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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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 [No Fee Required] For the transition period from
_____________ to _____________
Commission File No. 0-10248
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FONAR CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 11-2464137
(State of incorporation) (IRS Employer Identification Number)
110 Marcus Drive, Melville, New York 11747
(Address of principal executive offices) (Zip Code)
(631) 694-2929
(Registrant's telephone number, including area code)
____________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.0001 per share (Title of Class)
______________________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes ___X___ No _______
As of September 6, 2000, 56,678,153 shares of Common Stock, 4,211 shares of
Class B Common Stock, 9,562,824 shares of Class C Common Stock and 7,836,287
shares of Class A Non-voting Preferred Stock of the registrant were outstanding.
The aggregate market value of the approximately 54,125,684 shares of Common
Stock held by non-affiliates as of such date (based on the closing price per
share on September 6, 2000 as reported on the NASDAQ System) was approximately
$125.2 million. The other outstanding classes do not have a readily determinable
market value.
DOCUMENTS INCORPORATED BY REFERENCE
None
ITEM 1. BUSINESS
GENERAL
FONAR Corporation (the "Company" or "FONAR") is a Delaware corporation
which was incorporated on July 17, 1978. The Company's address is 110 Marcus
Drive, Melville, New York 11747 and its telephone number is (516) 694-2929.
FONAR also maintains a WEB site at www.fonar.com.
FONAR is engaged in the business of designing, manufacturing, selling
and servicing magnetic resonance imaging ("MRI" or "MR") scanners which utilize
MRI technology for the detection and diagnosis of human disease. FONAR
introduced the first MRI scanner in 1980 and is the originator of the iron-core
non-superconductive and permanent magnet technology.
FONAR's iron frame technology made FONAR the originator of "open" MRI
scanners. FONAR introduced the first "open" MRI in 1980 and maintained its
"open" design ever since.
Health Management Corporation of America (formerly U.S. Health
Management Corporation and hereinafter sometimes referred to as "HMCA") was
formed by the Company in March 1997 as a wholly-owned subsidiary in order to
enable the Company to expand into the business of providing comprehensive
management services to medical providers. In connection with its entry into this
new line of business, HMCA has completed five acquisitions. HMCA provides
management services, administrative services, office space, equipment, repair
and maintenance service and clerical and other non-medical personnel to
physicians and other medical providers, including diagnostic imaging centers.
See Note 20 to the Financial Statements for separate financial
information respecting the Company's medical equipment and physician and
diagnostic management services segments.
FORWARD LOOKING STATEMENTS.
Certain statements made in this Annual Report on Form 10-K are
"forward-looking statements" (within the meaning of the Private Securities
Litigation Reform Act of 1995) regarding the plans and objectives of Management
for future operations. Such statements involve known and unknown risks,
uncertainties and other factors that may cause actual results, performance or
achievements of the Company to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. The forward-looking statements included herein are based on current
expectations that involve numerous risks and uncertainties. The Company's plans
and objectives are based, in part, on assumptions involving the expansion of
business. Assumptions relating to the foregoing involve judgments with respect
to, among other things, future economic, competitive and market conditions and
future business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Although the
Company believes that its assumptions underlying the forward-looking statements
are reasonable, any of the assumptions could prove inaccurate and, therefore,
there can be no assurance that the forward-looking statements included in this
Report will prove to be accurate. In light of the significant uncertainties
inherent in the forward-looking statement included herein, the inclusion of such
information should not be regarded as a representation by the Company or any
other person that the objectives and plans of the Company will be achieved.
RECENT DEVELOPMENTS AND OVERVIEW.
The Company's products and works-in-progress (dubbed the "Fonar Seven")
are intended to significantly improve the Company's competitive position. The
Company's products are the Fonar 360(TM), the "QUAD(TM)" series of MRI scanners
and the Echo(TM) MRI scanner.
The Fonar 360, approved for marketing by the FDA on March 16, 2000,
includes the "Open Sky(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 version of the Fonar 360 is decoratively designed so that
it is incorporated into the panoramic landscape that decorates the walls of the
scan room. The ability of the Fonar 360 to give physicians direct 360 access to
patients and the availability of MRI compatible surgical instruments will also
enable the Fonar 360, in its future "OR-360(TM)" version, to be used for image
guided surgery.
