use of the
product. Either FDA or the manufacturer can initiate recalls.
There are three classifications, i.e., I, II, or III, assigned by the Food
and Drug Administration to a particular product recall to indicate the relative
degree of health hazard presented by the product being recalled.
Class I
Is a situation in which there is a reasonable probability that the use of,
or exposure to, a violative product will cause serious adverse health
consequences or death.
Class II
Is a situation in which use of, or exposure to, a violative product may
cause temporary or medically reversible adverse health consequences or
where the probability of serious adverse health consequences is remote.
Class III
Is a situation in which use of, or exposure to, a violative product is not
likely to cause adverse health consequences.
FONAR has initiated four Class II recalls. The recalls involved making
minor corrections to the product in the field. Frequently, corrections which are
made at the site of the device are called field corrections as opposed to
recalls.
Civil Money Penalties
The FDA, after an appropriate hearing, may impose civil money penalties for
violations of the FD&C Act that relate to medical devices. In determining the
amount of a civil penalty, FDA will take into account the nature, circumstances,
extent, and gravity of the violations, the violator's ability to pay, the effect
on the violator's ability to continue to do business, and any history of prior
violations. The civil money penalty may not exceed $15,000 for each violation
and may not exceed $1,000,000 for all violations adjudicated in a single
proceeding, per person.
Warning Letters
FDA issues written communications to a firm, indicating that the firm may
incur more severe sanctions if the violations described in the letter are not
corrected. Warning letters are issued to cause prompt correction of violations
that pose a hazard to health or that involve economic deception. The FDA
generally issues the letters before pursuing more severe sanctions.
Seizure
A seizure is a civil court action against a specific quantity of goods
which enables the FDA to remove these goods from commercial channels. After
seizure, no one may tamper with the goods except by permission of the court. The
court usually gives the owner or claimant of the seized merchandise
approximately 30 days to decide a course of action. If they take no action, the
court will recommend disposal of the goods. If the owner decides to contest the
government's charges, the court will schedule the case for trial. A third option
allows the owner of the goods to request permission of the court to bring the
goods into compliance with the law. The owner of the goods is required to
provide a bond (security deposit) to assure that they will perform the orders of
the court, and the owner must pay for FDA supervision of any activities by the
company to bring the goods into compliance.
Citation
A citation is a formal warning to a firm of intent to prosecute the firm if
violations of the FD&C Act are not corrected. It provides the firm an
opportunity to convince FDA not to prosecute.
Injunction
An injunction is a civil action filed by FDA against an individual or
company. Usually, FDA files an injunction to stop a company from continuing to
manufacture, package or distribute products that are in violation of the law.
Prosecution
Prosecution is a criminal action filed by FDA against a company or
individual charging violation of the law for past practices.
Foreign and Export Regulation
The Company obtains approvals as necessary in connection with the sales of
its products in foreign countries. In some cases, FDA approval has been
sufficient for foreign sales as well. The Company's standard practice has been
to require either the distributor or the customer to obtain any such foreign
approvals or licenses which may be required.
Legally marketed devices that comply with the requirements of the Food Drug
& Cosmetic Act require a Certificate to Foreign Government issued by the FDA for
export. Other devices that do not meet the requirements of the FD&C Act but
comply with the laws of a foreign government require a Certificate of
Exportability issued by the FDA. All products which Fonar sells have FDA
clearance and would fall into the first category.
Foreign governments have differing requirements concerning the import of
medical devices into their respective jurisdictions. The European Union (EU),
made up of 15 individual countries, has some essential requirements described in
the EU's Medical Device Directive (MDD). In order to export to one of these
countries, FONAR must meet the essential requirements of the MDD and any
additional requirements of the importing country. The essential requirements are
similar to some of the requirements mandated by the FDA. In addition the MDD
requires that FONAR enlist a Notified Body to examine and assess our
documentation (Technical Construction File) and verify that the product has been
manufactured in conformity with the documentation. The notified body must carry
out or arrange for the inspections and tests necessary to verify that the
product complies with the essential requirements of the MDD, including safety
performance and Electromagnetic Compatibility (EMC). Also required is a Quality
System (ISO-9001) assessment by the Notified Body. Fonar was approved for ISO
9001 certification for its Quality Management System in April, 1999.
Fonar received clearance to sell the QUAD(TM) scanners in the EU in May,
1999. Clearances for the Fonar 360(TM) and Stand-Up(TM) MRI scanners were
obtained in May, 2002.
Other countries such as China and Russia require that their own testing
laboratories perform an evaluation of our devices. This requires that we must
bring the foreign agency's personnel to the USA to perform the evaluation at
Fonar's expense before exporting.
Some countries, including many in Latin America and Africa, have very few
regulatory requirements.
Because Fonar's export sales are not material at this point, foreign
regulation does not have a material effect on Fonar. In any case, Fonar does not
believe that foreign regulation will deter its efforts to penetrate foreign
markets.
Reimbursement to Medical Providers for MRI Scans
Effective November 22, 1985, the Department of Health and Human Services
authorized reimbursement of MRI scans under the Federal Medicare program. In
addition, most private insurance companies have authorized reimbursement for MRI
scans.
Anti-Kickback and Self-Referral Legislation
Proposed and enacted legislation at the State and Federal levels has
restricted referrals by physicians to medical and diagnostic centers in which
they or their family members have an interest. In addition, regulations have
been adopted by the Secretary of Health and Human Services which provide limited
"safe harbors" under the Medicare Anti-Kickback Statute. These safe harbors
describe payments and transactions which are permitted between an entity
receiving reimbursement under the Medicare program and those having an interest
in or dealings with the entity. Although the Company cannot predict the overall
effect of the adoption of these regulations on the medical equipment industry,
the use and continuation of limited partnerships (where investors may be
referring physicians) to own and operate MRI scanners could be greatly
diminished.
HEALTH MANAGEMENT CORPORATION OF AMERICA
(PHYSICIAN AND DIAGNOSTIC MANAGEMENT SERVICES BUSINESS)
Health Management Corporation of America (formerly known as U.S. Health
Management Corporation and referred to as "HMCA") was organized by the Company
in March 1997 as a wholly-owned subsidiary for the purpose of engaging in the
business of providing comprehensive management services to physicians' practices
and other medical providers, including diagnostic imaging centers and 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.
As a result of five acquisitions completed by HMCA between June 30, 1997
and August 20, 1998 and the growth and expansion of its clients' MRI facilities
and practices, HMCA currently manages 13 MRI facilities, seven physical therapy
and rehabilitation practices and four primary care medical practices. For the
2002 fiscal year, the revenues HMCA recognized from the MRI facilities were
$15,514,294, the revenues recognized from the physical therapy and
rehabilitation practices were $11,493,680 and the revenues recognized from the
primary care medical practices were $1,517,465.
HMCA GROWTH STRATEGY
HMCA has changed its growth strategy from pursuing acquisitions to
upgrading and expanding the existing facilities it manages and expanding the
number of facilities it manages for its clients. Our most important effort in
this regard is to promote and facilitate the replacement of existing scanners
with new Fonar Stand-Up(TM) MRI scanners at the most promising locations. To
date, a new Stand-Up(TM) MRI scanner has been installed at the MRI facility in
Islandia, New York, two replacement Stand-Up(TM) MRI scanners are in the process
of being installed at the Staten Island and Bensonhurst, New York facilities we
manage and two additional Stand-Up(TM) MRI scanners are planned for the Garden
City, New York and Deerfield Beach, Florida facilities we manage.
HMCA's longer range plans involve upgrading or opening new MRI facilities
clustered in selected television and radio media areas in New York, Florida,
Houston, Boston, Los Angeles and Chicago, although at the present time our
efforts are focused only in the New York and Florida markets. Marketing efforts
in targeted areas include television, radio and billboard advertising.
In addition, HMCA has promoted the opening of new physical therapy and
rehabilitation offices by existing clients, expanding the number of such offices
from the initial three offices managed in August, 1998 to the seven offices
currently being managed. The number of primary care medical offices we manage
has remained constant at four. We have no present plans to increase the number
of primary care offices we manage.
PHYSICIAN AND DIAGNOSTIC MANAGEMENT SERVICES
HMCA's services to the facilities and practices it manages encompass
substantially all of the their business operations. The facilities and medical
practices are controlled however, by the physician owners, not HMCA, and all
medical services are performed by the physicians. HMCA is the management company
and performs services of a non-professional nature. These services include:
(1) Offices and Equipment. HMCA provides office space and equipment to its
clients. This includes technologically sophisticated medical equipment.
HMCA also provides improvements to leaseholds, assistance in site selection
and advice on improving, updating, expanding and adapting to new
technology.
(2) Personnel. HMCA staffs all the non-medical positions of its clients with
its own employees, eliminating the client's need to interview, train and
manage non-medical employees, as well as process the necessary tax,
insurance and other documentation relating to employees.
(3) Administrative. HMCA assists in the scheduling of patient appointments,
purchasing of medical supplies and equipment and handling of reporting,
accounting, processing and filing systems. It prepares and files the
physician portions of complex forms to ensure full and timely regulatory
compliance and appropriate cost reimbursement under no-fault insurance and
workers' compensation guidelines.
(4) Billing and Collections. HMCA is responsible for the billing and collection
of revenues from third-party payors including those governed by no-fault
and workers' compensation statutes.
(5) Cost Saving Programs. Based on available volume discounts, HMCA seeks to
obtain favorable pricing for medical supplies, equipment, pharmaceuticals
and other inventory for its clients.
(6) Diagnostic Imaging and Ancillary Services. HMCA can offer access to
diagnostic imaging equipment through diagnostic imaging facilities it
manages. The Company is expanding the ancillary services offered in its
network to include CT-scans, x-rays, ultrasound, and other ancillary
services useful to its clients.
(7) Marketing Strategies. HMCA is responsible for developing marketing plans
for its clients.
(8) Expansion Plans. HMCA assists the clients in developing expansion plans.
These plans are mutually developed. Additional physicians and physicians
assistants have been added where needed.
HMCA advises clients on all aspects of their business, including expansion
where it is a reasonable objective, on a continuous basis. HMCA's objective is
to free physicians from as many non-medical duties as practicable. Practices can
treat patients more efficiently if the physicians can spend less time on
business and administrative matters and more time practicing medicine.
HMCA provides its services pursuant to negotiated contracts with its
clients. While HMCA believes it can provide the greatest value to its clients by
furnishing the full range of services appropriate to that client, HMCA would
also be willing to enter into contracts providing for a more limited spectrum of
management services.
In the case of contracts with the MRI facilities, fees are charged by HMCA
based on the number of procedures performed. In the case of the physical
rehabilitation and medical practices, flat fees are charged on a monthly basis.
Fees are subject to adjustment on an annual basis, but must be based on mutual
agreement. The per procedure charges to the MRI facilities range from $150 to
$760 per MRI scan. The monthly fees charged to the medical and physical
rehabilitation practices range from approximately $59,300 to $297,500. No MRI
facilities, physical and rehabilitation facilities or medical practices are
owned by HMCA. Only one chiropractic practice managed by HMCA, providing HMCA
with management fees of approximately $180,000 in fiscal 2002 and $210,000 in
fiscal 2001, is owned by a seller in an acquisitions.
The practices and the facilities enter into contracts with managed care
companies. With the exception of some capitated health plans in which the
medical practices participate, neither HMCA's clients nor HMCA participate in
any risk sharing arrangements capitated plans are those HMO programs where the
provider is paid a flat monthly fee per patient. For the fiscal years ended June
30, 2002 and June 30, 2001, fees to HMCA's clients from capitated plans amounted
to approximately $703,000 and $814,000, respectively, an amount equal to 2.5%
and 2.2% respectively, of HMCA's revenues for the fiscal year. All of these were
attributable to medical professional corporations managed by A & A Services,
Inc., representing 46%, and 26% of their revenues in fiscal 2002 and fiscal
2001, respectively.
HMCA MARKETING
HMCA's marketing strategy is expand the business and improve the facilities
and practices which it manages. HMCA will also seek to increase the number of
locations of those facilities and practices where market conditions are
promising. HMCA will seek to promote growth of its clients' patient and revenue
through installing new Stand-Up(TM) MRI scanners at MRI facilities and
advertising in television, radio and other media.
HMCA will focus on opportunities for expanding the services clients offer
and plans to expand into new geographic areas such as Houston, Boston, Los
Angeles and Chicago.
To date, HMCA has not been able to add a significant number of specialty
practices to its client base. In part this difficulty stems from HMCA's lack of
capital resources to fund acquisitions; this lack of capital resources similarly
has prevented HMCA from increasing the number of clients it manages generally.
DIAGNOSTIC IMAGING CENTERS AND OTHER ANCILLIARY SERVICES
Diagnostic imaging centers managed by HMCA provide diagnostic imaging
services to patients referred by physicians who are either in private practice
or affiliated with managed care providers or other payor groups. The centers are
operated in a manner which eliminates the admission and other administrative
inconveniences of in-hospital diagnostic imaging services. Imaging services are
performed in an outpatient setting by trained medical technologists under the
direction of interpreting physicians. Following diagnostic procedures, the
images are reviewed by the interpreting physicians who prepare a report of these
tests and their findings. These reports are transcribed by HMCA personnel and
then delivered to the referring physician.
HMCA develops marketing programs in an effort to establish and maintain
profitable referring physician relationships and to maximize reimbursement
yields. These marketing approaches identify and target selected market segments
consisting of area physicians with certain desirable medical specialties and
reimbursement yields. Corporate and center managers determine these market
segments based upon an analysis of competition, imaging demand, medical
specialty and payor mix of each referral from the local market. HMCA also
directs marketing efforts at managed care providers.
Managed care providers are becoming an increasingly important factor in the
diagnostic imaging industry. To further its position, HMCA will seek to expand
the imaging modalities offered at its managed centers or to create networks with
other imaging centers.
COMPETITION (HMCA)
The physician and diagnostic management services field is highly
competitive. A number of large hospitals have acquired medical practices and
this trend may continue. HMCA expects that more competition will develop. Many
competitors have greater financial and other resources than HMCA.
With respect to the diagnostic imaging centers managed by HMCA, the
outpatient diagnostic imaging industry is highly competitive. Competition
focuses primarily on attracting physician referrals at the local market level
and increasing referrals through relationships with managed care organizations.
HMCA believes that principal competitors for the diagnostic imaging centers are
hospitals and independent or management company-owned imaging centers.
Competitive factors include quality and timeliness of test results, ability to
develop and maintain relationships with managed care organizations and referring
physicians, type and quality of equipment, facility location, convenience of
scheduling and availability of patient appointment times. HMCA believes that it
will be able to effectively meet the competition in this area by installing the
new Fonar Stand-Up(TM) MRI scanners at its most promising facilities.
GOVERNMENT REGULATION APPLICABLE TO HMCA
FEDERAL REGULATION
Stark Law
Under the federal Self-Referral Law (the "Stark Law") (which is applicable
to Medicare and Medicaid patients) and the self-referral laws of various States,
certain health practitioners (including physicians, chiropractors and
podiatrists) are prohibited from referring their patients for the provision of
designated health services (including diagnostic imaging and physical therapy
services) to any entity with which they or their immediate family members have a
financial relationship, unless the referral fits within one of the specific
exceptions in the statutes or regulations. Statutory exceptions under the Stark
Law include, among others, direct physician services, in-office ancillary
services rendered within a group practice, space and equipment rental and
services rendered to enrollees of certain prepaid health plans. Some of these
exceptions are also available under the State self-referral laws.
Anti-kickback Regulation
Under the federal Anti-kickback statute, which is applicable to Medicare
and Medicaid, it is illegal, among other things, for a provider MRI services to
pay or offer money or other consideration to induce the referral of MRI scans.
Neither HMCA nor its clients engage in this practice.
Approximately 8.8% of the revenues of HMCA's clients are attributable to
Medicare and 0.17% are attributable to Medicaid.
State Regulation
In addition to the federal self-referral law and federal Anti-kickback
statute, many States, including those in which HMCA and its clients operate,
have their own versions of self-referral and anti-kickback laws. These laws are
not limited in their applicability, as are the federal laws, to specific
programs. HMCA believes that it and its clients are in compliance with these
laws.
Various States prohibit business corporations from practicing medicine.
Various States also prohibit the sharing of professional fees or fee splitting.
Consequently, HMCA leases space and equipment to clients and provides clients
with a range of non-medical administrative and managerial services for agreed
upon fees. HMCA does not engage in the practice of medicine or establish
standards of medical practice or policies for its clients in any such State.
HMCA's clients generate revenue from patients covered by no-fault insurance
and workers' compensation programs. For the fiscal year ended June 30, 2002,
Approximately 43.2% of our clients' receipts were from patients covered by
no-fault insurance and approximately 8.7% of our client's receipts were from
patients covered by worker's compensation programs. In the event that changes in
these laws alter the fee structures or methods of providing service, or impose
additional or different requirements, HMCA could be required to modify its
business practices and services in ways that could be more costly to HMCA or in
ways that decrease the revenues which HMCA receives from its clients.
HMCA believes that it and its clients are in compliance with applicable
Federal, State and local laws. HMCA does not believe that such laws will have
any material effect on its business.
EMPLOYEES
As of July 1, 2002, the Company employed 570 persons on a full-time and
part-time basis. Of such employees, 29 were engaged in marketing and sales, 44
in research and development, 75 in prodution, 40 in customer support services,
355 in administration (including 234 on site at facilities and offices managed
by HMCA and 70 performing billing, collection and transcription services for
those facilities) and 27 professional MRI technicians on site at diagnostic
imaging centers managed by HMCA.
ITEM 2. PROPERTIES
Fonar leases approximately 135,240 square feet of office and plant space at
its principal offices in Melville, New York and at two other locations in
Melville and Farmingdale, New York at a current aggregate annual rental rate of
approximately $834,000, excluding utilities, taxes and other related expenses.
The term of one of the leases extends through 2002 with options to renew up
through 2008 and the term of the other leases extends to the beginning of 2009.
The Company also leased space in Harrisburg, Pennsylvania at a rental of $1350
per month through March 31, 2002. Management believes that these premises are
adequate for its current needs. HMCA leases approximately 16,850 square feet for
its headquarters in Melville, New York at a current annual rental rate of
$369,865. The term of the lease extends through September, 2009. In addition,
HMCA maintains leased office premises for its clients at approximately 38 site
locations having an aggregate annual rental rate of approximately $1.9 million
under leases having various terms.
ITEM 3. LEGAL PROCEEDINGS
There is no material litigation pending, or to its knowledge, threatened
against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 17, 2002, we held our annual meeting of stockholders. The matters
before the meeting were the election of directors and the ratification of the
selection of auditors for fiscal 2002. All nominees for directors were elected
and the selection of Grassi & Co., CPA's, P.C. as the Company's auditors for
fiscal 2002 were approved. Raymond V. Damadian, Claudette J.V. Chan, Robert
Janoff and Charles N. O'Data were sitting directors. Robert Djerejian is a new
director first elected at the June 17, 2002 annual meeting. The table below
lists the votes cast for, against or withheld, as well as abstentions. There
were no broker non-votes.
Election of Directors:
For Withheld
----------- ---------
Raymond V. Damadian 299,992,702 1,198,266
Claudette J.V. Chan 300,144,693 1,046,275
Robert J. Janoff 299,472,917 1,718,052
Charles N. O'Data 299,560,867 1,670,101
Robert Djerejian 299,519,709 1,671,260
Ratification of Auditors:
For Against Withheld
----------- ------- ---------
Grassi & Co., CPA's, P.C. 300,328,333 672,678 219,958
Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the Nasdaq SmallCap market under
the National Association of Securities Dealers Automated Quotation System
("NASDAQ") symbol FONR. The following table sets forth the high and low trades
reported in NASDAQ System for the periods shown.
Fiscal Quarter High Low
------------------------------ ---- ----
January - March 1999 1.78 1.19
April - June 1999 1.50 1.03
July - September 1999 1.18 0.91
October - December 1999 3.25 0.69
January - March 2000 5.00 1.63
April - June 2000 3.44 1.44
July - September 2000 3.47 1.50
October - December 2000 2.31 1.03
January - March 2001 2.00 0.97
April - June 2001 1.97 1.28
July - September 2001 2.49 1.20
October - December 2001 1.48 1.15
January - March 2002 1.24 0.96
April - June 2002 2.15 0.95
July - September 19 2002 1.99 1.02
On September 19, 2002, the Company had approximately 4,725 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 4,049
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 one additional dividend on monies received from the
enforcement of its patents. Except for these dividends, however, it is expected
that the Company will continue to retain earnings to finance the development and
expansion of its business.
Item 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data has been extracted from
the Company's consolidated financial statements for the five years ended June
30, 2002. This consolidated selected financial data should be read in
conjunction with the consolidated financial statements of the Company and the
related notes included in Item 8 of this form. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for a discussion of
the Company's business plan.
As of, or For the Period Ended June 30,
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
STATEMENT OF
OPERATIONS
Revenues $44,679,000 $42,273,000 $36,155,000 $33,289,000 $27,554,000
Cost of $26,244,893 $27,798,000 $26,592,000 $26,062,000 $23,842,000
revenues
Research $ 5,100,000 $ 5,866,000 $ 5,532,000 $ 6,648,000 $ 6,507,000
and Development
Expenses
Net Loss ($22,882,000) $(15,184,000) $(10,956,000) $(14,216,000) $(5,653,000)
Basic and Diluted
Net Loss $(.36) $(.26) $ (.20) $(.27) $ (.11)
per common share
Weighted 63,511,814 57,388,050 55,096,212 52,862,647 49,967,482
average number
Of shares
outstanding
BALANCE SHEET
DATA
Working
capital $10,505,000 $15,405,000 $24,440,000 $37,863,000 $54,426,000
(deficit)
Total $72,830,000 $84,900,000 $84,599,000 $97,648,000 $108,448,000
assets
Long- $10,609,000 $21,244,000 $20,969,000 $24,822,000 $16,003,000
term debt
and obligations
under capital
leases
Stock- $35,695,000 $41,830,000 $51,285,000 $59,304,000 $72,572,000
holder's
equity
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 Stand-Up(TM) MRI, Fonar 360(TM),
QUAD(TM) and Echo(TM) MRI scanners. The Stand-Up(TM) MRI allows patients to be
scanned for the first time under weight-bearing conditions. The Company is
aggressively seeking new sales and during fiscal 2002 received orders for 20
Stand-Up(TM) MRI scanners. The Stand-Up(TM) MRI is the only MRI capable of
producing images in the weight bearing state. At 0.6 Tesla field strength, the
Stand-Up(TM) MRI, Fonar 360(TM) and QUAD(TM) magnets are among the highest field
"Open MRI" in the industry, offering non-claustrophobic MRI together with
high-field image quality. Fonar's open MRI scanners were the first high field
strength MRI scanners in the industry. The Company's work-in-progress QUAD-S(TM)
MRI scanner will combine Fonar's iron frame magnet with a superconducting
driver, and is expected to have a field strength between 0.6 and 1.0 Tesla.
Fonar also offers the Echo(TM), a low cost open MRI scanner. Fonar's works in
progress also include an in-office extremities scanner. (See "Description of
Business - Products, Works-in-Progress and Product Marketing.")
HMCA commenced operations in July, 1997 and generates revenues from
providing comprehensive management services (including development,
administration, accounting and billing and collection services) together with
office space, medical equipment, supplies and non-medical personnel to its
clients. Revenues are in the form of management and leasing fees, which are
earned under contracts with MRI facilities, medical practices and physical
rehabilitation practices.
Approximately 99% of HMCA's revenues for the fiscal years ended June 30,
2002, June 30, 2001 and June 30, 2000 were derived from contracts with such
facilities and practices owned by Dr. Raymond V. Damadian, the President of
FONAR and HMCA and principal stockholder of FONAR. The agreements with the MRI
facilities are for one-year terms which renew automatically on an annual basis,
unless terminated. The fees are based on the number of procedures performed and
currently range from $150 to $760 per MRI scan. The fees are reviewed and if
appropriate, adjusted on an annual basis by mutual agreement.
The agreements with the medical practices and physical rehabilitation
practices are for a term of 20 years. The fees are fixed monthly fees adjusted
annually. Historically, adjustments have been on the basis of changes in HMCA's
costs, plus a percentage. Currently, the monthly fees under these contracts
range from approximately $53,300 to $297,500.
Critical Accounting Policies
----------------------------
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to investments, intangible assets, income taxes, contingencies and
litigation. We base our estimates on historical experience and on various
assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements. We recognize revenue and related costs of revenue from
sales contracts for our MRI scanner products, under the percentage-of-completion
method. Under this method, we recognize revenue and related costs of revenue, as
each sub-assembly is completed. Amounts received in advance of our commencement
of production are recorded as customer advances.
We recognize revenue from license agreements for our intellectual property
over the shorter of the contractual life of the license or the estimated
economic life. For our current license agreement, we are recognizing revenue
ratably over 5 years.
We record a valuation allowance to reduce our deferred tax assets to the
amount that is more likely than not to be realized. As of June 30, 2002, we
recorded a valuation allowance which reduced our deferred tax assets to equal
our deferred tax liability.
We amortize our intangible assets, including patents, purchased management
agreements and capitalized software development costs, over the shorter of the
contractual/legal life or the estimated economic life. Our amortization life for
patents, purchased management agreements and capitalized software development
costs is 17 years, 20 years and 5 years, respectively.
We periodically assesses the recoverability of long-lived assets, including
property and equipment, intangibles and management agreements, 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. During the
year ended June 30, 2002, we recorded an impairment loss of $4,700,000 related
to certain management contracts in our physician's management services segment.
RESULTS OF OPERATIONS. FISCAL 2002 COMPARED TO FISCAL 2001
In fiscal 2002, the Company experienced a net loss of $22.9 million on
revenues of $44.7 million, as compared to net loss of $15.2 million on revenues
of $42.3 million for fiscal 2001. This represents an increase in the net loss of
51.0% and an increase in revenues of 6.0%. The Company's consolidated operating
loss increased by 22.0% to $19.7 million for fiscal 2002 as compared to an
operating loss of $16.2 million for fiscal 2001. Included in our operating loss
for fiscal 2002 is an impairment loss of $4,700,000 related to our physician and
diagnostic management services segment.
Discussion of Operating Results of Medical Equipment Segment
------------------------------------------------------------
Revenues attributable to the Company's medical equipment segment increased
by 54.3% to $16.2 million in fiscal 2002 from $10.5 million in fiscal 2001,
reflecting an increase in scanner sales of 90.0%, from $6.1 million in fiscal
2001 to $11.6 million in fiscal 2002 and an increase in service revenue of 10%,
from $2.0 million in fiscal 2001 to $2.2 million in fiscal 2002. This
improvement in revenues was attributable to the Company's increase in scanner
sales, particularly its Stand-Up(TM) MRI, which is unique in that it permits MRI
scans to be performed on patients in the weight-bearing state. During the fiscal
year ended June 30, 2002, the Company received orders for 20 Stand-Up(TM) MRI
scanners.
Confirming the Company's expectation of increased demand for its MRI
scanners, scanner sales to unrelated parties increased by 59.0% in fiscal 2002
from $3.4 million in fiscal 2001 to $5.4 million in fiscal 2002. Scanner sales
to related parties increased by 130.0% in fiscal 2002 from $2.7 million in
fiscal 2001 to $6.2 million in fiscal 2002. The Company believes that its
principal challenges in achieving greater market penetration are primarily
attributable to the better name recognition and larger sales forces of its
larger competitors such as General Electric, Siemens and Hitachi and the ability
of some of its competitors to offer attractive financing terms through
affiliates, such as G.E. Capital. Nevertheless, no other competitor offers a
whole body weight bearing MRI scanner such as the Stand-Up(TM) MRI, and General
Electric Medical Systems division acts as a sales representative for the
Stand-Up(TM) MRI. To date, General Electric has purchased four Stand-Up(TM) MRI
scanners for resale.
The Company recognized revenues of $11.1 million from the sale of its new
Stand-Up(TM) MRI scanners and of $361,000 from the sale of two refurbished
(used) Beta(TM) scanners (the Company no longer manufactures Beta(TM) scanners)
in fiscal 2002. In fiscal 2001, the Company recognized revenues of $1.6 million
from the sale of Stand-Up(TM) MRI scanners, $3.0 million from the sale of
QUAD(TM) scanners and $1.1 million from the sale of Echo(TM) scanners.
Product sales revenues for fiscal 2002 included revenues from the sale of
11 scanners , two of which were used Beta(TM) scanners which were refurbished.
Product sales revenues for fiscal 2001 included revenues from the sales of seven
scanners and for fiscal 2000, three scanners.
Sales of MRI scanners to affiliated parties, consisting of professional
corporations and other entities in which Dr. Damadian or members of his family
have an interest represented approximately 14.0% ($6.2 million) of the Company's
revenues in fiscal 2002, as compared to 6.0% ($2.7 million) of the Company's
revenues in fiscal 2001.
License and royalty revenue ($2.4 million in fiscal 2002 and $2.4 million
in fiscal 2001) remained constant.
Gross profit margins on product sales improved significantly during fiscal
2002 from a negative 2% in fiscal 2001 to 28% in fiscal 2002. Such improvement
was principally attributable to the medical equipment segment operating at a
higher level of capacity resulting from the increased sales volume.
Research and development expenses, net of capitalized costs, decreased by
14.0% to $5.1 million in fiscal 2002 as compared to $5.9 million in fiscal 2001.
Our expenses for fiscal 2002 represented continued research and development of
Fonar's scanners, its new hardware and software product, "Sympulse (TM)" and new
surface coils to be used with the Stand-Up(TM) MRI scanner.
The operating loss for the medical equipment segment improved by 10.0% from
a loss of $17.2 million in fiscal 2001 to a loss of $15.4 million in fiscal
2002. This improvement is attributable to our increase in gross margins on our
scanner sales.
Discussion of Operating Results of Physician and Diagnostic Management Services
Segment
--------------------------------------------------------------------------------
Revenues attributable to the Company's physician and diagnostic management
services segment (HMCA) decreased by 10.0% to $28.5 million in fiscal 2002 from
$31.8 million in fiscal 2001. The decrease in revenues reflected the closing of
certain facilities managed by HMCA and the decline in management fees from the
primary care practices from $2.0 million in fiscal 2001 to $1.5 million in
fiscal 2002.
Cost of revenue for the Company's physician management services segment
decreased from $19.3 million or 61.0% of related revenues for the year ended
June 30, 2001 to $15.3 million, or 54.0% of related revenue for the year ended
June 30, 2002.
Operating income of this segment declined from $1.0 million in fiscal 2001
to an operating loss of $4.3 million in fiscal 2002. This was attributable to an
impairment loss of $4.7 million recorded in fiscal 2002 (discussed below) and
reduced revenues resulting from the closing of several facilities managed by
HMCA. HMCA believes that focusing its efforts on more profitable facilities,
including the introduction of Stand-Up(TM) MRI scanners, will in the long term
improve HMCA's profitability.
Discussion of Consolidated Results of Operations
------------------------------------------------
Other expenses of $69,133 was recognized by the Company in fiscal 2002 as
compared to other income of $1.0 million (principally the sales of a partnership
interest) and investment income of $973,862 was recognized by the Company in
2002 as compared to $1.8 million in fiscal 2001. This represents a decrease of
64% in other income. In addition, the Company recorded non-cash financing costs
of $2.4 million in fiscal 2002 in connection with the payment of its convertible
debentures to The Tailwind Fund in common stock and the issuance of related
warrants. This expense represented the discount from the market price on the
stock issued to The Tailwind Fund and the value of the purchase warrants granted
to the investor. In addition, in fiscal 2002, we recorded a debt conversion
expense of $545,000 in connection with a premium associated with the repayment
of approximately $2.5 million in long-term debt incurred in connection with an
HMCA acquisition (see Note 12).
Selling, general and administrative expenses increased by 13.0% to $21.5
million in fiscal 2002 from $19.1 million in fiscal 2001. The increase in
selling, general and administrative expenses was attributable primarily to the
expansion of Fonar's increased manufacturing, advertising marketing and sales
activity. In particular, the Company engaged the services of an advertising
agency and introduced television and radio advertising.
The increase in compensatory element of stock issuances from approximately
$4.0 million in fiscal 2001 to $4.7 million in fiscal 2002 reflected greater use
of Fonar's stock bonus plan to pay certain highly compensated employees and
others in stock rather than cash.
The higher provision for bad debt of $972,000 in fiscal 2002 as compared to
$443,000 in fiscal 2001, reflected an increase in reserves and the write off of
certain indebtedness by the medical equipment segment of $243,000 and reserves
for fees due from HMCA managed facilities that were closed in the amount of
$729,000.
Impairment Loss
---------------
During the quarter ended June 30, 2002, the primary care medical practices
managed by the Company's subsidiary, A&A Services, Inc., experienced a
significant overall decline in patient volume and related operating cash flows
which led to the inability of the medical practices to fully and timely pay the
contractual management fees to the Company. As a result of the continued
occurrence of this negative trend, the Company recorded an impairment loss of
$4,700,000 during the quarter ended June 30, 2002 related to those management
agreements which reduced the carrying value of such agreements to $3,518,847 at
June 30, 2002. We do not presently expect any further deterioration in our
management fees from these primary care medical practices.
The amortization expense in fiscal 2002 and 2001 of approximately $1.2
million in each year reflects the amortization of management agreements
attributable to HMCA's acquisitions.
The Company is enthusiastic about the future of its Stand-Up(TM) MRI and
FONAR 360(TM) product line scanners which are bringing a new plateau of
"openness" to diagnostic MRI and are expected to bring a new frontier in surgery
for performing surgical treatments using MRI images to guide surgery. The
Company believes its new products are beginning to successfully penetrate the
market, as reflected in the dramatic increase in product sales from
approximately $3.4 million in fiscal 2000 to $6.1 million in fiscal 2001 and to
$11.6 million in fiscal 2002. In addition to increased product sales, the
decline in service and repair fees has been reversed, as reflected by the
increase in service and repair fees from $1.7 million in fiscal 2000 to $2.0
million in fiscal 2001 to $2.2 million in fiscal 2002.
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 2002 the
Company continued its investment in the development of its new MRI scanners,
together with software and upgrades, with an investment of $5,955,394 in
research and development ($855,612 of which was capitalized) as compared to
$6,621,225 ($754,804 of which was capitalized) in fiscal 2001. The research and
development expenditure was approximately 34.6% of revenues attributable to the
Company's medical equipment segment (and 13.3% of total revenues) in 2002 and
108% of medical equipment segment revenues (and 15.7% of total revenues)in
fiscal 2001. This represented a decrease of approximately 10.1% in research and
development expenses from fiscal 2001 to fiscal 2002.
In summary, Fonar continued the trend of steadily increasing MRI scanner
sales, most dramatically the increase in Stand-Up(TM) MRI scanner sales from
fiscal 2000 through fiscal 2002. The physician practice management segment
(HMCA) continued to decline slightly in the same period, from $30.2 million in
fiscal 2000 to $31.8 in fiscal 2001 to $28.5 million in fiscal 2002.
Fonar anticipates that the increase in scanner sales will continue due to
the unique capability of the Stand-Up(TM) MRI scanner to scan patients in
weight-bearing positions and the high field strength of its other open MRI
scanners, the Fonar 360(TM) and QUAD(TM) scanners. Service revenues have also
increased over the past there fiscal years, from $1.7 million in fiscal 2000 to
$2.0 million in fiscal 2001 to $2.2 million in fiscal 2002, which increases are
attributable primarily to the increased number of scanners being placed in
service. Most of the revenues on the Stand-Up(TM) MRI scanners sold in the last
quarter of fiscal 2002,were not recognized as of June 30, 2002, and as of June
30, 2002, the Company's balance sheet reflects $7.7 million in customer
advances.
The Company has taken steps to reverse the decline in HMCA revenues by
closing unprofitable facilities and commencing its program of replacing the MRI
scanners at the MRI facilities it manages with Stand-Up(TM) MRI scanners. One
Stand-Up(TM) MRI is now installed in the Islandia, New York site, two are in the
process of being installed in Bensonhurst, New York and Staten Island, New York
and two are planned for Deerfield Beach, Florida and Garden City, New York.
Expenditures for advertising and marketing are likely to continue to
increase, as the Company believes the increased advertising is helpful to
promote sales.
RESULTS OF OPERATIONS. FISCAL 2001 COMPARED TO FISCAL 2000
In fiscal 2001, the Company experienced a net loss of $15.2 million on
revenues of $42.3 million as compared to a net loss of $11.0 million on revenues
of $36.2 million for fiscal 2000. This represented an increase in the net loss
of 38% and an increase in revenues of 16.9%.
Discussion of Operating Results of Medical Equipment Segment
------------------------------------------------------------
Revenues attributable to the Company's medical equipment segment increased
by 75% to $10.5 million in fiscal 2001 from $6.0 million in fiscal 2000,
reflecting an increase in scanner sales of 79.4%, from $3.4 million in fiscal
2000 to $6.1 million in fiscal 2001 and an increase in service revenue of $11.1%
from $1.7 million in fiscal 2000 to $2.0 million in fiscal 2001. The Company
attributes the increase in scanner sales to the growing market penetration of
its products, particularly the Stand-Up(TM) MRI. Product sales to unrelated
parties increased by 113% in fiscal 2001 from $1.6 million in fiscal 2000 to
$3.4 million in fiscal 2001.
Sales to affiliated parties, consisting of professional corporations owned
by Dr. Damadian represented approximately 6.4% ($2,686,646) of the Company's
revenues in fiscal 2001, as compared to 4.9% ($1,752,298) of the Company's
revenues in fiscal 2000.
Research and development expenses increased by 6.8% to $5.9 million in
fiscal 2001 as compared to $5.5 million in fiscal 2000. This increase
represented continued research and development of Fonar's scanners and its new
hardware and software product, "Sympulse(TM)".
Negative gross profit margins on product sales (negative 2.0% in fiscal
2001 and negative 32.0% in fiscal 2000) were principal attributable to the
medical equipment segment operating at a low level of capacity and reflect the
inefficiencies attendant to Fonar's fixed factory overhead expenses, such as
salaries and benefits. The improvement in fiscal 2001 reflected increased sales
volume.