The "QUAD(TM) 12000" MR scanner utilizes a 6000 gauss iron core
electromagnet and is accessible from four sides. The QUAD 12000 is the first
"open" MR scanner at high field. The greater field strength of the 6000 gauss
magnet, when enhanced by the electronics already utilized by the Company's
scanners, produces images of a quality and clarity competitive with high field
superconductive magnets. The QUAD 12000 scanner magnet is the highest field
"open MRI" in the industry.
The Company also produces the "QUAD(TM) 7000," a MR scanner which is
similar in design to the QUAD 12000 but utilizes a smaller 3,500 gauss
electromagnet. The less expensive QUAD 7000 offers an economical solution to the
rising cost of medicine.
In addition, the Company offers a low cost open MRI scanner, the
"Echo(TM)" operating at .3 Tesla field strength. The Company's current "works in
progress" include its "Stand-Up MRI"(TM), also called "Indomitable(TM)", a
scanner which will allow patients to be scanned while in weight-bearing
positions, and the "Pinnacle(TM)" which combines many of the features of the
QUAD scanners with a superconducting magnet. (See "Works in Progress".)
Indomitable(TM) will permit, for the first time, MRI diagnoses to be
made in the weight-bearing state. It is also anticipated that Indomitable(TM)
will enable MRI-guided surgical and interventional procedures to be performed
when the patient is upright. The Company submitted the Indomitable(TM) to the
FDA for approval in August, 2000.
As a result of these new products and other research and development,
the Company is positioning itself to dramatically increase sales and improve its
competitive position in the marketplace.
Following a two and a half year period of intense research and
development activity the Company is now in the process of turning its attention
from predominately research and development to predominantly sales.
The Company intends to increase its sales force and is seeking
experienced medical equipment salesmen and distributors worldwide. Among other
things the Company also intends to expand its website to a full-scale
interactive sales desk for reaching new customers and assisting existing
customers.
The Company will also continue to actively seek to promote foreign
sales. The Company believes there are and will be significant market
opportunities abroad, particularly in Asia and Eastern Europe.
In March 1997, FONAR formed Health Management Corporation of America
(formerly U.S. Health Management Corporation and hereinafter sometimes referred
to as "HMCA") as a wholly-owned subsidiary for the purpose of engaging in the
business of providing comprehensive management and administrative services,
office space, equipment, repair and maintenance service for equipment and
clerical and other personnel (other than physicians) to physicians' practices
and other medical providers, including diagnostic centers.
HMCA entered the physician and diagnostic management services business
through the consummation of two acquisitions, effective June 30, 1997. As a
result of these two acquisitions, three additional acquisitions and the opening
of new facilities, HMCA currently is managing 22 diagnostic imaging centers and
12 primary care and specialty medical practices located principally in New York
State and Florida.
PRODUCTS
The Company's principal products are the Fonar 360, the QUAD series of
MRI scanners and the Echo.
The Fonar 360 has an enlarged room sized magnet in which the magnet
frame is incorporated into the floor, ceiling and walls of the scan room. This
is made possible by Fonar's patented Iron-Frame(TM) technology which allows the
Company's engineers to control, contour and direct the magnet's lines of flux in
the patient gap where wanted and almost none outside of the steel of the magnet
where not wanted. Physicians and family members are able to actually enter the
scanner and approach the patient. In its Open Sky version, the Fonar 360 serves
as an open patient friendly scanner which allows 360 access to the patient on
the scanner bed. The walls can be decorated with panoramic murals and the entire
scan room can be decorated to be incorporated into the pictured landscape.
In its future interventional OR-360 version, the enlarged room sized
magnet and 360 access to the patient afforded by the Fonar 360 permit
full-fledged surgical teams to walk into the magnet and perform surgery on the
patient inside the magnet. Most importantly the exceptional quality of the MRI
image and its exceptional capacity to exhibit tissue detail on the image, by
virtue of the nuclear resonance signal's extraordinary capacity to create image
contrast, can then be obtained real time during surgery to guide the surgeon in
the surgery. Thus surgical instruments, needles, catheters, endoscopes and the
like can be introduced directly into the human body and guided to the malignant
lesion by means of the MRI image. The number of inoperable lesions should be
greatly reduced by the availability of this new capability. Most importantly
treatment can be carried directly to the target tissue.