Results of operations for the medical equipment segment improved by 4% from
a loss of $18.0 million in fiscal 2000 to a loss of $17.2 million in fiscal
2001. Increased license and royalty revenue (from $920,000 in fiscal 2000 to
$2.4 million in fiscal 2001) was a principal factor. This reflects an
improvement in our gross margins offset by an increase of 8.3% in selling,
general and administrative expenses to $11.7 million in fiscal 2001 from $10.8
million in fiscal 2000.
The Company recognized revenues of $1.6 million from the sale of its new
Stand-Up(TM) MRI scanners and of $1.1 million from the sale of Echo(TM) scanners
in fiscal 2001. There were no sales of Stand-Up(TM) MRI scanners or Echo(TM)
scanners in fiscal 2000. Revenues generated by sales of QUAD(TM) MRI scanners
decreased slightly by 6.3% from $3.2 million (8.8% of total revenues) in fiscal
2000 to $3.0 million (7.1% of total revenues) in fiscal 2001.
Sales of Beta(TM) scanners were $0 in fiscal 2001 (0% of total revenues)
and $84,255 (approximately 0.2% of total revenues) in fiscal 2000. The sales in
fiscal 2000 represented the sale of refurbished equipment, as the company no
longer manufactures Beta(TM) scanners.
Product sales revenues for fiscal 2001 included revenues from the sale of
seven scanners. Product sales revenues for fiscal 2000 included revenues from
the sales of three scanners.
Discussion of Operating Results of Physician Management Services Segment
---------------------------------------------------------------------------
Revenues attributable to the Company's physician and diagnostic management
services segment (HMCA) increased to $31.8 million in fiscal 2001 from $30.2
million in fiscal 2000, representing an increase of 5.3%. Operating income of
$1.0 million was recognized from the Company's physician and diagnostic
management services in fiscal 2001, as compared to operating income of $2.5
million in fiscal 2000, representing a decrease of 60%.
Cost of revenue for the Company's physician management services segment
decreased from $19.8 million, or 66.0%, of related revenues for the year ended
June 30, 2000 to $19.3 million, or 61.0%, of related revenues for the year ended
June 30, 2001. Operating income of this segment declined from $2.5 million in
fiscal 2000 to $1.0 million in fiscal 2001 due to increases in selling, general
and administrative expenses of $1.9 million, increases in compensatory element
of stock issuance of $1.4 million, increases in provision for bad debt expense
of $.2 million offset by an improvement in gross profit of $2.0 million.
Discussion of Consolidated Results of Operations
------------------------------------------------
The increase in compensatory element of stock issuances from approximately
$1.9 million in fiscal 2000 to $4.0 million in fiscal 2001 reflected greater use
of Fonar's stock bonus plan to pay certain highly compensated employees and
others in stock rather than cash.
The higher provision for bad debt of $442,505 in fiscal 2001 as compared to
$177,162 in fiscal 2000, reflected reserves for fees from HMCA managed
facilities that were closed during the year.
The amortization expense in fiscal 2001 and 2000 of approximately $1.2
million in each year reflects the amortization of management agreements
attributable to HMCA's acquisitions.
In fiscal 2001, we continued our investment in the development of its new
MRI scanners, together with software and upgrades, with an investment of
$6,621,225 in research and development ($754,804 of which was capitalized) as
compared to $5,893,948 ($361,623 of which was capitalized) in fiscal 2000. The
research and development expenditure was approximately 63% of revenues
attributable to the Company's medical equipment segment (and 15.7% of total
revenues) in 2001 and 98% of medical equipment segment revenues (and 16.3% of
total revenues) in 2000. This represented a increase of approximately 12% in
research and development expenses from 2000 to fiscal 2001.
During the fiscal year ended June 30, 2001, the Company realized other
income of approximately $1.0 million, principally from the sale of a partnership
interest, as compared to other income of approximately $5.7 million (principally
from the settlement of patent infringement disputes) in fiscal 2000.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and marketable securities declined by 35.0% from
$20.1 million at June 30, 2001 to $13.1 million at June 30, 2002. Principal uses
of cash during fiscal 2002 included capital expenditures of $3.1 million,
repayment of indebtedness and capital lease obligations in the amount of $4.5
million, and capitalized software development costs and patents of $1.4 million.
Marketable securities approximated $5.6 million as of June 30, 2002, as
compared to $6.1 million as of June 30, 2001. At June 30, 2002, we decreased our
investments in U.S. Government obligations from approximately $4.1 million to
$3.8 million and reduced our investments in corporate and government agency
bonds from approximately $1.9 million to $1.8 million. This has had the intended
effect of reducing the volatility of the Company's investment portfolio.
Cash provided by operating activities for fiscal 2002 approximated
$624,000. Cash provided by operating activities was attributable substantially
to an increase in customer advances of $6 million offset by the funding of the
net loss for fiscal 2002.
Cash used in investing activities for fiscal 2002 approximated $4 million.
The principal uses of cash from investing activities during fiscal 2002
consisted of expenditures for property and equipment and capitalized software
and patent costs of approximately $4.5 million, offset by the proceeds from the
sale of marketable securities of $.5 million
Cash used in financing activities for fiscal 2002 approximated $3.2
million. The principal uses of cash in financing activities during fiscal 2002
consisted of repayment of principal on long-term debt of approximately $4.5
million and the principal source was proceeds from a warrant exercise of $1.5
million.
Total liabilities decreased by 16% during fiscal 2002, from approximately
$42.9 million at June 30, 2001 to approximately $36.9 million at June 30, 2002.
The decrease in liabilities was attributable principally to the repayments of
long term debt and capital leases.
During the year ended June 30, 2002, we issued 4,931,576 shares of our
common stock in connection with the repayment of $4.5 million of convertible
debentures and related interest and debt discounts. In addition, we issued
2,045,000 shares of our common stock in connection with a repayment of notes
payable in the aggregate amount of $2,603,000.
The Company's obligations and the periods in which they are scheduled to
become due are set forth in the following table:
Due in
Less Due Due Due
than 1 in 1-3 in 4-5 after 5
Obligation Total Years years years years
-------------- ----------- ----------- ---------- ----------- -------
Long-term debt $ 9,085,259 $ 8,970,400 $ 114,859 $ - $ -
Capital lease
Obligation 1,524,245 805,939 718,306 - -
Operating
leases 15,656,167 3,254,819 6,937,552 5,463,796 -
----------- ----------- ---------- ----------- -------
Total cash
Obligations $26,265,671 $13,031,158 $7,770,717 $5,463,796 $ -
=========== =========== ========== =========== =======
Other commercial commitments of the Company are as follows (by commitment
expiration date):
Lines of credit: $139,000
Standby letters of credit: $68,000
As at June 30, 2002, our obligations included approximately $2.1 million in
various state taxes. The Company has to enter into payment plans with taxing
authorities with respect to $1.5 million of past due taxes.
As of June 30, 2002, we had a bank credit facility of $5,500,000. The
unused portion of the facility was approximately $139,000. The interest on loans
made under the facility is either the bank's prime rate, as in effect from time
to time or 0.5% plus the bank's cost of funds rate, as selected by Fonar when
the loan is made.
Our working capital surplus as of June 30, 2002 approximates $10.5 million,
as compared to a working capital surplus of $15.5 million as of June 30, 2001.
The change in our working capital position resulted primarily from our
investments in new equipment, capitalized software and patent costs totalling
$4.5 million, and note payments primarily on the purchase prices for HMCA's
acquisitions of $4.5 million.
In order to conserve its capital resources, we have issued common stock
under its stock bonus and stock option plans to compensate employees and
non-employees for services rendered. In fiscal 2002, the compensatory element of
stock issuances was $4.6 as compared to $4.0 million for fiscal 2001.
Utilization of equity in lieu of cash compensation has improved our liquidity
since it increases cash available for other expenditures.
The foregoing trends in Fonar's capital resources are expected to improve
as Fonar's MRI scanner products gain wider market acceptance and produce greater
sales revenues.
Capital expenditures for fiscal 2002 approximated $4.5 million and
substantially consisted of office and production equipment ($3.1 million),
capitalized software costs ($856,000) and capitalized patent costs ($548,000).
Fonar has not committed to making capital expenditures in the 2003 fiscal
year other than its intention to continue research and development expenditures
at current levels and to purchase equipment for $35,000. In addition, HMCA plans
to incur expenditures of approximately $140,000 for a new billing system.
Our business plan currently includes an aggressive program for
manufacturing and selling its new line of Open MRI scanners. In addition, we are
enhancing our revenue by participating into the physician and diagnostic
management services business through its subsidiary, HMCA and is in the process
of upgrading the facilities which it manages, most significantly by the
replacement of existing MRI scanners with new Stand-Up(TM) MRI scanners.
Our business 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 $2.0 million for the year ended June 30, 2001
and $2.2 million for the year ended June 30, 2002 (transactions between FONAR
and its subsidiaries are eliminated in the consolidation).
As at June 30, 2002, our current assets were $41.5 million and current
liabilities of $31.0 million, resulting in a working capital surplus of
approximately $10.5 million. Capital resources included $7.5 million in cash and
cash equivalents and $5.6 million in marketable securities. In addition, we
expect to generate additional cash receipts from the Stand-Up(TM) MRI scanners
ordered by customers in fiscal 2002 in the amount of $12.3 million, as
additional progress payments are made on the scanners as they are built,
delivered and installed.
In addition, in May of 2001, we raised $4.5 through the issuance of
debentures to The Tail Wind Fund. The debentures to The Tail Wind Fund. The
debentures were repaid in shares of common stock, although at a discounted
price, but provided us with much needed liquidity. Subsequently, in June, 2002,
The Tailwind Fund provided Fonar with an additional $1,500,000 through the
exercise of warrants for 1,000,000 shares at a price of $1.50 per share and in
August, 2002 with an additional $1,125,000 through the exercise of warrants for
an additional 1,000,000 shares at an exercise price of $1.125 per share.
We believe that the above mentioned financial resources, anticipated cash
flows from operations and potential financing sources, will provide the cash
flows needed to achieve the sales, service and production levels necessary to
support its operations.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
FONAR's investments in fixed rate instruments. None of the fixed rate
instruments in which FONAR invests extend beyond June 30, 2007. Below is a
tabular presentation of the maturity profile of the fixed rate instruments held
by the Company at June 30, 2002.
INTEREST RATE SENSITIVITY
PRINCIPAL AMOUNT BY EXPECTED MATURITY
WEIGHTED AVERAGE INTEREST RATE
Investments
in Fixed Rate Weighted Average
Date Instruments Interest Rate
---------- ------------- ----------------
6/30/03 3,376,791 5.8%
6/30/04 1,157,820 5.4%
6/30/05 353,734 6.5%
6/30/06 399,569 6.0%
6/30/07 200,000 6.1%
------------
Total: 5,487,914
Fair Value
at 6/30/02 5,573,483
All of our revenue, expense and capital purchasing activities are
transacted in United States dollars.
See Note 11 to the consolidated Financial Statements for information on
long term debt.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FONAR CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
INDEPENDENT AUDITORS' REPORT
CONSOLIDATED BALANCE SHEETS
At June 30, 2002 and 2001
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Years Ended June 30, 2002, 2001 and 2000
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Three Years Ended June 30, 2002, 2001 and 2000
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Years Ended June 30, 2002, 2001 and 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SCHEDULE OF VALUATION ALLOWANCES
For the Three Years Ended June 30, 2002, 2001 and 2000
(*) Included in Part II, Item 14 of the Form.
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Audit Committee of the Board of Directors
FONAR Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of FONAR
Corporation and Subsidiaries as of June 30, 2002 and 2001, and the related
consolidated statements of operations, stockholders' equity, cash flows and
schedule of valuation allowances for each of the years in the three-year period
ended June 30, 2002. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements and schedules referred to
above present fairly, in all material respects, the consolidated financial
position of FONAR Corporation and Subsidiaries at June 30, 2002 and 2001, and
the consolidated results of their operations and cash flows for each of the
years in the three-year period ended June 30, 2002, in conformity with
accounting principles generally accepted in the United States of America.
During each of the years in the three-year period ended June 30, 2002, a
significant portion of the Company's revenues was from related parties.
/s/MARCUM & KLIEGMAN LLP
New York, New York
September 30, 2002
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
------
June 30,
-----------------------------
2002 2001
------------- -------------
Current Assets:
Cash and cash equivalents $ 7,493,986 $ 14,040,334
Marketable securities 5,573,483 6,085,266
Restricted cash 5,500,000 -
Accounts receivable - net of allowances for
doubtful accounts of $1,077,092 and
$1,033,331 at June 30, 2002 and 2001,
respectively 781,371 849,740
Accounts receivable - related medical
practices - net of allowances for doubtful
accounts of $1,096,390 and $538,297 at
June 30, 2002 and 2001, respectively 13,311,238 13,180,654
Costs and estimated earnings in excess of
billings on uncompleted contracts 1,152,606 1,768,856
Inventories 4,663,767 3,725,375
Investment in sales-type leases with related
parties 1,796,724 191,304
Investment in sales-type lease 119,601 119,549
Prepaid expenses and other current assets 1,101,902 903,751
------------ ------------
Total Current Assets 41,494,678 40,864,829
Restricted Cash - 5,500,000
Property and Equipment - Net 10,596,481 10,637,397
Advances and Notes to Related Parties - Net
of discounts and allowance for doubtful
accounts of $366,035 and $316,035 at June 30,
2002 and 2001, respectively 1,497,008 1,559,159
Investment in Sales-Type Leases with Related
Parties 814,892 2,513,703
Investment in Sales-Type Lease 741,647 861,249
Notes Receivable 175,000 375,000
Management Agreements - Net of accumulated
amortization of $5,154,243 and $3,935,551 at
June 30, 2002 and 2001, respectively 14,519,606 20,438,298
Other Intangible Assets - Net 2,648,618 1,853,506
Other Assets 341,857 297,272
------------- -------------
Total Assets $ 72,829,787 $ 84,900,413
============= =============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
June 30,
-----------------------------
2002 2001
------------- -------------
Current Liabilities:
Current portion of long-term debt and
capital leases $ 9,776,339 $ 6,634,863
Accounts payable 4,076,730 3,020,832
Other current liabilities 7,556,199 8,515,757
Customer advances 4,307,632 1,265,362
Customer advances - related parties 3,400,000 407,160
Income taxes payable 757,722 764,884
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,114,912 351,592
Convertible debentures - 4,500,000
------------- -------------
Total Current Liabilities 30,989,534 25,460,450
Long-term Debt and Capital Leases, Less
current maturities 833,165 10,109,286
Deferred Revenue - License Fee 4,680,000 7,020,000
Other Liabilities 359,534 327,411
------------- -------------
Total Liabilities 36,862,233 42,917,147
------------- -------------
Minority Interest 272,306 152,972
------------- -------------
Commitments, Contingencies and Other Matters
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
(Continued)
June 30,
-----------------------------
2002 2001
------------- -------------
Stockholders' Equity:
Class A non-voting preferred stock - $.0001
par value; authorized - 8,000,000 shares;
issued and outstanding - 7,836,287 shares
at June 30, 2002 and 2001, respectively $ 784 $ 784
Preferred stock - $.001 par value;
authorized - 10,000,000 shares; issued
and outstanding - none - -
Common stock - $.0001 par value; authorized
85,000,000 and 60,000,000 shares; issued -
71,582,243 and 59,524,455 shares at June 30,
2002 and 2001, respectively; outstanding
- 71,291,179 and 59,233,391 shares at June
30, 2002 and 2001, respectively 7,158 5,952
Class B common stock (10 votes per share) -
$.0001 par value; authorized - 4,000,000
shares; issued and outstanding - 4,211
shares at June 30, 2002 and 2001, 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, 2002 and 2001, respectively 956 956
Paid-in capital in excess of par value 120,156,196 104,984,020
Accumulated other comprehensive income 85,569 84,133
Accumulated deficit (82,882,893) (60,000,686)
Notes receivable from stockholders (997,132) (1,040,457)
Unearned compensation - (1,529,018)
Treasury stock, at cost - 291,064 shares
of common stock at June 30, 2002 and 2001 (675,390) (675,390)
------------- -------------
Total Stockholders' Equity 35,695,248 41,830,294
------------- -------------
Total Liabilities and Stockholders' Equity $ 72,829,787 $ 84,900,413
============= =============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2002
Class A
Non- Paid-in
Class A Common Stock Class C Voting Capital in Treasury
-------------------- Common Preferred Excess of Stock
Shares Amount Stock Stock Par Value Amount
---------- -------- -------- --------- ------------- -----------
Balance - June 30, 2001 59,524,455 $ 5,952 $ 956 $ 784 $ 104,984,020 $ (675,390)
Net loss - - - - - -
Other comprehensive income,
net of tax:
Unrealized gain on
securities arising
during the year,
net of tax - - - - - -
Exercise of stock options 13,868 1 - - 15,045 -
Exercise of callable warrants 1,000,000 100 - - 1,499,900 -
Stock issued to employees
under stock bonus plans 2,108,674 211 - - 2,762,301 -
Issuance of stock for
professional services 604,492 60 - - 728,196 -
Issuance of stock under
consulting contracts 1,116,078 112 - - 1,497,916 -
Issuance of stock for note
receivable - stockholder 140,100 14 - - 159,161 -
Issuance of stock for
conversion of convertible
debentures 3,832,073 383 - - 4,499,617 -
Issuance of stock for
financing costs 1,099,503 110 - - 1,291,036 -
Issuance of stock for
notes payable 2.045,000 205 - - 2,602,391 -
Issuance of stock for
equipment 98,000 10 - - 116,613 -
Net reduction in notes
receivable from stockholders - - - - - -
Amortization of unearned
compensation - - - - - -
Amortization of value assigned
to warrants in debt financing - - - - - -
---------- -------- -------- --------- ------------- -----------
BALANCE - JUNE 30, 2002 71,582,243 $ 7,158 $ 956 $ 784 $120,156,196 $ (675,390)
========== ======== ======== ========= ============= ===========
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2002
Notes Accumulated
Receivable Other Comprehensive
from Unearned Comprehensive Accumulated Income
Stockholders Compensation Income Deficit Total (Loss)
------------ ------------ ------------- ------------- ------------ -------------
Balance - June 30, 2001 $(1,040,457) $(1,529,018) $ 84,133 $(60,000,686) $41,830,294 -
Net loss - - - (22,882,207) (22,882,207) $ (22,882,207)
Other comprehensive income, Income, net of tax:
Unrealized gains on
securities arising
during the year,
net of tax - - 1,436 - 1,436 1,436
Exercise of stock options - - - - 15,046 -
Exercise of callable warrants - - - - 1,500,000 -
Stock issued to employees
under stock bonus plans - - - - 2,762,512 -
Issuance of stock for
professional services - - - - 728,256 -
Issuance of stock under
consulting contracts - - - - 1,498,028 -
Issuance of stock for note
receivable - stockholder (159,175) - - - - -
Issuance of stock for
conversion of convertible
debentures - - - - 4,500,000 -
Issuance of stock for
financing costs - - - - 1,291,146 -
Issuance of stock for
notes payable - - - - 2,602,596 -
Issuance of stock for
equipment - - - - 116,623 -
Net reduction in notes
receivable from stockholders 202,500 - - - 202,500 -
Amortization of unearned
compensation - 451,623 - - 451,623 -
Amortization of value assigned
to warrants in debt finacing - 1,077,395 - - 1,077,395 -
------------ ------------ ------------- ------------- ------------ -------------
BALANCE - JUNE 30, 2002 $ (997,132) $ - $ 85,569 $(82,882,893) $35,695,248 $(22,880,771)
============ ============ ============= ============= ============ =============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2001
Class A
Non- Paid-in
Class A Common Stock Class C Voting Capital in Treasury
-------------------- Common Preferred Excess of Stock
Shares Amount Stock Stock Par Value Amount
---------- -------- --------- --------- ------------ ----------
Balance - June 30, 2000 56,315,471 $ 5,631 $ 956 $ 784 $98,581,757 $ (671,359)
Net loss - - - - - -
Other comprehensive income,
net of tax:
Unrealized gains on
securities arising
during the year,
net of tax - - - - - -
Less:
Reclassification
adjustment
for (gains) losses
included in net loss - - - - - -
Exercise of stock options 24,000 2 - - 28,170 -
Purchase of treasury stock - - - - - (4,031)
Stock issued to employees
under stock bonus plans 1,636,602 164 - - 2,636,417 -
Issuance of stock for
professional services 435,976 44 - - 653,895 -
Issuance of stock under
consulting contracts 923,482 92 - - 1,632,980 -
Issuance of stock for
research and development
expenses 183,924 18 - - 344,839 -
Issuance of stock for notes
receivable - stockholders 5,000 1 - - 10,311 -
Value assigned to
warrants issued in
debt financing - - - - 1,095,651 -
Net reduction in notes
receivable from
stockholders - - - - - -
Amortization of unearned
compensation - - - - - -
---------- -------- --------- -------- ------------ ----------
BALANCE - JUNE 30, 2001 59,524,455 $ 5,952 $ 956 $ 784 $104,984,020 $(675,390)
========== ======== ========= ======== ============ ==========
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2001
Notes Accumulated
Receivable Other
from Unearned Comprehensive Accumulated Comprehensive
Stockholders Compensation Income Deficit Total Income (Loss)
------------ ------------ ------------- ------------- ------------ --------------
Balance - June 30, 2000 $(1,338,005) $ (213,374) $ (264,808) $(44,816,824) $51,284,758 -
Net loss - - - (15,183,862) (15,183,862) $ (15,183,862)
Other comprehensive
income, net of tax:
Unrealized gains on
securities arising during
the year, net of tax - - 342,050 - - 342,050
Less: Reclassification
adjustment for
(gains) losses
included in net loss - - 6,891 - 348,941 6,891
Exercise of stock options - - - - 28,172 -
Purchase of treasury stock - - - - (4,031) -
Stock issued to employees
under stock bonus plans - - - - 2,636,581 -
Issuance of stock for
professional services - - - - 653,939 -
Issuance of stock under
consulting contracts - (1,247,813) - - 385,259 -
Issuance of stock for research
and development expenses - - - - 344,857 -
Issuance of stock for notes
receivable - stockholders (10,312) - - - - -
Value assigned to warrants
in debt financing - (1,095,651) - - - -
Net reduction in notes
receivable from
stockholders 307,860 - - - 307,860 -
Amortization of unearned
Compensation - 1,027,820 - - 1,027,820 -
------------ ------------ ------------- ------------- ------------ --------------
$(1,040,457) $(1,529,018) $ 84,133 $(60,000,686) $41,830,294 $ (14,834,921)
BALANCE - JUNE 30, 2001 ============ ============ ============= ============= ============ ==============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2000
Class A
Non- Paid-in
Class A Common Stock Class C Voting Capital in Treasury
-------------------- Common Preferred Excess of Stock
Shares Amount Stock Stock Par Value Amount
---------- -------- -------- --------- ----------- -----------
Balance - June 30, 1999 53,793,042 $ 5,378 $ 956 $ 784 $95,385,863 $ (592,239)
Net loss - - - - - -
Other comprehensive income,
net of tax:
Unrealized losses on
securities arising
during the year, net
of tax - - - - - -
Less: Reclassification
adjustment for (gains)
losses included in net
loss - - - - - -
Exercise of stock options 389,000 39 455,780 -
Purchase of treasury stock - - - - - (79,120)
Stock issued to employees
under stock bonus plans 193,523 20 - - 396,662 -
Issuance of stock for
professional services 490,000 49 - - 742,323 -
Issuance of stock under
consulting contracts 1,429,574 143 - - 1,539,378 -
Issuance of stock for
acquisition of Central
Health Care 19,332 2 - - 61,751 -
Net reduction in notes
receivable from
stockholders - - - - - -
Amortization of unearned
compensation - - - - - -
Conversion of Class B
common stock to Class A
common stock 1,000 - - - - -
---------- -------- -------- --------- ----------- ----------
BALANCE - JUNE 30, 2000 56,315,471 $ 5,631 $ 956 $ 784 $98,581,757 $ (671,359)
========== ======== ======== ========= =========== ==========
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2000
Notes Accumulated
Receivable Other Comprehensive
from Unearned Comprehensive Accumulated Income
Stockholders Compensation Income Deficit Total (Loss)
------------ ------------ ------------- ------------- ------------ -------------
Balance - June 30, 1999 $(1,226,148) $ (206,878) $ (203,106) $(33,860,837) $59,303,773
Net loss - - - (10,955,987) (10,955,987) $ (10,955,987)
Other comprehensive income,
net of tax:
Unrealized losses on
securities arising
during the year, net
of tax - - (47,830) - (47,830) (47,830)
Less: Reclassification
adjustment for (gains)
losses included in net
loss - - (13,872) - (13,872) (13,872)
Exercise of stock options (391,250) - - - 64,569 -
Purchase of treasury stock - - - - (79,120) -
Stock issued to employees
under stock bonus plans - - - - 396,682 -
Issuance of stock for
professional services - - - - 742,372 -
Issuance of stock under
consulting contracts - (726,962) - - 812,559 -
Issuance of stock for
acquisition of Central
Health Care - - - - 61,753 -
Net reduction in notes
receivable from
stockholders 279,393 - - - 279,393 -
Amortization of unearned
compensation - 720,466 - - 720,466 -
Conversion of Class B
common stock to Class A
common stock - - - - - -
------------ ------------ ------------- ------------- ------------ -------------
BALANCE - JUNE 30, 2000 $(1,338,005) $ (213,374) $ (264,808) $(44,816,824) $51,284,758 $ (11,017,689)
============ ============ ============= ============= ============ =============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30,
----------------------------------------
2002 2001 2000
------------ ------------ ------------
Revenues
Product sales - net $ 5,364,809 $ 3,370,826 $ 1,606,229
Product sales - related parties
- net 6,229,195 2,686,646 1,752,298
Service and repair fees - net 1,901,954 1,893,251 1,609,023
Service and repair fees - related
parties - net 254,173 123,086 83,514
Patient revenue - net - 1,285,028 996,337
Management and other fees - related
medical practices - net 28,525,439 30,490,464 29,187,396
License fees and royalties 2,403,000 2,424,000 920,000
------------ ------------ ------------
Total Revenues - Net 44,678,570 42,273,301 36,154,797
------------ ------------ ------------
Costs and Expenses
Costs related to product sales 3,815,081 3,206,385 2,281,709
Costs related to product sales -
related parties 4,523,940 2,956,668 2,141,207
Costs related to service and repair
fees 2,338,361 2,216,899 2,278,354
Costs related to service and repair
fees - related parties 312,493 144,127 118,255
Costs related to patient revenue - 1,138,569 953,619
Costs related to management and
other fees - related parties 15,255,018 18,134,550 18,818,925
Research and development 5,099,782 5,866,421 5,532,325
Selling, general and administrative 21,454,907 19,118,276 16,211,414
Compensatory element of stock
issuances for selling, general
and administrative expenses 4,712,163 4,044,826 1,929,706
Provision for bad debts 972,236 442,505 177,162
Loss on impairment of management
agreements 4,700,000 - -
Amortization of management
agreements 1,218,692 1,218,692 1,218,693
------------ ------------ ------------
Total Costs and Expenses 64,402,673 58,487,918 51,661,369
------------ ------------ ------------
Loss from Operations (19,724,103) (16,214,617) (15,506,572)
Financing costs paid in stock and
warrants (2,368,541) - -
Interest Expense (730,041) (1,255,440) (1,710,188)
Investment Income 973,862 1,841,869 1,919,744
Other (Expense) Income (69,133) 964,488 4,655,375
Debt Conversion Expense (544,370) - -
Minority Interests in Income of
partnerships (392,842) (480,166) (270,669)
------------ ------------ ------------
Loss Before Provision for Income Taxes (22,855,168) (15,143,866) (10,912,310)
Provision for Income Taxes 27,039 39,996 43,677
------------ ------------ ------------
Net Loss $(22,882,207) $(15,183,862) $(10,955,987)
============ ============ ============
Basic and Diluted Net Loss Per Share $(.36) $(.26) $(.20)
===== ===== =====
Weighted Average Number of Shares
Outstanding 63,511,814 57,388,050 55,096,212
============ ============ ============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30,
----------------------------------------
2002 2001 2000
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(22,882,207) $(15,183,862) $(10,955,987)
Adjustments to reconcile net loss
to net cash provided by (used
in) operating activities:
Minority interest in income of
partnerships 392,842 480,166 270,669
Depreciation and amortization 5,407,184 4,712,767 4,670,473
License fee - 11,700,000 -
Amortization of unearned
license fee (2,340,000) (2,340,000) -
Loss on impairment of management
agreements 4,700,000 - -
Gain on sale of partnership
interest - (750,000) -
Issuance of stock for research
and development expenses - 344,839 -
Gain on sale of equipment - (150,000) -
Imputed interest on deferred
payment obligations - 52,087 397,521
Provision for bad debts 972,236 442,505 177,162
Compensatory element of stock
issuances 4,712,163 4,049,210 1,929,706
Financing costs paid in stock 2,368,541 - -
Debt conversion expense 544,370 - -
Stock issued for professional
services 728,256 653,895 742,372
Liabilities assumed by purchaser
on sale of subsidiary - - (824,394)
(Increase) decrease in operating
assets, net:
Accounts receivable (1,034,451) 110,763 (859,090)
Notes receivable 200,000 125,810 (476,014)
Costs and estimated earnings
in excess of billings on
uncompleted contracts 616,250 (800,697) 495,291
Inventories (938,392) (189,206) 701,609
Sales-type lease receivable -
related party - (1,895,000) (935,000)
Sales-type lease receivable - (1,083,192) 4,565
Principal payments received on
sales-type lease - related
parties 93,391 120,428 -
Principal payments received on
sales-type lease 119,550 102,394 -
Prepaid expenses and other
current assets (198,151) (299,692) 97,374
Other assets (44,584) (590) (3,064)
Receivables and advances to
related parties 62,151 (400,161) 275,691
Increase (decrease) in operating
liabilities, net:
Accounts payable 1,055,898 1,281,985 (434,425)
Other current liabilities (734,519) (1,556,133) (673,669)
Customer advances 6,035,110 1,089,971 487,033
Billings in excess of costs
and estimated earnings on
uncompleted contracts 763,320 351,592 -
Other liabilities 32,123 189,073 6,709
Income taxes payable (7,162) (52,029) (60,227)
------------ ------------ ------------
NET CASH PROVIDED BY (USED
IN) OPERATING ACTIVITIES 623,919 1,106,923 (4,965,695)
------------ ------------ ------------
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30,
----------------------------------------
2002 2001 2000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Sales of marketable securities $ 513,219 $ 5,747,851 $ 8,651,820
Purchases of property and equipment (3,104,573) (2,556,982) (2,807,264)
Costs of capitalized software
development (855,612) (752,285) (361,323)
Proceeds from sale of equipment 39,465 150,000 -
Cost of patents and copyrights (548,290) - -
------------ ------------ ------------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES (3,955,791) 2,588,584 5,483,233
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from convertible debenture - 4,500,000 -
Proceeds from long-term debt - 500,000 -
Increase in restricted cash - (500,000) -
Costs in connection with debt
financing - (270,729) -
Repayment of borrowings and capital
lease obligations (4,456,014) (5,739,395) (3,750,205)
Proceeds from exercise of stock
options and warrants 1,515,046 28,172 64,569
Proceeds from sale of partnership
interest - 750,000 -
Purchase of common stock - (4,031) (79,120)
Distributions to holders of minority
interests (273,508) (348,709) (347,067)
------------ ------------ ------------
NET CASH USED IN FINANCING ACTIVITIES (3,214,476) (1,084,692) (4,111,823)
------------ ------------ ------------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (6,546,348) 2,610,815 (3,594,285)
CASH AND CASH EQUIVALENTS - BEGINNING
OF YEAR 14,040,334 11,429,519 15,023,804
------------ ------------ ------------
CASH AND CASH EQUIVALENTS - END
OF YEAR $ 7,493,986 $ 14,040,334 $ 11,429,519
============ ============ ============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
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 in fiscal 1997, two acquisitions in fiscal
1998, and one acquisition consummated in fiscal 1999. The acquired companies in
all cases were actively engaged in the business of managing medical providers.
The medical providers are diagnostic imaging centers, principally MRI scanning
centers, multi-specialty practices and primary care practices.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of FONAR Corporation,
its majority and wholly-owned subsidiaries and partnerships. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The Company does not consolidate the medical practices which it manages, as it
has previously determined that consolidation of such medical practices is not
appropriate because the underlying management agreements do not meet all of the
six criteria of Emerging Issues Task Force ("EITF") Consensus No. 97-2.
Use of Estimates
----------------
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
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 allowances, intangible assets, income
taxes, useful lives of equipment, contingencies, revenue recognition and
litigation. 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.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investment in Marketable Securities
-----------------------------------
The Company accounts for its investments using Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS No. 115"). This standard requires that certain debt
and equity securities be adjusted to market value at the end of each accounting
period. Unrealized market value gains and losses are charged to earnings if the
securities are traded for short-term profit. Otherwise, such unrealized gains
and losses are charged or credited to comprehensive income.
Management determines the proper classifications of investments in obligations
with fixed maturities and marketable equity securities at the time of purchase
and re-evaluates such designations as of each balance sheet date. At June 30,
2002 and 2001, all securities covered by SFAS No. 115 were designated as
available for sale. Accordingly, these securities are stated at fair value, with
unrealized gains and losses reported in comprehensive income. Realized gains and
losses on sales of investments, as determined on a specific identification
basis, are included in investment income in the Consolidated Statements 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 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.
Intangible Assets
-----------------
1) Management Agreements
Amounts allocated to management agreements, in connection with four acquisitions
completed during the period from June 1997 through August 1998, are being
amortized using the straight-line method over the 20-year term of the
agreements.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Other Intangible Assets
-----------------------
1) Capitalized Software Development Costs
Capitalization of computer software development costs begins upon the
establishment of technological feasibility. Technological feasibility for the
Company's computer software is generally based upon achievement of a detail
program design free of high risk development issues and the completion of
research and development on the product hardware in which it is to be used. The
establishment of technological feasibility and the ongoing assessment of
recoverability of capitalized computer software development costs requires
considerable judgement by management with respect to certain external factors,
including, but not limited to, technological feasibility, anticipated future
gross revenue, estimated economic life and changes in software and hardware
technology.
Amortization of capitalized computer software development costs commences when
the related products become available for general release to customers.
Amortization is provided on a product by product basis. The annual amortization
is the greater of the amount computed using (a) the ratio that current gross
revenue for a product bear to the total of current and anticipated future gross
revenue for that product, or (b) the straight-line method over the remaining
estimated economic life of the product.
The Company periodically performs reviews of the recoverability of such
capitalized software costs. At the time a determination is made that capitalized
amounts are not recoverable based on the estimated cash flows to be generated
from the applicable software net realizable value, any remaining capitalized
amounts are written off.
2) Patents and Copyrights
Amortization is calculated on the straight-line basis over 17 years.
3) Deferred Financing Costs
Financing costs in connection with the May 24, 2001 convertible debenture
offering were amortized over the one-year period of the obligation. (see Note
13)
Long-Lived Assets
-----------------
The Company periodically assesses the recoverability of long-lived assets,
including property and equipment, intangibles and management agreements, 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 (see Note 3).
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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. Revisions in cost estimates and 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 is recognized on the straight-line method
over the related contract period, usually one year.
Revenue from sales of other items are recognized upon shipment.
Revenue from sales-type leases are recognized when collectibility of the minimum
lease payments is reasonably predictable and no important uncertainties surround
the amount of unreimbursable costs yet to be incurred by the Company as lessor
under the lease. The minimum lease payments, plus the unguaranteed residual
value accruing to the benefit of the Company as lessor, are recorded as the
gross investment in the lease. The difference between the gross investment in
the lease and the sum of the present value of the minimum lease payments and
unguaranteed residual value, accruing to the Company's benefit as lessor, are
recorded as unearned income.
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.
Patient revenue from the Company's wholly-owned Florida multi-specialty practice
through the period ended June 30, 2001 was recorded in the period the services
were rendered at established rates reduced by provisions for doubtful accounts
and contractual adjustments. Such adjustments represent the difference between
charges at established rates and estimated recoverable amounts and were
recognized in the period the services were rendered. Any differences between
estimated contractual adjustments and actual final settlements were recognized
as contractual adjustments in the year final settlements were determined. This
multi-specialty practice was sold by the Company on June 30, 2001. (see Note
17).
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Research and Development Costs
------------------------------
Research and development costs are charged to expense as incurred. The costs of
materials and equipment that are acquired or constructed for research and
development activities, and have alternative future uses (either in research and
development, marketing or production), are classified as property and equipment
and depreciated over their estimated useful lives.
During the year ended June 30, 2001, the Company acquired a minority interest in
a development stage technology company through the issuance of 270,000 shares
valued at $344,857. The entire amount of this purchase price was charged to
research and development expenses.
Advertising Costs
-----------------
Advertising costs are expensed as incurred.
Shipping Costs
--------------
The Company's shipping and handling costs are included under costs of product
sales for all periods presented.
Income Taxes
------------
Deferred tax assets and liabilities 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.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings (Loss) Per Share
-------------------------
Basic earnings (loss) per share is computed based on weighted average shares
outstanding and excludes any potential dilution. In accordance with EITF Topic
D-95, "Effect of Participating Convertible Securities on the Computation of
Basic Earnings Per Share," the Company's participating convertible securities,
which include the Class A Non-voting Preferred stock, Class B common stock and
Class C common stock, are not included in the computation of basic or diluted
earnings per share since they are antidilutive. In accordance with EITF Topic
D-95, prior period's earnings per share were restated. Diluted earnings (loss)
per share reflects the potential dilution from the exercise or conversion of all
dilutive securities into common stock based on the average market price of
common shares outstanding during the period.
Options and warrants to purchase approximately 3,022,000, 4,036,000 and 427,000
shares of common stock were outstanding at June 30, 2002, 2001 and 2000,
respectively, but were not included in the computation of diluted earnings per
share due to losses for all years, as a result of the options and warrants being
antidilutive.
Cash and Cash Equivalents
-------------------------
The Company considers all short-term highly liquid investments with a maturity
of three months or less when purchased to be cash or cash equivalents.