With current treatment methods, therapy must always be restricted in the
doses that can be applied to the malignant tissue because of the adverse effects
on the healthy tissues. Thus chemotherapies must be limited at the first sign of
toxic side effects. The same is the case with radiation therapy. The Company
expects that with the OR 360 treatment agents may be administrated directly to
the malignant tissue through small catheters or needles allowing much larger
doses of chemotherapy, x-rays, laser ablation, microwave, or rf to be applied
directly and exclusively to the malignant tissue with more effective results.
Since the procedure of introducing a treatment needle or catheter under image
guidance will be minimally invasive the procedure can be readily repeated should
metastases occur elsewhere, with minimum impact on the patient beyond a
straightforward needle injection.
The presence of the MRI image during treatment will enable the operator
to make assessments during treatment if his treatment is being effective.
To increase the number of patients who can be scanned, patients are rolled into
the scanner room on a special high-throughput gurney. Once the bed is anchored
in position, it allows for full horizontal, vertical and rotational positioning
for scanning any region of the body. To optimize the patient-friendly character
of the Open Sky MRI, the walls, floor, ceiling and magnet poles are decorated
with landscape murals. The patient gap is twenty inches and the magnetic field
strength, like that of FONAR's QUAD 12000, is 0.6 Tesla. The Open Sky MRI shares
the fundamental technology of the QUAD 12000 and offers the same speed,
precision and image quality.
The QUAD(TM) 12000 MR scanner utilizes a 6000 gauss iron core
electromagnet and is accessible from four sides. The QUAD 12000 is the first
"open" MR scanner at high field. The QUAD(TM) 7000 is similar in design to the
QUAD 12000 but utilizes a smaller 3,500 gauss electromagnet.
In addition to the patient comfort, increased throughput and new
applications (such as MRI directed surgery and MRI mammography) made possible by
the QUAD scanners' open design, the QUAD scanners are designed to maximize image
quality through an optimal combination of signal-to-noise (S/N) and
contrast-to-noise (C/N) ratios. The technical improvements realized in the
QUAD's design over its predecessors also include increased image-processing
speed and diagnostic flexibility.
MRI directed surgery (laproscopic surgical procedures) is possible by
the QUAD's ability to supply images to a monitor positioned next to the patient,
enabling a surgeon to view in process surgical procedure from an unlimited
number of vantage points. The marked openness of FONAR's QUAD scanners enables
surgeons to perform a wide range of surgical procedures inside the magnet.
The "QUAD" scanners are unique MR scanners in that four sides are open,
thus allowing access to the scanning area from four vantage points. The
starshaped open design of the QUAD will also make possible a host of new
applications, particularly MRI mammography and MRI directed surgery
(Interventional MRI).
With the QUAD's multi-bed patient handling system, many more short scan
procedures such as those used in breast imaging can be done in a day, allowing
the price of MRI mammography to drop without reducing the scanner's
revenue-generating capacity. At the same time, there is not the painful
compression of the breast characteristic of X-ray mammography.
The principal difference between the QUAD scanners and other open MRI
scanners is in field strength. Other open MRIs operate at significantly lower
magnetic field strengths and, therefore, are unable to produce the amount of MRI
image-producing signal necessary to make high-quality MRI images (measured by
signal-to-noise ratios, S/N).
The QUAD 12000 scanner utilizes a 6000 gauss (.6 Tesla field strength)
iron core electromagnet. The greater field strength of the 6000 gauss magnet,
when enhanced by the electronics already utilized by the Company's scanners,
produces images of a higher quality and clarity than other open MRI scanners.
The QUAD 12000 scanner magnet is the highest field "open MRI" in the industry
and operates at a field strength that is almost two times its closest competitor
(.6 Tesla field strength versus .35 Tesla field strength).
The QUAD scanners are designed to maximize image quality through an
optimal combination of signal-to-noise (S/N) and contrast-to-noise (C/N) ratios.
The technical improvements realized in the QUAD's design over its predecessors
also include increased image-processing speed and diagnostic flexibility.