Restricted Cash
---------------
At June 30, 2002 and 2001, $5,500,000 of cash has been pledged as collateral on
an outstanding bank loan and has been classified as restricted cash on the
accompanying balance sheet.
Concentration of Credit Risk Cash
---------------------------------
The Company maintains its cash and cash equivalents with various financial
institutions which exceed federally insured limits throughout the year. At June
30, 2002, the Company had cash on deposit of $11,272,978 in excess of federal
insured limits.
Related Parties
---------------
Net revenues from related parties accounted for approximately 78%, 78% and 86%
of the consolidated net revenues for the years ended June 30, 2002, 2001 and
2000, respectively.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Value of Financial Instruments
-----------------------------------
The financial statements include various estimated fair value information at
June 30, 2002, 2001 and 2000, as required by SFAS No. 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 and restricted cash: The carrying amount approximates
fair value because of the short-term maturity of those instruments.
Accounts receivable and accounts payable: The carrying amounts approximate fair
value because of the short maturity of those instruments.
Investment in sales-type leases and investments, advances and notes to
affiliates and related parties: The carrying amount approximates fair value
because the discounted present value of the cash flow generated by the related
parties approximates the carrying value of the amounts due to the Company.
Long-term debt and loans payable: The carrying amounts of debt and loans payable
approximate fair value due to the length of the maturities, the interest rates
being tied to market indices and/or due to the interest rates not being
significantly different from the current market rates available to the Company.
All of the Company's financial instruments are held for purposes other than
trading.
Stock-Based Compensation
------------------------
The Company accounts for its employee compensation and stock option plans in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. In
accordance with SFAS No. 123, Accounting for Stock-Based Compensation, the
Company provides proforma net income and proforma earnings per share disclosures
for employee stock option grants, as if the fair-value-based method defined in
SFAS No. 123 had been applied.
Comprehensive Income (Loss)
---------------------------
Comprehensive income (loss) generally includes all changes in equity during a
period, except those resulting from investments by stockholders and
distributions to stockholders.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements
--------------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Accounting for Business Combinations" and SFAS No. 142, "Accounting for
Goodwill and Other Intangible Assets". SFAS No. 141 requires that all business
combinations be accounted for using the purchase method of accounting and
prohibits the pooling-of-interests method of accounting for business
combinations initiated after June 30, 2001. According to SFAS No. 142, goodwill,
which arises from business combinations after June 30, 2001, cannot be
amortized. In addition, SFAS No. 142 requires the discontinuation of goodwill
amortization and the amortization of intangible assets with indeterminate lives
effective the date the Company adopts the statement, which is expected to be
June 30, 2002. The Company has six months from the date it adopts SFAS No. 142
to test for impairment and any impairment charge resulting from the initial
application of the new rule must be classified as the cumulative effect of a
change in accounting principle. Thereafter, goodwill and intangible assets with
indeterminate lives should be tested for impairment annually or as needed.
The adoption of SFAS No. 142 did not have a significant impact on the
consolidated financial statements and the Company expects to continue to
amortize all identifiable intangible assets.
In October 2001, the FASB issued SFAS No. 144 ("SFAS 144"), "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No. 121
("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" and certain provisions of APB Opinion No.
30, "Reporting Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." SFAS 144 requires that long-lived assets to be
disposed of by sale, including discontinued operations, be measured at the lower
of the carrying amount or fair value, less cost to sell, whether reported in
continuing operations or in discontinued operations. SFAS 144 also broadens the
reporting requirements of discontinued operations to include all components of
an entity that have operations and cash flows that can be clearly distinguished,
operationally and for financial reporting purposes, from the rest of the entity.
The provisions of SFAS 144 have been adopted by the Company as of July 1, 2001.
The adoption of SFAS 144 did not have a significant impact to the consolidated
financial statements.
In April 2002, the FASB issued SFAS No. 145 ("SFAS 145"), "Rescission of FASB
Statement No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." The rescission of SFAS No. 4, "Reporting Gains and Losses from
Extinguishments", and SFAS No. 64, "Extinguishments of Debt Made to Satisfy
Sinking Fund Requirements", which amended SFAS No. 4, will affect income
statement classification of gains and losses from extinguishment of debt. The
Company adopted SFAS 145 on January 1, 2002 on the prospective basis and the
adoption did not have a significant impact to the consolidated financial
statements.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
--------------------------------------------
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullified Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS 146 requires that a
liability for a cost associated with an exit or disposal activity to be
recognized when the liability is incurred. A fundamental conclusion reached by
the FASB in this statement is that an entity's commitment to a plan, by itself,
does not create a present obligation to others that meets the definition of a
liability. SFAS 146 also establishes that fair value is the objective for
initial measurement of the liability. The provisions of this statement are
effective for exit or disposal activities that are initiated after December 31,
2002, with early application encouraged. The adoption of SFAS 146 did not have a
significant impact to the consolidated financial statements.
Reclassifications
-----------------
Certain prior year balances have been reclassified to conform to the current
year presentation.
NOTE 3 - MANAGEMENT AGREEMENTS
In connection with four acquisitions completed during the period June of 1997
through August of 1998, a portion of the purchase price was allocated to various
long-term management agreements. The cost, accumulated amortization and net
carrying value at June 30, 2002 and 2001 is as follows:
As of June 30, 2002
-------------------
Acquisition Accumulated Net Carrying
Date Cost Amortization Value
------------ ----------- ------------ ------------
Affordable Diagnostics, Inc. June 1997 3,719,640 $ 883,738 $ 2,835,902
A&A Services, Inc. March 1998 5,748,139(a) 2,229,292 3,518,847
Dynamic Health Care
Management, Inc. August 1998 8,951,907 1,790,381 7,161,526
Central Health Care
Management Services, Inc. January 1998 1,254,163 250,832 1,003,331
----------- ------------ ------------
$19,673,849 $5,154,243 $14,519,606
=========== ============ ============
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 3 - MANAGEMENT AGREEMENTS (Continued)
As of June 30, 2001
-------------------
Acquisition Accumulated Net Carrying
Date Cost Amortization Value
------------ ----------- ------------ ------------
Affordable Diagnostics, Inc. June 1997 $ 3,719,640 $ 697,754 $ 3,021,884
A&A Services, Inc. March 1998 10,448,139 1,706,886 8,741,255
Dynamic Health Care
Management, Inc. August 1998 8,951,907 1,342,786 7,609,121
Central Health Care
Management Services, Inc.
January 1998 1,254,163 188,125 1,066,038
----------- ------------ ------------
$24,373,849 $ 3,935,551 $20,438,298
=========== ============ ============
The estimated amortization expense of management agreements for each of the next
5 years is approximately $983,700.
(a) Impairment Loss
---------------
During the quarter ended June 30, 2002, the primary care medical practices
managed by the Company's subsidiary, A&A Services, Inc., experienced a
significant overall decline in patient volume and related operating cash flows
which led to the inability of the medical practices to fully and timely pay the
contractual management fees to the Company. As a result of the continued
occurrence of this negative trend, the Company recorded an impairment loss of
$4,700,000 during the quarter ended June 30, 2002 related to those management
agreements which reduced the carrying value of such agreements to $3,518,847 at
June 30, 2002.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 4 - MARKETABLE SECURITIES
The following is a summary of marketable securities at June 30, 2002 and 2001:
2002
------------------------------------
Unrealized
Holding Fair Market
Cost Gain Value
----------- ---------- -----------
U.S. Government Obligations $ 3,764,690 $ 60,942 $ 3,825,632
Corporate and government
agency bonds 1,723,224 24,627 1,747,851
----------- ---------- -----------
$ 5,487,914 $ 85,569 $ 5,573,483
=========== ========== ===========
2001
------------------------------------
Unrealized
Holding Fair Market
Cost Gain Value
----------- ---------- -----------
U.S. Government Obligations $4,128,191 $ 63,849 $4,192,039
Corporate and government
agency bonds 1,872,942 20,284 1,893,227
---------- ---------- ----------
$6,001,133 $ 84,133 $6,085,266
========== ========== ==========
All debt securities are due within five years. At June 30, 2002, the amount of
cost due within one year was $3,377,896.
NOTE 5 - ACCOUNTS RECEIVABLE, ACCOUNTS RECEIVABLE - RELATED MEDICAL PRACTICES,
NET AND CONCENTRATION OF CREDIT RISK - ACCOUTS RECEIVABLE
The Company's customers are concentrated in the 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.
Collection by the Company of its accounts receivable may be impaired by the
uncollectibility of PC's 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 52%,56% and 48%, respectively, of the PC's 2002, 2001 and 2000 net
revenues were derived from no-fault and personal injury protection claims. The
Company considers the aging of its accounts receivable in determining the amount
of allowance for doubtful accounts and contractual allowances. The Company takes
all legally available steps, including legally prescribed arbitrations, to
collect its receivables. Credit losses associated with the receivables are
provided for in the consolidated financial statements and have historically been
within management's expectations.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 5 - ACCOUNTS RECEIVABLE, ACCOUNTS RECEIVABLE - RELATED MEDICAL PRACTICES,
NET AND CONCENTRATION OF CREDIT RISK - ACCOUTS RECEIVABLE (Continued)
Net revenues from management and other fees charged to the related PC's
accounted for approximately 64%, 72% and 81%, of the consolidated net revenues
for the years ended June 30, 2002, 2001 and 2000, respectively.
Unaudited Financial Information of Unconsolidated Managed Medical Practices
---------------------------------------------------------------------------
Audited financial information related to the 24 unconsolidated medical practices
managed by the Company is not available. Substantially all of these medical
practice books and records are maintained on a cash basis and depreciate their
assets on an accelerated tax basis and have a December 31 year end.
Summarized unaudited income statement data for the years ended December 31,
2001, 2000 and 1999 related to the 24 unconsolidated medical practices managed
by the Company are as follows:
(000's omitted)
2001 2000 1999
------- ------- -------
Patient Revenue - Net $35,018 $36,266 $32,944
======= ======= =======
Income (loss) from Operations $ (293) $ 485 $ 509
======= ======= =======
Net Income (loss) $ (539) $ 281 $ 353
======= ======= =======
Credit risk with respect to the Company's accounts receivable related to product
sales and service and repair fees is limited due to the customer advances
received prior to the commencement of manufacturing work performed and the
billing of amounts to customers as sub-assemblies are completed. Service and
repair fees are billed on a monthly or quarterly basis and the Company does not
continue providing these services if accounts receivable become past due. The
Company controls credit risk with respect to accounts receivable from service
and repair fees through its credit evaluation process, credit limits, monitoring
procedures and reasonably short collection terms. The Company performs ongoing
credit authorizations before a product sales contract is entered into or service
and repair fees are provided. Bad debt expense has been within management's
expectations and, generally, the Company does not require collateral or other
security to support accounts receivable.
NOTE 6 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND CUSTOMER
ADVANCES
1) Information relating to uncompleted contracts as of June 30, 2002 and 2001 is
as follows:
As of June 30,
-------------------------
2002 2001
---------- ----------
Costs incurred on uncompleted
contracts $3,547,178 $2,248,706
Estimated earnings 1,252,425 560,558
---------- ----------
4,799,603 2,809,264
Less: Billings to date 4,761,909 1,392,000
---------- ----------
$ 37,694 $1,417,264
========== ==========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
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,
-------------------------
2002 2001
---------- ----------
Costs and estimated earnings in
excess of billings on
uncompleted contracts $1,152,606 $1,768,856
Billings in excess of costs and
estimated earnings on
uncompleted contracts 1,114,912 351,592
---------- ----------
$ 37,694 $1,417,264
========== ==========
2) Customer advances consist of the following:
As of June 30, 2002
-------------------------------------
Related
Total Parties Other
----------- ----------- -----------
Total advances $12,469,541 $ 5,957,409 $ 6,512,132
Less: Advances on contracts
under construction 4,761,909 2,557,409 2,204,500
----------- ----------- -----------
$ 7,707,632 $ 3,400,000 $ 4,307,632
=========== =========== ===========
As of June 30, 2001
-------------------------------------
Related
Total Parties Other
----------- ----------- -----------
Total advances $ 3,064,522 $ 1,492,160 $ 1,572,362
Less: Advances on contracts
under construction 1,392,000 1,085,000 307,000
----------- ----------- -----------
$ 1,672,522 $ 407,160 $ 1,265,362
=========== =========== ===========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 7 - INVENTORIES
Inventories included in the accompanying consolidated balance sheets consist of:
As of June 30,
-------------------------
2002 2001
---------- ----------
Purchased parts, components and
supplies $3,326,318 $3,049,879
Work-in-process 1,337,449 675,496
---------- ----------
$4,663,767 $3,725,375
========== ==========
NOTE 8 - INVESTMENT IN SALES-TYPE LEASES
During the year ended June 30, 2001, the Company entered into two lease
agreements, totalling $1,895,000, with related parties for MRI scanners, which
are considered sales-type leases. The leases are payable in 120 monthly
installments of $12,356 and $11,903, respectively, including interest at 10% and
8.5% per annum. The lessees can also elect to pay lump sums of $581,544 and
$580,149, respectively, at the end of the 60 months. If the lease term is
extended beyond 60 months, the lessee may elect to purchase the scanner at the
end of the second 60-month period for a purchase price of $1.
During the year ended June 30, 2001, the Company entered into a $1,050,000 lease
agreement with an outside party for an MRI scanner, which is considered
sales-type lease. The lease is payable in 75 monthly installments of $18,389
each, plus at the end of the 75-month lease, the lessee can elect to continue
the lease for an additional five years, at a monthly payment of $18,389,
including interest at 12.5% per annum, or pay a lump sum of $200,000.
During the year ended June 30, 2000, the Company entered into a $935,000 lease
agreement with a related party for an MRI scanner which is considered a
sales-type lease. The lease is payable in 120 monthly installments of $12,356,
including interest at 10% per annum. The lessee can also elect to pay a lump sum
of $581,544 at the end of 60 months. If the lease term is extended beyond 60
months, the lessee may elect to purchase the scanner at the end of the second
60-month period for a purchase price of $1.
During September 2002, two related entities that have lease agreements with the
Company obtained financing from a third party and utilized the proceeds to repay
amounts due to the Company. On September 30, 2002, the Company received a total
of $1,600,000 from these related entities as payment of a substantial portion of
the amounts due to the Company under the lease agreements.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 8 - INVESTMENT IN SALES-TYPE LEASES (Continued)
The Company's investment in sales-type leases as at June 30, 2002 and 2001 is as
follows:
As of June 30,
-------------------------
2002 2001
---------- ----------
Net minimum lease payments
Receivable $4,630,593 $5,029,225
Less: Unearned income 1,157,729 1,343,420
---------- ----------
Net Investment in Sales-type
Leases $3,472,864 $3,685,805
========== ==========
Current portion $1,916,325 $ 310,853
Non-current portion 1,556,539 3,374,952
---------- ----------
$3,472,864 $3,685,805
========== ==========
Future minimum lease payments are as follows:
Years Ended June 30:
-------------------
2003 $1,916,325
2004 211,956
2005 236,675
2006 248,731
2007 859,177
----------
$3,472,864
==========
NOTE 9 - PROPERTY AND EQUIPMENT
Property and equipment, at cost, less accumulated depreciation and amortization,
at June 30, 2002 and 2001, is comprised of:
As of June 30,
-------------------------
2002 2001
----------- -----------
Diagnostic equipment under lease $ 1,569,197 $ 1,263,181
Diagnostic equipment 5,695,488 4,485,217
Research, development and
demonstration equipment 8,447,906 7,916,447
Machinery and equipment 6,542,283 6,265,041
Furniture and fixtures 3,303,984 3,222,076
Equipment under leases 2,444,947 2,444,947
Leasehold improvements 4,261,640 3,185,611
----------- -----------
32,265,445 28,782,520
Less: Accumulated depreciation
and amortization 21,668,964 18,145,123
----------- -----------
$10,596,481 $10,637,397
=========== ===========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 9 - PROPERTY AND EQUIPMENT (Continued)
Depreciation and amortization of property and equipment for the years ended June
30, 2002, 2001 and 2000 was $3,579,702, $3,323,516 and $3,237,384, respectively.
The equipment under leases has a net book value of $1,295,537 and $1,684,083 at
June 30, 2002 and 2001, respectively.
NOTE 10 - OTHER INTANGIBLE ASSETS
Other intangible assets, net of accumulated amortization, at June 30, 2002 and
2001 are comprised of:
As of June 30,
-------------------------
2002 2001
---------- ----------
Capitalized software development
Costs $3,171,355 $2,315,744
Patents and copyrights 1,674,098 1,125,808
Deferred financing costs - 270,729
---------- ----------
4,845,453 3,712,281
Less: Accumulated amortization 2,196,835 1,858,775
---------- ----------
$2,648,618 $1,853,506
========== ==========
Information related to other intangible assets for the years ended June 30,
2002, 2001 and 2000 is as follows:
2002 2001 2000
---------- ---------- ----------
Balance - Beginning of Year $1,853,506 $1,035,924 $ 888,992
Amounts capitalized 1,403,902 1,025,533 361,323
Amortization (608,790) (207,951) (214,391)
---------- ---------- ----------
Balance - End of Year $2,648,618 $1,853,506 $1,035,924
========== ========== ==========
Amortization of capitalized software development costs for the years ended June
30, 2002, 2001 and 2000 was $271,837, $141,727 and $148,167, respectively.
The estimated amortization of patents and copyrights and capitalized software
development costs for the five years ending June 30, 2007 is as follows:
Capitalized
Software
For the Years Patents and Development
Ending June 30, Total Copyrights Costs
-------------- ---------- ------------ ------------
2003 $ 399,105 $ 102,776 $ 296,329
2004 399,105 102,776 296,329
2005 399,105 102,776 296,329
2006 326,840 102,776 224,064
2007 320,732 96,668 224,064
---------- ----------- -----------
$1,844,877 $ 507,772 $1,337,115
========== ========== ===========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
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 was paid 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).
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, 2002 and 2001.
Class C Common Stock
--------------------
On April 3, 1995, the stockholders 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.
Class A Non-Voting Preferred Stock
----------------------------------
On April 3, 1995, the stockholders 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.
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).
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 11 - CAPITAL STOCK (Continued)
Options
-------
The Company has stock option plans which provide for the awarding of incentive
and non-qualified stock options to employees, directors and consultants who may
contribute to the success of the Company. The options granted vest either
immediately or ratably over a period of time from the date of grant, typically
three or four years, at a price determined by the Board of Directors or a
committee of the Board of Directors, generally the fair value of the Company's
common stock at the date of grant. The options must be exercised within ten
years from the date of grant.
Stock option share activity and weighted average exercise prices under these
plans and grants for the years ended June 30, 2002, 2001 and 2000 were as
follows:
Weighted
Average
Number of Exercise
Shares Price
--------- ---------
Outstanding, July 1, 1999 387,735 $ 4.62
Granted 413,000 1.52
Exercised (374,000) 1.15
Forfeited - -
--------- ------
Outstanding, June 30, 2000 426,735 2.83
Granted 672,896 1.52
Exercised (24,000) 1.18
Forfeited - -
--------- ------
Outstanding, June 30, 2001 1,075,631 2.05
Granted - -
Exercised (13,868) 1.09
Forfeited - -
--------- ------
Outstanding, June 30, 2002 1,061,763 $ 2.06
========= ======
Exercisable at:
June 30, 2000 426,735 $ 2.83
June 30, 2001 402,735 $ 2.93
June 30, 2002 1,061,763 $ 2.06
The range of exercise prices for options outstanding as of June 30, 2002 was as
follows:
Weighted
Average
Range of Remaining
Exercise Number of Contractual
Price Options Life in Years
----------- --------- -------------
$0.75-$1.88 885,278 8
$3.00-$5.00 176,485 2
---------
1,061,763
=========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 11 - CAPITAL STOCK (Continued)
Options (Continued)
-------------------
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 of the common
stock of HMCA. Options to purchase 1,600,000 shares at an option price of $0.10
per share 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,
2002.
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, 2002.
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, 2002.
Stock option share activity and weighted average exercise prices under the HMCA
plans and grants for the three years ended June 30, 2002, 2001 and 2000 were as
follows:
Weighted
Average
Number of Exercise
Options Price
--------- ---------
Outstanding - June 30, 2002,
2001 and 2000 2,770,000 $ .48
========= =========
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,
2002, 2001 or 2000 as follows:
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 11 - CAPITAL STOCK (Continued)
Options (Continued)
-------------------
2002 2001 2000
------------- ------------ ------------
Net Loss:
As reported $(22,882,207) $(15,183,862) $(10,955,987)
Proforma $(23,549,156) $(15,183,862) $(11,059,237)
Loss Per Share:
As reported $(.36) $(0.26) $(0.20)
Proforma $(.37) $(0.26) $(0.20)
The fair value of the options granted under all plans is estimated at $0.52 and
$0.20, respectively, on the date of grant using the Black-Scholes option-pricing
model based on the following assumptions for the years ended June 30, 2001 and
2000:
2002 2001 2000
All Plans: ------ ------ ------
Dividend yield 0% 0% 0%
Expected volatility 92% 98% 33%
Expected life (years) 3% 3 3
The risk-free interest rates were based upon a rate with maturity equal to
expected term. U.S. Treasury instruments were utilized. The weighted average
interest rate amounted to 4.0%, 5.0% and 5.0%, respectively.
Stock Bonus Plans
-----------------
On June 1, 2002, October 1, 2000 and May 9, 1997, the Board of Directors adopted
Stock Bonus Plans. Under the terms of the Plans, 2,000,000, 5,000,000 and
5,000,000 shares of common stock, respectively, were available for issuance
under each plan. The stock bonuses may be awarded no later than May 31, 2012 for
the 2002 Plan, September 30, 2010 for the 2000 Plan and March 31, 2007 for the
1997 Plan.
During fiscal 2002, 2001 and 2000, 2,108,674, 3,001,060 and 2,148,429 shares,
respectively, were issued under the stock bonus plans.
Warrants
--------
In connection with the convertible debenture financing completed in May of 2001
(Note 13), the Company granted to the investor and the placement agent warrants
to purchase a total of 959,501 common shares at an exercise price of $1.801 per
share. The warrants are exercisable over a five-year period. The fair value of
the warrants was estimated at $1.14 on the date of grant using the Black-Scholes
pricing model. Separately, the Company issued to the investor callable warrants
to purchase a total of 2,000,000 shares of common stock at fluctuating prices
(Note 13).
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 12 - LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASES
Long-term debt, notes payable and capital leases consist of the following:
June 30,
--------------------------
2002 2001
------------ ------------
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. $ 157,837 $ 274,931
Promissory notes payable to a bank, collateralized
by $5.5 million certificate of deposit, requiring
monthly payments of interest only, at a variable
rate based on the bank's prime rate (4.56% at June
30, 2002) with payment of the entire principal due
on March 20, 2003. 5,500,000 5,500,000
Notes payable to the former shareholders of A&A
Services, Inc. The note called 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 (see
Modification of Notes Payable). 492,000 1,709,406
Note payable to the former shareholders 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. 219,477 497,199
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. 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 (see
Modification of Notes Payable). 274,083 1,277,770
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 12 - LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASES (Continued)
June 30,
--------------------------
2002 2001
------------ ------------
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. $ 17,867 $ 101,779
Note payable to the former shareholders of Dynamic
Health Care Management, Inc. The note called for
three annual payments of principal, including
interest at a rate of 6%, commencing August 20,
1999. The note was collateralized by all of the
assets of the acquired business and guaranteed by
FONAR. - 972,824
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. 223,087 399,881
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. The obligation has been recorded,
net of discount of $739,324, representing interest
imputed at a rate of 7.5% over two years. The
obligation is collateralized by all of the assets
of the acquired business and guaranteed by FONAR. 2,070,048 3,842,057
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 6.75% at June 30,
2002), commencing April 2000. The obligations
under each note are guaranteed by FONAR. 18,197 18,197
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 12 - LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASES (Continued)
June 30,
--------------------------
2002 2001
------------ ------------
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 6.75% at June 30,
2002), commencing March 2000. The obligations
under each note are guaranteed by FONAR. $ 127,189 $ 127,119
Capital lease requiring monthly payments of
$28,997, including interest at a rate of 9.95% per
annum through April 2004. The loan is
collateralized by the related equipment. 652,297 856,055
Note payable in monthly installments of $15,686,
including interest at a rate of 9.25% per annum
through February 2003. 121,242 289,697
Capital lease required monthly payments of
$12,595, including interest at a rate of 9%
through October 1, 2002. The loan was
collateralized by the related equipment. - 112,479
Capital lease required monthly payments of $8,468,
including interest at a rate of 8.63% through
April, 2006. The loan was collateralized by the
related equipment. 293,438 -
Other (including capital leases for property and
equipment) 442,742 764,755
Less: Current maturities ------------ ------------
10,609,504 16,744,149
9,776,339 6,634,863
------------ ------------
$ 833,165 $10,109,286
============ ============
The maturities of long-term debt over the next five years are as follows:
Years Ending
June 30,
------------
2003 $ 9,776,339
2004 656,545
2005 142,209
2006 34,411
-----------
$10,609,504
===========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 12 - LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASES (Continued)
Modification of Notes Payable
-----------------------------
Pursuant to a stock payment agreement consummated January 11, 2002 between the
Company and the former stockholder of A&A, these stockholders agreed to accept
payment of certain debt obligations in shares of the Company's common stock. The
promissory notes were initially issued by HMCA in partial payment of the
purchase price for the acquisition of A&A Services, Inc. Payments under the
notes were due quarterly through December 2002.
In order to induce the former A&A stockholders to accept payment in stock, and
in the manner provided in the stock payment agreement, the Company agreed to pay
a 15% premium on the note obligations and related accrued interest. On January
11, 2002, the Company issued 1,000,000 shares of common stock to each of them,
or 2,000,000 shares in the aggregate, at $1.27 per share, totalling $2,540,000.
The shares were issued in partial payment of four promissory notes. The total
remaining balance of principal and interest due under the notes was $766,083 as
of June 30, 2002. The debt conversion expense of $544,370, as a result of the
agreement has been recorded as an other expense item (and not an extraordinary
item) in the statement of operations for the year ended June 30, 2002, in
accordance with provisions of SFAS 145.
Under the terms of the stock payment agreement, the Company will issue shares
and the net proceeds from the sale of the shares will be applied to the
indebtedness. The quarterly payment due dates were waived, but the net proceeds
received by the selling stockholders must be sufficient to pay the full
indebtedness for each note, including the premium on the note, but the final
maturity dates of the notes is September 20, 2002 in the case of two of the
notes, and December 20, 2002 in the case of the other two of the notes. The
Company has not yet made the payments that were due on September 20, 2002. The
notes, including the premium, that are not satisfied in full by the time of its
final maturity date will accrue interest on the unpaid balance at the rate of 6%
per annum and the selling stockholders could require the difference to be paid
in cash.
In the event the net proceeds from the sale of the 2,000,000 shares issued to
them are not sufficient to pay the obligations in accordance with the agreement,
the Company will issue additional shares in an amount estimated to be sufficient
to pay the balance due. The Company has reserved the option not to issue more
than 5,000,000 shares in the aggregate.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 13 - CONVERTIBLE DEBENTURES
Pursuant to a securities purchase agreement, dated May 24, 2001, between the
Company and an investor group, the Company issued and sold to the investor
group:
- 4% convertible debentures due June 30, 2002 in the aggregate principal amount
of $4.5 million, convertible into shares of the Company's common stock at a
conversion price of $2.047 per share, subject to adjustment.
- Purchase warrants to the investor group to purchase an aggregate of 659,501
shares of the Company's common stock at an initial exercise price of $1.801 per
share, subject to adjustment, exercisable through May 24, 2006.
In connection with the issuance of the debentures, the Company paid a placement
fee in the amount of $157,500. In addition, the Company issued 300,000 purchase
warrants to the placement agent at the same terms as to the investor group.
The debentures were convertible at the option of the holder at a price of $2.047
per share. The debentures were payable in ten monthly installments of $450,000,
commencing October 1, 2001. At the option of the Company, the principal
installments could have been either paid in cash or shares of the Company's'
common stock, valued at 90% of the market value, as defined. By amendment, dated
October 25, 2001, however, the payments originally due October 1, 2001 and
November 1, 2001, were extended to November 5, 2001, and for those payments, the
stock was valued at the average of the two lowest closing bid prices for October
2001 less $0.25. During the year ended June 30, 2002, the Company repaid the
principal on the debentures of $4,500,000 and related accrued interest of
$132,022 through the issuance of 4,931,576 shares of the Company's common stock.
Separately, callable warrants were issued to purchase 2,000,000 shares of common
stock and have a variable exercise price. Subject to a maximum price of $6.00
per share and a minimum price of $2.00 per share, which is subject to
adjustment, pursuant to the terms of the warrants, the exercise price will be
equal to the average closing bid price of the Company's common stock for the
full calendar month preceding the date of exercise. The exercise period extends
to May 24, 2004.
The Company had the option of redeeming up to 200,000 callable warrants per
month at a price of $0.01 per underlying warrant share, if the average closing
bid price of its common stock is greater than 115% of the warrant price in
effect for five consecutive trading days in any calendar month.
During the month of June 2002, the investor exercised 1,000,000 callable
warrants at an exercise price of $1.50 per share for total proceeds received by
the Company of $1,500,000. In addition, during August 2002, the investor
exercised an additional 1,000,000 callable warrants at an exercise price of
$1.125 per share for a total proceeds received by the Company of $1,125,000.
The purchase warrants provide for proportionate adjustments in the event of
stock splits, stock dividends and reverse stock splits. In addition, exercise
price will be reduced, with certain specified exceptions, if the Company issues
shares at lower prices than the warrant exercise price, or less than market
price, for its common stock.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 14 - INCOME TAXES
The provision for income taxes consists entirely of current state and local
income taxes.
A reconciliation of the federal statutory income tax rate to the Company's
effective tax rate as reported is as follows:
2002 2001 2000
------ ------ ------
Taxes at federal
statutory rate (34.0)% (34.0)% (34.0)%
State and local income
taxes, net of federal
benefit .1 0.3 0.4
Permanent differences .6 0.7 1.1
Increase in the valuation
allowance against
deferred tax assets 33.4 33.3 32.9
------ ------ ------
Effective income tax rate .1% 0.3% 0.4%
====== ====== ======
As of June 30, 2002, the Company has net operating loss ("NOL") carryforwards of
approximately $78,884,000 that will be available to offset future taxable
income. The utilization of certain of the NOL's is limited pursuant to Section
1502 of the Internal Revenue Code. The expiration dates of NOL carryforwards are
as follows:
June 30,
--------
2007 $ 764,000
2008 527,000
2009 145,000
2010 32,000
2011 1,037,000
2012 5,867,000
2013 867,000
2019 15,983,000
2020 18,756,000
2021 17,604,000
2022 17,302,000
-----------
$78,884,000
===========
The Company has, for federal income tax purposes, research and development tax
credit carryforwards aggregating $2,603,616, which are accounted for under the
flow-through method. The tax credit carryforwards expire as follows:
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 14 - INCOME TAXES (Continued)
June 30:
-------
2003 $ 258,200
2004 172,207
2012 70,145
2013 402,590
2019 432,195
2020 378,193
2021 448,221
2023 441,865
-----------
$2,603,616
===========
In addition, for New York State income tax purposes, the Company has tax credit
carryforwards aggregating approximately $1,070,000, which are accounted for
under the flow-through method. The tax credit carryforwards expire during the
years 2006 to 2022.
The Company has charitable contributions of approximately $250,000, which expire
during the years 2003 to 2007.
Significant components of the Company's deferred tax assets and liabilities at
June 30, 2002 and 2001 are as follows:
2002 2001
----------- -----------
Deferred tax assets:
Allowance for doubtful accounts $ 998,302 $ 1,045,768
Non-deductible accruals 690,684 772,073
Net operating carryforwards 31,945,236 20,675,405
Tax credits 3,850,578 3,211,726
Inventory capitalization for
tax purposes 57,407 84,000
Impairment of asset 1,880,000 -
Charitable contributions 42,376 87,784
----------- -----------
39,464,583 25,876,756
Valuation allowance (37,816,617) (24,481,237)
----------- -----------
Net deferred tax assets 1,647,966 1,395,519
----------- -----------
Deferred tax liabilities:
Fixed assets and depreciation (940,393) (974,462)
Capitalized software costs (707,573) (421,057)
----------- -----------
Gross deferred tax liabilities (1,647,966) (1,395,519)
----------- -----------
Net deferred tax liabilities $ - $ -
=========== ===========
The net change in the valuation allowance for deferred tax assets increased by
approximately $13,335,400 and $10,557,000, respectively, for the years ended
June 30, 2002 and 2001.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 15 - OTHER CURRENT LIABILITIES
Included in other current liabilities are the following:
2002 2001
----------- ----------
Deferred revenue - license fee $ 2,340,000 $2,340,000
Unearned revenue on service contracts 817,110 906,602
Accrued bonuses 244,924 397,012
Accrued payroll taxes 45,697 250,475
Accrued interest 48,234 140,309
Accrued salaries and commissions 784,694 764,146
Accrued professional fees 285,000 224,882
Litigation judgements 289,189 268,091
Excise and sales taxes 2,069,291 2,655,678
Other 632,060 568,562
----------- ----------
$ 7,556,199 $8,515,757
=========== ==========
NOTE 16 - COMMITMENTS AND CONTINGENCIES
Leases
------
The Company rents its operating facilities and certain equipment pursuant to
operating lease agreements expiring at various dates through February 2009. The
leases for certain facilities contain escalation clauses relating to increases
in real property taxes as well as certain maintenance costs.
Future minimum lease commitments consisted of the following at June 30, 2002:
Facilities
And
Equipment Equipment
Year Ending (Operating (Capital
June 30, Leases) Leases)
----------- ----------- ------------
2003 $ 3,254,819 $ 805,939
2004 2,595,065 517,124
2005 2,256,551 150,372
2006 2,085,936 50,810
2007 1,626,799 -
Thereafter 3,836,997 -
----------- ------------
Total minimum obligations $15,656,167 1,524,245
===========
Less: Amount representing
interest (163,019)
------------
Present value of net minimum
lease obligations $ 1,361,226
============
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 16 - COMMITMENTS AND CONTINGENCIES (Continued)
Rent expense for operating leases approximated $3,502,254, $3,307,000 and
$3,235,000 for the three years ended June 30, 2002, 2001 and 2000, respectively.
Contingent Consideration
------------------------
Contingent consideration is payable to the former shareholders of A&A, if
operating income, as defined for the acquired business, exceeds $2.3 million in
any of the five years following the closing as follows: in each year, 75% of
operating income, as defined, between $2.3 million and $2.8 million; 50% of
operating income, as defined, between $2.8 million and $3.5 million, and 25% of
operating income, as defined, in excess of $3.5 million. The contingent
additional purchase price is not determinable as of June 30, 2002 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 value of the management agreement, subject to amortization over the
stated period. No additional payments were due under the earnout provision for
the years ended June 30, 2002, 2001 and 2000.
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 MRI
imaging apparatus. Royalty expense charged to operations for the years ended
June 30, 2002, 2001 and 2000 approximated $69,572, $33,000 and $36,000,
respectively.
The Company is self-insured with respect to product liability. During the fiscal
years ended June 30, 2002, 2001 and 2000, no material claims arose.
In July 2000, the Company entered into a license agreement, pursuant to which it
licensed certain of its intellectual assets on a non-exclusive basis.
Remuneration payable to the Company under this agreement is $11.7 million, of
which $9.0 million was received in September of 2000 and $2.7 million in January
of 2001. The license fee of $11.7 million is being recognized as income ratably
over the five-year period ending June 30, 2005.
Employment Agreements
---------------------
On August 20, 1998, a wholly-owned subsidiary of HMCA entered into two
employment agreements with the former owners of Dynamic. Each agreement provides
for base compensation of $150,000 during the first year with annual cost of
living increases for the first five years. Each agreement also provides for an
increase in base compensation of $100,000 per annum commencing in the sixth
year. In addition, the agreements provide for bonus compensation contingent upon
pretax earnings of Dynamic. The employment agreements expire ten years from
August 20, 1998.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 16 - COMMITMENTS AND CONTINGENCIES (Continued)
Employment Agreements (Continued)
---------------------------------
Minimum annual payments, excluding bonuses, incentives and cost of living
increases under these contracts are as follows:
Years Ending
June 30,
------------
2003 $ 300,000
2004 466,666
2005 500,000
2006 500,000
2007 500,000
Thereafter 583,334
----------
$2,850,000
==========
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, 2002, 2001 and 2000.
The stockholders of the Company approved the 2000 Employee Stock Purchase Plan
("ESPP") at the Company's annual stockholders' meeting in April 2000. The ESPP
provides for eligible employees to acquire common stock of the Company at a
discount, not to exceed 15%. The Plan has not been put into effect as of June
30, 2002.
NOTE 17 - OTHER INCOME (EXPENSE) AND SUPPLEMENTARY PROFIT AND LOSS DATA
Other income (expense) consists of:
For the Years Ended June 30,
----------------------------------------
2002 2001 2000
------------ ------------ ------------
Other income $ (19,133) $ 101,707 $ 93,425
Gain on sale of subsidiary/
partnership interest - 712,781 1,021,950
Gain on settlement of
various legal disputes and
other claims - - 3,540,000
Litigation settlement (50,000) - -
Gain on sale of property - 150,000 -
------------ ------------ ------------
$ (69,133) $ 964,488 $ 4,655,375
============ ============ ============
In October 2000, the Company sold its interest in the partnership of AMD
Southfield Michigan Limited Partnership for $750,000. AMD Southfield operates an
MRI Scanning Center in Michigan. The Company recognized a pre-tax gain of
$750,000.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 17 - OTHER INCOME (EXPENSE) AND SUPPLEMENTARY PROFIT AND LOSS DATA
(CONTINUED)
In June 2001, HMCA sold the stock of its wholly-owned Florida multi-specialty
practice subsidiaries, Medical Specialties, Inc. and Diagnostic Services, Inc.
for a promissory note for $50,000, resulting in a loss of $37,000.
Advertising expense approximated $2,082,000, $2,022,000 and $2,140,000 for the
years ended June 30, 2002, 2001 and 2000, respectively. Maintenance and repair
expenses totalled approximately $748,000, $905,000 and $758,000 for the years
ended June 30, 2002, 2001 and 2000, respectively. Royalty expenses approximated
$69,572, $33,000 and $36,000 for the years ended June 30, 2002, 2001 and 2000,
respectively.
NOTE 18 - SUPPLEMENTAL CASH FLOW INFORMATION
During the years ended June 30, 2002, 2001 and 2000, the Company paid $255,230,
$1,261,379 and $1,596,931 for interest, respectively. During the years ended
June 30, 2002, 2001 and 2000, the Company paid $32,420, $39,997 and $20,144 for
income taxes, respectively.
Non-Cash Transactions
---------------------
During the year ended June 30, 2002:
a) The Company issued 2,045,000 shares of its common stock, valued at
$2,602,596, in connection with the repayment of notes payable.
b) The Company acquired equipment of $357,056 under capital lease obligations.
c) The Company issued 98,000 shares of its common stock, valued at $116,623,
in connection with the acquisition of equipment.
d) The Company issued 3,832,073 shares of its common stock in connection with
the repayment of $4,500,000 of convertible debentures.
During the year ended June 30, 2001:
a) Property and equipment, costing $636,504, was acquired under a capital
lease obligation.
b) The Company issued 20,000 shares of its common stock, valued at $28,438, in
connection with the repayment of note payable of $115,000.
c) The Company acquired equipment of $176,480 under equipment notes payable
obligations.
During the year ended June 30, 2000:
a) Property and equipment, costing $215,086, was acquired under a capital
lease obligation.
b) In connection with the sale of its foreign subsidiary, the Company issued a
note payable aggregating $115,000.
c) 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.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 19 - ADVANCES AND NOTES TO RELATED PARTIES
Effective December 1, 1993, Albany Magnetic Imaging Center, P.C. ("Albany
Center"), a Georgia professional corporation, of which Raymond V. Damadian is
the sole stockholder, purchased the scanner being utilized at its site from the
Company for a purchase price of $1,128,844. In June of 1997, the payment terms
for the outstanding balance of $344,766 were restructured to provide for 60
equal monthly payments (including interest at the rate of 10% per annum) of
$7,325 each, commencing July 1997. The balance due under this note as of June
30, 2002 was $89,951.
During 1994, Melville MRI, P.C. ("Melville Center"), a New York professional
corporation, of which Raymond V. Damadian is the sole shareholder, director and
president, purchased an MRI scanner from the Company for a purchase price of
$1,011,431. Of the purchase price, $900,000 is to be paid by the assumption and
payment of the Company's indebtedness to the lender secured by the scanner,
pursuant to a note, bearing interest at 14% per annum, and providing for 60
monthly payments of $20,700 each. The remaining $111,431 of the purchase price
was to be paid concurrently with the payments to the lender. The payment terms
for the principal balance, plus accrued interest (in the aggregate amount of
$139,290), were restructured to provide for 60 equal monthly payments (including
interest at the rate of 10% per annum) of $2,959.50 each, commencing July 1998.
In fiscal 2001, the balance outstanding on the obligation was paid in full by
the Company as guarantor of the indebtedness due to the lender. This resulted in
a balance of $893,606 owing to the Company by the Melville Center. The $2,959.50
monthly payment to the Company has been increased by an additional principal
payment of $10,000 per month to be applied toward the balance due. The balance
due under this note as of June 30, 2002 was $713,614.
Canarsie MRI Associates ("Canarsie"), a joint venture partnership, of which MRI
Specialties, Inc. ("Specialties") is an owner, is a party to a service agreement
for its scanner with the Company at an annual fee of $70,000. In addition,
during fiscal 2001, Canarsie entered into an agreement to purchase a QUAD MRI
scanner from the Company, recognizing on a percentage-of-computation basis
revenue of $636,121. The agreement provides for a purchase price of $850,000,
payable as follows: (1) $400,000 downpayment (received April 2001); (2) $450,000
in 84 equal monthly installments, including interest at 6%, pursuant to a
promissory note to be executed upon acceptance of the scanner. Timothy Damadian,
the son of Raymond V. Damadian, is the sole stockholder, Director and President
of Specialties. The balance due under this note as of June 30, 2002 was
$419,275.
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.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 20 - SEGMENT AND RELATED INFORMATION (CONTINUED)
The Company operates in two industry segments - manufacturing and the servicing
of medical equipment and management of physician practices, including diagnostic
imaging services.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. All intersegment sales are
market-based. The Company evaluates performance based on income or loss from
operations.
Summarized financial information concerning the Company's reportable segments is
shown in the following table:
Physician
Medical Management
Equipment Services Totals
------------- ------------- ------------
Fiscal 2002:
Net revenues from external
customers $ 16,153,131 $ 28,525,439 $ 44,678,570
Intersegment net revenues $ 1,050,599 $ - $ 1,050,599
Loss on impairment of management
agreements $ - $ (4,700,000) $ (4,700,000)
Operating loss $(15,433,351) $ (4,290,752) $(19,724,103)
Depreciation and amortization $ 2,727,794 $ 2,679,390 $ 5,407,184
Compensatory element of
stock issuances $ 1,715,678 $ 2,996,485 $ 4,712,163
Total identifiable assets $ 40,179,100 $ 32,650,687 $ 72,829,787
Capital expenditures $ 2,107,509 $ 1,470,743 $ 3,578,252
Fiscal 2001:
Net revenues from external
customers $ 10,497,809 $ 31,775,492 $ 42,273,301
Intersegment net revenues $ 1,039,499 $ - $ 1,039,499
Operating (loss) income $(17,205,614) $ 990,997 $(16,214,617)
Depreciation and amortization $ 2,203,591 $ 2,509,176 $ 4,712,767
Compensatory element of
stock issuances $ 1,684,136 $ 2,360,690 $ 4,044,826
Total identifiable assets $ 45,938,960 $ 38,961,453 $ 84,900,413
Capital expenditures $ 3,039,866 $ 1,082,385 $ 4,122,251
Fiscal 2000:
Net revenues from external
customers $ 5,971,064 $ 30,183,733 $ 36,154,797
Intersegment net revenues $ 1,227,075 $ - $ 1,227,075
Operating (loss) income $(17,984,534) $ 2,477,962 $(15,506,572)
Depreciation and amortization $ 1,817,547 $ 2,638,529 $ 4,456,076
Compensatory element of
stock issuances $ 926,421 $ 1,003,285 $ 1,929,706
Total identifiable assets $ 43,045,691 $ 41,367,346 $ 84,413,037
Capital expenditures $ 2,081,551 $ 940,795 $ 3,022,346
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 20 - SEGMENT AND RELATED INFORMATION (Continued)
Export Product Sales
--------------------
The Company's areas of operations are principally in the United States. The
Company had export sales of medical equipment amounting to 25.8% and 63.0% of
product sales revenues to third parties for the years ended June 30, 2002, and
2000, respectively. There were no foreign product sales during the year-ended
June 30, 2001.
The foreign product sales were made to customers in the following locations:
2002 2000
------ ----
Scotland 25.8% -%
Spain - 63.0
------ ----
25.8% 63.0%
====== ====
Foreign Service and Repair Fees
-------------------------------
The Company's areas of service and repair are principally in the United States.
The Company had foreign revenues of service and repair of medical equipment
amounting to 27.7%, 33.7% and 46.3% of consolidated net service and repair fees
for the years ended June 30, 2002, 2001 and 2000, respectively. The foreign
service and repair fees were provided principally to the following locations:
2002 2001 2000
------ ------ ------
Korea 9.3 % 11.9% 14.9%
Spain 3.7 .3 -
Mexico 3.0 3.5 3.8
Puerto Rico 3.5 4.1 4.9
Saudi Arabia 4.5 8.4 4.7
Poland 3.7 4.0 14.9
India - 1.5 3.1
----- ------ ------
27.7% 33.7% 46.3%
===== ====== ======
The Company does not have any material assets outside of the United States.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 21 - QUARTERLY FINANCIAL DATA (UNAUDITED)
(000's omitted, except per share data)
September 30, December 31, March 31, June 30,
Quarter Ended: 2001 2001 2002 2002
-------------- ------------- ------------ ---------- ---------
Total Revenues - Net $ 10,153 $ 9,766 $ 10,953 $ 13,807
Total Costs and Expenses 13,535 13,797 14,804 22,267
Loss from Operations (3,382) (4,031) (3,851) (8,460)
Net Loss (3,847) (4,710) (5,050) (9,275)
Basic and Diluted Net
Loss Per Share $ (0.06) $ (0.08) $ (0.08) $ (0.14)
(000's omitted, except per share data)
September 30, December 31, March 31, June 30,
Quarter Ended: 2001 2001 2002 2002
-------------- ------------- ------------ ---------- ---------
Total Revenues - Net $ 9,091 $ 9,946 $ 11,978 $ 11,258
Total Costs and Expenses 13,090 13,904 14,804 16,690
Loss from Operations (3,999) (3,958) (2,826) (5,432)
Net Loss (3,907) (3,014) (2,801) (5,462)
Basic and Diluted Net
Loss Per Share $ (0.07) $ (0.05) $ (0.05) $ (0.09)
NOTE 22 - SUBSEQUENT EVENT
During the quarter ended September 30, 2002, the Company granted approximately
1,900,000 incentive stock options to various employees which are exercisable at
$1.125 per share and expire ten years from the date of grant.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Effective as of September 10, 2002, the Company, as a result of the recent
merger of several of the partners of Grassi & Co., CPAs, P.C. into Marcum &
Kliegman LLP, in order to retain the services of the individual partners and
staff accountants who have been serving the Company as its independent
certifying public accountants since fiscal 1990, the Company dismissed Grassi &
Co. and engaged Marcum & Kliegman. There were no disagreements with Grassi & Co.
or other matters requiring disclosure under Regulation S-K, Item 304(b). This
change in accountants was previously reported in the Company's 8-K filed on
September 16, 2002, as amended by the 8-K/A filed on October 2, 2002.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Directors serve from the date of their election until the next annual
meeting of stockholders and until their successors are elected and qualify. With
the exception of Dr. Raymond V. Damadian, who does not receive any fees for
serving as a director, each director receives $20,000 per annum for his or her
service as a director. Officers serve at the discretion of the Board of
Directors.
The officers and directors of the Company are set forth below:
Raymond V. Damadian, M.D. 66 President, Treasurer,
Chairman of the Board
and a Director
David B. Terry 55 Vice President and Secretary
Claudette J.V. Chan 65 Director
Robert J. Janoff 75 Director
Charles N. O'Data 66 Director
Robert Djerejian 70 Director
Raymond V. Damadian, M.D. has been the Chairman of the Board and President
of FONAR since its inception and Treasurer since February, 2001. Dr. Damadian
was employed by the State University of New York, Downstate Medical Center, New
York, as an Associate Professor of Biophysics from 1967 until September 1979.
Dr. Damadian received an M.D. degree in 1960 from Albert Einstein College of
Medicine, New York, and a B.S. degree in mathematics from the University of
Wisconsin in 1956. In addition, Dr. Damadian conducted post-graduate work at
Harvard University, where he studied extensively in the fields of physics,
mathematics and electronics. Dr. Damadian is the author of numerous articles and
books on the nuclear magnetic resonance effect in human tissue, which is the
theoretical basis for the FONAR MRI scanners. Dr. Damadian is a 1988 recipient
of the National Medal of Technology and in 1989 was inducted into the National
Inventors Hall of Fame, for his contributions in conceiving and developing the
application of magnetic resonance technology to medical applications including
whole body scanning and diagnostic imaging. Dr. Damadian is the President,
Treasurer and director of HMCA.
David B. Terry is the Vice President of Administration and Secretary of the
Company. Mr. Terry has been serving as Vice President since December 1998 and as
Secretary since May, 1990. Previously, he served as Treasurer from May 1990 to
December, 1998, as Secretary from July 1978 through June 1987 and as Treasurer
from August 1981 through June 1987. From July 1978 through June 1987, he was
also a Director of the Company. Between July 1987 and January 1990, Mr. Terry
was a co-owner and actively engaged in the business of Carman-Terry Realty, a
real estate brokerage firm. In January 1990, Mr. Terry resumed his employment
with the Company. Mr. Terry is the brother-in-law of Raymond V. Damadian and
uncle of Timothy R. Damadian.
Claudette J.V. Chan has been a Director of FONAR since October 1987. Mrs.
Chan was employed from 1992 through 1997 by Raymond V. Damadian, M.D. MR
Scanning Centers Management Company and since 1997 by HMCA, as "site inspector,"
in which capacity she is responsible for supervising and implementing standard
procedures and policies for MRI scanning centers. From 1989 to 1994 Mrs. Chan
was employed by St. Matthew's and St. Timothy's Neighborhood Center, Inc., as
the director of volunteers in the "Meals on Wheels" program, a program which
cares for the elderly. In approximately 1983, Mrs. Chan formed the Claudette
Penot Collection, a retail mail-order business specializing in women's apparel
and gifts, of which she was the President until she stopped operating the
business in approximately 1989. Mrs. Chan practiced and taught in the field of
nursing until 1973, when her son was born. She received a bachelor of science
degree in nursing from Cornell University in 1960. Mrs. Chan is the sister of
Raymond V. Damadian and aunt of Timothy R. Damadian.
Robert J. Janoff has been a Director of FONAR since February, 1989. Mr.
Janoff has been a self-employed New York State licensed private investigator for
more than thirty-five years and was a Senior Adjustor in Empire Insurance Group
for more than 15 years until retiring from that position on July 1, 1997. Mr.
Janoff also served, from June 1985 to June 1991, as President of Action Data
Management Strategies, Ltd., a supplier of computer programs for use by
insurance companies. Mr. Janoff is a member of the Board of Directors of Harmony
Heights of Oyster Bay, New York, which is a nonprofit residential school for
girls with learning disabilities.
Charles N. O'Data has been a Director of FONAR since February, 1998. From
1968 to 1997, Mr. O'Data was the Vice President for Development for Geneva
College, a liberal arts college located in western Pennsylvania. In that
capacity, he acted as the College's chief investment officer. His
responsibilities included management of the College's endowment fund and fund
raising. In July 1997, Mr. O'Data retired from Geneva College after 36 years of
service to assume a position of National Sales Executive for SC Johnson
Company's Professional Markets Group (a unit of SC Johnson Wax), and specialized
in healthcare and education sales, a position he held until the spring of 1999.
In his capacity with SC Johnson he was responsible for sales to the nation's
three largest Group Purchasing Organizations which included some 4,000
hospitals. Mr. O'Data presently acts an independent financial consultant to
various entities, including Pittsburgh National Bank. Mr. O'Data served on the
board of the Medical Center, Beaver, Pennsylvania (now a part of Heritage Valley
Health System), a 500 bed acute care facility, for 22 years, three as its Chair.
Mr. O'Data also served on the board of the Hospital Council of Western
Pennsylvania, a shared-services and group purchasing organization covering seven
states. He founded The Beaver County Foundation, a Community Foundation, in
1992, and serves as its President. Mr. O'Data is listed as a finance associate
in the Middle States Association, Commission on Higher Education. The commission
is the formal accrediting body for higher education in the eastern region of the
country. In this capacity he valuates the financial aspects of educational
organizations. Mr. O'Data is a graduate of Geneva College, where he received a
B.S. degree in Economics in 1958.
Robert Djerejian, has been a Director for Fonar since June, 2002. Since
1996 he has served as a senior consultant for Haines, Lundberg & Waehler
International, an architecture, design and engineering firm, which among other
specialties designs hospitals and laboratories. Prior to that time he was the
senior managing partner of the firm. Mr. Djerejian serves on the Board of
Trustees of Pratt Institute, where he is also VIce Chairman of the Executive
Committee and on the Board of Directors of the Delaware College of Art and
Design, of which he was one of the founding directors. He is a graduate of Pratt
Institute, where he received a B.A. in Architecture in 1955.
ITEM 11. EXECUTIVE COMPENSATION.
With the exception of the Chief Executive Officer, the compensation of the
Company's executive officers is based on a combination of salary and bonuses
based on performance. The Chief Executive Officer's compensation consists only
of a salary which has remained constant for more than the past three fiscal
years.
The Board of Directors does not have a compensation Committee: Dr. Raymond
V. Damadian, President, Chief Executive Officer and Chairman of the Board, is
the only executive officer who is a member of the Board of Directors. Dr.
Damadian participates in the determination of executive compensation for the
Company's officers.
The Board of Directors has established an audit committee. The members of
the committee are Robert J. Janoff, Charles N. O'Data and Robert Djerejian.
There is set forth in the following Summary Compensation Table the
compensation provided by the Company during fiscal 2002 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 2002.
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. 2002 $86,799.96 - - - - - -
Damadian, 2001 $86,799.96 - - - - - -
CEO 2000 $86,799.97 - - - - - -
--------- ---- ---------- ----- ------- ---------- ------- ------- -------
II. OPTION/SAR GRANTS IN LAST FISCAL YEAR
Potential
Realizable
Value at Assumed
Annual Rates of Alternative
Stock Price to (f) and
Appreciation for (g): Grant
Individual Grants Option Term Date Value
----------------------------------------------------------- ---------------- -----------
(a) (b) (c) (d) (e) (f) (g) (h)
% of Total
Options/
SARs
Options/ Granted to Excercise
SARs Employees or Grant Date
Granted in Fiscal Base Price Expiration Present
Name (#) Year ($/Sh) Date 5% ($) 10% ($) Value $
---------- -------- ---------- ---------- ---------- ------- ------- ----------
Raymond V.
Damadian, 0 - - - - - -
President
& CEO
III. OPTION/SAR EXERCISES AND YEAR-END VALUE TABLE
Aggregated Options/SAR Exercises in Last Fiscal Year 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
Equity Compensation Plan Information as of June 30, 2002
(a) (b) (c)
Plan category Number of Weighted- Number of securities
securities average remaining available
to be issued exercise price for future issuance
upon exercise of outstanding under equity
of outstanding options, compensation plans
options, warrants warrants (excluding securities
and rights and rights reflected in column (a)
----------------- -------------- -----------------------
Equity compensation
plans not approved
by security holders 1,061,763 $2.06 3,900,369
Equity compensation
plans not approved
by security holders - N/A 1,701,016
----------------- -------------- -----------------------
Total 1,061,763 $2.06 5,601,385
================= ============== ====================
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, 2002, no options to purchase 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, 2002, options to
purchase 3,900,369 shares of Common Stock of FONAR were available for future
grant.
FONAR's 2000 Stock Bonus Plan, adopted on October 1, 2000, permits FONAR to
issue on aggregate of 5,000,000 shares of Common Stock of FONAR as bonus or
compensation. FONAR selects the persons to whom bonus stock will be issued, the
number of shares to be awarded and such other terms and conditions as it deems
advisable. The 2000 Stock Bonus Plan will terminate on September 30, 2010. As of
June 30, 2002, no shares of Common Stock of FONAR were available for future
grant.
Fonar's 2002 Incentive Stock Option Plan, adopted on July 1, 2002, is
intended to qualify as an incentive stock option plan under Section 422A of the
Internal Revenue Code of 1954, as amended. The 2002 Incentive Stock Option Plan
permits the issuance of stock options covering an aggregate of 2,500,000 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 2002 Stock Option Plan will
terminate on June 30, 2012.
Fonar's 2002 Stock Bonus Plan, adopted on June 1, 2002, permits Fonar to
issue an aggregate 2,000,000 shares of Common Stock of Fonar as bonus or
compensation. Fonar selects the persons to whom bonus stock will be issued, the
number of shares to be awarded and such other terms and conditions as it deems
advisable. The 2002 Stock Bonus Plan will terminate on May 31, 2012. As of June
30, 2002 1,701,061 shares of Common Stock of Fonar were available for future
grant under the Plan.
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, 2002, 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, 2002, 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, 2002, options to purchase
100,000 shares of Common Stock were available for future grant.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the number and percentage of shares of the
Company's securities held by each director, by each person known by the Company
to own in excess of five percent of the Company's voting securities and by all
officers and directors as a group as of September 20, 2002.
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 3.38%
Class C Stock 9,561,174 99.98%
Class A Preferred 477,328 6.09%
Claudette Chan
Director
Common Stock 2,648 *
Class A Preferred 800 *
Robert J. Janoff
Director
Common Stock 50,000 *
Class A Preferred 1,999 *
Charles N. O'Data
Director
Common Stock 700 *
All Officers and Directors
as a Group (5 persons) (2)
(3)
Common Stock 2,548,220 3.46%
Class C Stock 9,561,174 99.98%
Class A Preferred 480,165 6.13%
--------------------------
* Less than one percent
1. Address provided for each beneficial owner owning more than five percent of
the voting securities of the Company.
2. Includes 101 shares of the Company's Common Stock and 19 shares of the
Company's Class A Non-voting Preferred Stock held by an officer jointly
with his wife and 192 shares of the Company's Common Stock and 38 shares of
the Company's Class A Non-voting Preferred Stock held in trust by an
officer for his children.
3. Includes options to purchase 6,286 shares of Common Stock held by an
officer.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Background.
On April 7, 1989, at a time when the Company lacked both the financing and
working capital to establish its own centers, Donna Damadian, the wife of
Raymond V. Damadian, M.D., Chairman and President of the Company, purchased from
FONAR a scanner for a purchase price of $1,508,000 (the price paid by FONAR's
customers for like equipment). $1.2 million was paid in cash, providing a much
needed cash infusion for the Company, and the balance was paid over time with
interest pursuant to a promissory note of even date. The scanner was leased to
Macon Magnetic Resonance Imaging, P.C., a Georgia professional corporation
wholly-owned by, and of which Dr. Damadian is, the President. Thereafter,
between 1990 and 1996, Raymond V. Damadian, M.D. MRI Scanning Centers Management
Company, a Delaware corporation of which Dr. Damadian was the sole stockholder,
director and President ("RVDC"), purchased and leased scanners from FONAR to
establish a network of professional corporations operating MRI scanning centers
("Centers"), including the Macon Center, in New York, Florida, Georgia and other
locations. Dr. Damadian was the owner, director and President of each of these
professional corporations. RVDC provided the necessary management and the
scanners to the Centers, although in certain situations, a Center would acquire
the scanner directly from FONAR.
ACQUISITION OF RVDC.
Effective June 30, 1997, FONAR's wholly-owned subsidiary, Health Management
Corporation of America ("HMCA"), formerly known as U.S. Health Management
Corporation, acquired RVDC by purchasing all of the issued and outstanding
shares of RVDC from Dr. Damadian for 10,000 shares of the Common Stock of FONAR.
The transactions can be rescinded by Dr. Damadian, however, in the event of a
change of control in FONAR or the bankruptcy of FONAR. There is no time limit on
the right to rescind. In connection with the transaction, FONAR granted RVDC a
nonexclusive royalty free license to FONAR's patents and software. These
licenses may be terminated by FONAR in the event of the bankruptcy of RVDC or a
change in control of RVDC.
In connection with and immediately prior to the sale of RVDC to HMCA,
certain leases and sales of scanners to RVDC were terminated. The scanners were
then leased directly to the Centers at which they were installed pursuant to new
scanner leases between HMCA and the Centers.
NEW AGREEMENTS WITH HMCA.
Effective July 1, 1997, immediately following the effective date of the
acquisition of RVDC by HMCA, all previous management arrangements between RVDC
and the Centers were terminated and new management agreements were entered into
by the Centers and HMCA.
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, 13
MRI Centers, both those previously managed by RVDC and additional Centers opened
after the acquisition, have management agreements with HMCA.
In addition, HMCA is providing the MRI scanners used at 2 of the 13 Centers
pursuant to scanner leases.
The fees to HMCA under both the management agreements and the scanner
leases are on a per scan basis.
During the fiscal years ended June 30, 2002 and June 30, 2001 the net
revenues received by HMCA from the MRI Centers owned by Dr. Damadian were
approximately $15.5 million and $14.8 million respectively.
Effective December 1, 1993, one of the Centers, Albany Magnetic Resonance
Imaging, P.C. (the "Albany Center"), a Georgia professional corporation of which
Raymond V. Damadian is the sole shareholder, director and President, purchased
the scanner being utilized at its site from the Company for a purchase price of
$1,128,844, which in Fonar's opinion represented a fair market price based on
sales of like equipment by Fonar to its customers. Of the purchase price,
$574,077 was paid by the assumption and payment of the Company's indebtedness to
the lender secured by the scanner. Such indebtedness to the lender was retired
pursuant to a new equipment finance lease between the lender and the Albany
Center, guaranteed by the Company, providing for 18 monthly payments of $35,000
each. Following payment of the lease, the remaining $554,767 of the purchase
price due to the Company was required to be paid pursuant to a promissory note,
with interest at 10% per annum, over an 18 month term (17 payments of $35,000
each and one final payment of $2,454.08). In June, 1997, the payment terms for
the outstanding balance of $344,766 were restructured to provide for 60 equal
monthly payments (including interest at the rate of 10% per annum) of $7,325.27
each commencing July, 1997. The Albany Center has been closed and payments are
in arrears. As of June 30, 2002, $102,553.78 in principal and interest
($89,951.41 in principal) were owed by the Albany Center to Fonar.
Effective December 1, 1993, Daytona Beach Magnetic Resonance Imaging, P.A.
(the "Daytona Beach Center"), a Florida professional association of which
Raymond V. Damadian is the sole shareholder, director and President, purchased
the scanner being utilized at its site from the Company for a purchase price of
$1,416,717, which in Fonar's opinion represented a fair market price based on
sales of like equipment by Fonar to its customers. Of the purchase price,
$328,044 was paid by the assumption and payment of the Company's indebtedness to
the lender secured by the scanner. Such indebtedness to the lender was retired
pursuant to a new equipment finance lease between the lender and the Daytona
Beach Center, guaranteed by the Company, providing for 18 monthly payments of
$20,000 each. The remaining $1,088,673 of the purchase price due to the Company
was required to be paid pursuant to a promissory note, with interest at 10% per
annum. In May, 1999, the payment terms for the outstanding balance of $1,001,507
were restructured to provide for 84 equal monthly payments (including interest
at the rate of 10% per annum) of $16,626.20 each commencing May 1999. During
fiscal 2001, FONAR took back the scanner in satisfaction of the outstanding
indebtedness. The Daytona Beach Center then purchased a new QUAD(TM) MRI scanner
from FONAR for a purchase price of $960,000, which is payable with interest a
rate of 8.5% per annum in 59 monthly payments of $11,902.62 each and one final
installment of $580,148.53. This indebtedness was in arrears of six months as of
June 30, 2002 and four months as of September, 30, 2002. The Daytona Beach
Center is party to service agreement with Fonar for its scanner. The rate in
effect for the July 1, 2002 to June 30, 2002 year is $50,000 per annum.
On June 30, 1994, Melville MRI, P.C. (the "Melville Center"), a New York
professional corporation of which Raymond V. Damadian is the sole shareholder,
director and President, purchased the scanner being utilized at its site from
the Company for a purchase price of $1,011,431.12, which in Fonar's opinion
represented a fair market price based on sales of like equipment by Fonar to its
customers. Of the purchase price, $900,000 is to be paid by the assumption and
payment of the Company's indebtedness to the lender secured by the scanner
pursuant to a note bearing interest at 14% per annum and providing for 60
monthly payments of $20,700 each. The remaining $111,431.12 of the purchase
price was to be paid concurrently with the payments to the lender. The payment
terms for the principal balance, plus accrued interest (in the aggregate amount
of $139,290) were restructured to provide for 60 equal monthly payments
(including interest at the rate of 10% per annum) of $2,959.50 each commencing
July, 1998. In fiscal 2001, following the payment in full by FONAR, as
guarantor, of the indebtedness due to the lender, there was as a result a
balance of $893,606 then owing to FONAR by the Melville Center. The $2,959.50
monthly payment to FONAR has been increased by an additional principal amount of
$10,000 per month to be applied toward the balance due. This indebtedness was
six months in arrears on June 30, 2002 and four months in arrears on September
30, 2002.
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, 2002, the net revenues from the Affordable Professional
Corporations were approximately $4.3 million.
ACQUISITION OF A & A SERVICES.
Effective March 20, 1998, HMCA acquired A & A Services, Inc. ("A & A
Services"), an management company managing four primary care practices in Queens
County, New York. Concurrently with the acquisition, Raymond V. Damadian
purchased the four New York professional service corporations under contract
with A & A Services (the "A & A Professional Corporations"). During the fiscal
year ended June 30, 2002, the net revenues from the A & A Professional
Corporations were $1.6 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, 2002, the net revenues from the Dynamic Professional
Corporations were $5.97 million.
OTHER TRANSACTIONS
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, 2002, the net
revenues from Superior were $5.5 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, 2002 to July 30, 2003. The rate in effect during the prior
year was also $50,000. In addition, during the 2002 fiscal year, the partnership
agreed to purchase a Stand-Up(TM) MRI scanner from Fonar for a purchase price of
$1,450,000.
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 and this indebtedness has been written off by
the Company as uncollectable.
Pursuant to an agreement dated September 30, 1993, AMD sold to Dade County
MRI, P.A. its interests in a partnership which had formerly operated an MRI
scanning center in Miami, Florida. The purchase price of $100,000 is payable,
with interest at 10% per annum,in sixty (60) equal consecutive monthly
installments of principal and interest (including interest accrued from
September 30, 1993), commencing 90 days after the scanner is placed in service.
The partnership is presently inactive. Dade County MRI, P.A. is a Florida
professional association of which Raymond V. Damadian is the sole stockholder,
director and President. This indebtedness has been written off by the Company as
uncollectable.
Pursuant to a sales agreement dated April 1, 1996, RVDC agreed to purchase
an MRI scanner with certain upgrades from the Company which RVDC then
contributed to Orlando MRI Associates, Limited Partnership (the "Orlando
Partnership"), a limited partnership. The Orlando Partnership is utilizing the
scanner at a site located in Orlando, Florida. The sales agreement provided 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. This
indebtedness has been written off by the Company. The Orlando Partnership was
party to a service agreement for its scanner with the Company at an annual fee
of $50,000 for the period from April 8, 2001 through April 7, 2002. The price in
effect for the prior year was also $50,000. Timothy Damadian, the son of Raymond
V. Damadian, is a limited partner in Orlando.
Pursuant to an agreement dated March 1, 1999, Dublin Magnetic Resonance
Imaging, P.C., ("Dublin"), a Georgia professional corporation which Raymond V.
Damadian is the sole stockholder, director and President, agreed to lease a used
Fonar Beta(TM) 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. This indebtedness was two months in
arrears on June 30, 2002 but has been paid in full as of September 30, 2002.
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(TM) 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. This indebtedness
was six months in arrears as of June 30, 2002 and was current on September 30,
2002. A balance of $14,285.08 was owing as of September 30, 2002 following a
payment of $800,000.
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(TM) 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. This indebtedness was six months in arrears as of June 30, 2002 and was
current on September 30, 2002. A balance of $25,288.12 was owing as of September
30, 2002 following a payment of $800,000.
Canarsie MRI Associates ("Canarsie"), a joint venture partnership of which
MRI Specialties, Inc. ("Specialties") is an owner, is party to a service
agreement for its scanner with the Company at an annual fee of $70,000 for the
period from September 1, 2001 through August 31, 2002. The price in effect
during the prior year was also $70,000. In addition, during fiscal 2001,
Canarsie entered into an agreement to purchase a QUAD(TM) 12000 MRI scanner from
FONAR for a purchase price of $850,000. Of the purchase price, $400,000 has been
paid and $450,000 is payable pursuant to a note over a period of 7 years at 6%
interest per annum. The monthly payment is $6,573.85 commencing December 1,
2001. Timothy Damadian, the son of Raymond V. Damadian, is the sole stockholder,
director and President of Specialties.
Pompano MRI Associates ("Pompano"), a joint venture partnership of which
Guardian MRI, Inc. ("Guardian") is an owner, was party to a service agreement
for its scanner with the Company at an annual fee of $70,000 for the period from
October 1, 2000 through September 30, 2001. The price in effect during the prior
year was also $70,000. In addition, during fiscal 2002, Pompano purchased a
Stand-Up(TM) MRI scanner from FONAR for a purchase price of $1,400,000. Timothy
Damadian, the son of Raymond V. Damadian, is a stockholder, director and officer
of Guardian.
During fiscal 2001, Damadian MRI in Orlando, P.A. ("Orlando MRI"), a
Florida professional association of which Raymond V. Damadian is the sole
stockholder, director and President, purchased a Stand-Up(TM) MRI scanner from
FONAR for a purchase price of $1,500,000. The purchase price has been paid in
full.
During fiscal 2001, Damadian MRI at Islandia, P.C. ("Islandia") a New York
professional corporation of which Raymond V. Damadian is the sole stockholder,
director and President, purchased a Stand-Up(TM) MRI scanner from FONAR for a
purchase price of $1,350,000. The purchase price has been paid in full.
During fiscal 2001, Black Bear Management LLC, a New York limited liability
company of which TRD Services, Inc. ("TRD") is a member, agreed to purchase a
Stand-Up(TM) MRI scanner from FONAR for a purchase price of $1,400,000. Timothy
Damadian, the son of Raymond V. Damadian, is the stockholder, director and
President of TRD. The scanner has been delivered, installed and paid in full.
During fiscal 2002, Damadian MRI at Elmhurst, P.C. ("Elmhurst"), a New York
professional corporation of which Raymond V. Damadian is the sole stockholder,
director and President, agreed to lease an Echo(TM) MRI scanner from FONAR on a
fee per scan basis of $200 per MRI scan performed.
During fiscal 2002, Tallahassee MRI, P.A. ("Tallahassee"), a Florida
professional association of which Raymond V. Damadian is the sole stockholder,
director and President, agreed to lease a QUAD(TM) MRI scanner from FONAR on a
fee per scan basis of $350 per MRI scan performed.
During fiscal 2002, Central Island MRI, P.C. ("Central Island"), a New York
professional corporation of which Raymond V. Damadian is the sole stockholder,
director and President, agreed to purchase a Stand-Up(TM) MRI scanner from Fonar
for a purchase price of $1,650,000.
During fiscal 2002, Bronx MRI Associates, LLC, a New York limited liability
company of which Raymond V. Damadian and Donna Damadian, jointly, TRD Services,
Inc. ("TRD"), JAD Ventures, Inc. ("JAD"), Keira Reinmund, Thomas Terry and
Constance Terry, among others, are members, purchased a Stand-Up(TM) MRI scanner
for a purchase price of $1,400,000. Donna Damadian is the wife of Raymond
Damadian. TRD is owned by Timothy Damadian, a son of Raymond and Donna Damadian,
JAD is owned by Jevan Damadian, a son of Raymond and Donna Damadian and Keira
Reinmund is the daughter of Dr. and Mrs. Damadian. Constance Terry is the wife
of David B. Terry, Vice President and Secretary of Fonar and brother-in-law of
Dr. Damadian. Thomas Terry is also the brother-in-law of Dr. Damadian.
During fiscal 2002, Deer Park Management Services, LLC, a New York limited
liability company of which TRD and JAD are, among others, members, agreed to
purchase a Stand-Up(TM) MRI scanner from Fonar for a purchase price of
$1,400,000. TRD and JAD are owned by Timothy Damadian and Jevan Damadian,
respectively, who are the sons of Raymond V. Damadian.
During fiscal 2002, Long Island Management Services, LLC, a New York
limited liability company of which TRD, JAD and Donna Damadian are, among
others, members, agreed to purchase a Stand-Up(TM) MRI scanner from Fonar for a
purchase price of $1,400,000. Donna Damadian is the wife of Raymond Damadian.
TRD and JAD are owned by Timothy Damadian and Jevan Damadian, respectively, the
sons of Raymond and Donna Damadian.
During the first quarter of fiscal 2003, Miami MRI Associates, LLC, a
Florida limited liability company of which TRD, JAD and Donna Damadian are,
among other parties, members, agreed to purchase a Stand-Up(TM) MRI from Fonar
for a purchase price of $1,400,000. Donna Damadian is the wife of Raymond
Damadian. TRD and JAD are owned by Timothy Damadian and Jevan Damadian,
respectively, the sons of Raymond and Donna Damadian.
PART IV
ITEM 14. CONTROLS AND PROCEDURES
Management believes that its disclosure controls and procedures in place
are effective to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others in these
entities in a timely manner so that appropriate disclosures can be made and
appropriate corporate action be taken.
ITEM 15. 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, 2002 and 2001.
Consolidated Statements of Operations for the Three Years Ended June 30,
2002, 2001 and 2000.
Consolidated Statements of Stockholders' Equity for the Three Years Ended
June 30, 2002, 2001 and 2000.
Consolidated Statements of Cash Flows for the Three Years Ended June 30,
2002, 2001 and 2000.
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.
10.21 2000 Stock Bonus Plan incorporated herein by reference to Exhibit 99.1 to
the Registrant's registration Statement on Form S-8, Commission File No.:
333-66760.
10.22 2002 Stock Bonus Plan incorporated herein by reference to Exhibit 99.1 to
the Registrant's registration statement on Form S-8, Commission File No.:
333-89578.
10.23 2002 Incentive Stock Option Plan incorporated herein by reference to
Exhibit 99.1 to the Registrant's registration statement on Form S-8,
Commission File No.: 333-96557.
21. Subsidiaries of the Registrant. See Exhibits.
99.1 Certification. See Exhibits.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FONAR CORPORATION
Dated: October 4, 2002
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 4, 2002
Raymond V. Damadian Board of Directors,
President, Director
Principal Executive
Officer and Acting
Principal Financial
Officer)
/s/ Claudette J.V. Chan Director October 4, 2002
Claudette J.V. Chan
/s/ Robert J. Janoff Director October 4, 2002
Robert J. Janoff
/s/ Charles N. O'Data Director October 4, 2002
Charles N. O'Data
/s/ Robert Djerejian Director October 4, 2002
Robert Djerjian
CERTIFICATION
I, Raymond V. Damadian, certify that:
1. I have reviewed this annual report on Form 10-K of Fonar
Corporation;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements made, not misleading
with respect to the period covered by this annual report; and
3. Based on my knowledge, the financial statements, and other
financial information, included in this annual report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this annual report.
Date: October 4, 2002
/s/Raymond V. Damadian
Raymond V. Damadian
President, Principal Executive Officer and Acting Principal
Financial Officer