Maximal S/N is achieved when the direction of the magnetic field and the
direction of the receiving coil axis are perpendicular to one another, as is the
case with the QUAD scanners. The orientation of the magnetic field is vertical
and when combined with any one of FONAR's array of solenoidal (wrap-around)
surface coils, the QUAD 12000, for example, produces as much S/N as a supercon
MRI at twice the field strength. So that prospective buyers can make an accurate
comparison, the number 12,000 is used to describe the S/N equivalency of the
QUAD 12000 to 12,000-gauss superconductive machines.
Several technological advances have been engineered into the QUAD
scanners for extra improvements in S/N, including: new high-S/N Organ
Specific(TM) receiver coils\; new ceramic magnet poles that provide advanced
eddy-current control\; new advanced front-end electronics featuring high-speed,
wide-dynamic-range analog-to-digital conversion and a miniaturized
ultra-low-noise pre-amplifier\; high-speed automatic tuning, bandwidth-optimized
pulse sequences, multi-bandwidth sequences, and off-center FOV imaging
capability.
In addition to the signal-to-noise ratio, however, the factor that must
be considered when it comes to image quality is contrast, the quality that
enables reading physicians to clearly distinguish adjacent, and sometimes
minute, anatomical structures. This quality is measured by contrast-to-noise
ratios (C/N). Unlike S/N, which increases with increasing field strength,
relaxometry studies have shown that C/N peaks in the mid-field range and
actually falls off precipitously at higher field strengths. The QUAD 7000 and
QUAD 12000 scanners operate squarely in the optimum C/N range. In addition, the
Company's works-in-progress, the OR 360, Open Sky MRI and Stand-Up MRI are also
designed to operate with said C/N range.
The QUAD provides various features allowing for versatile diagnostic
capability. For example, SMART(TM) scanning allows for same-scan customization
of up to 63 slices, each slice with its own thickness, resolution, angle and
position. This is an extremely important feature for scanning parts of the body
that include small-structure sub-regions requiring finer slice parameters.
There's also Evolving Images(TM), Multi-Angle Oblique (MAO)(TM) imaging, and
oblique imaging.
The QUAD console includes a mouse-driven, multi-window interface for
easy operation and a 19-inch, 1280 x 1280-pixel, 20-up, high-resolution image
monitor with features such as electronic magnifying glass and real-time,
continuous zoom and pan.
Prior to the introduction of the QUAD scanners, the Ultimate(TM) 7000
scanner, introduced in 1990, was the Company's principal product. The Ultimate
scanner replaced the Company's traditional principal products, the Beta(TM) 3000
scanner (which utilized a permanent magnet) and the Beta(TM) 3000M scanner
(which utilized an iron core electromagnet). All of the Company's current and
earlier model scanners create cross-sectional images of the human body.
During fiscal 2000, sales of the Company's QUAD scanners accounted for
approximately 8.6% of the Company's total revenues and 66.5% of its medical
equipment segment revenues, as compared to 7% of total revenues and 40% of
medical equipment revenues during fiscal 1999. There were no sales of Ultimate
or Beta scanners in fiscal 2000 and only one sale of a Beta scanner (1% of total
revenues and 6.6% of medical equipment segment revenues) in fiscal 1999.
The Company also offers a low cost open scanner, the Echo, which
operates at a .3 Tesla field strength. The Echo is an open upgraded version of
the Company's former principal product, the Beta MRI scanner, but open on four
sides to provide four directions for patient access instead of two.
The materials and components used in the manufacture of the Company's
products (circuit boards, computer hardware components, electrical components,
steel and plastic) are generally available at competitive prices. The Company
has not had difficulty acquiring such materials.
WORKS IN PROGRESS
The Company's current "works in progress" center around the development
of the Indomitable(TM) and Pinnacle scanners. All of the Company's products and
works-in-progress seek to bring to the public MRI products that are expected to
provide important advances against serious disease.
MRI takes advantage of the nuclear resonance signal elicited from the
body's tissues and the exceptional sensitivity of this signal for detecting
disease. Much of the serious disease of the body occurs in soft tissue. The
principal diagnostic modality currently in use for detecting disease, as in the
case of x-ray mammography, are diagnostic x-rays. X-rays discriminate soft
tissues like healthy breast tissue and cancerous tissue poorly because the x-ray
particle traverses the tissues almost equally thereby rendering the target film
equally exposed by the two tissues and creating healthy and cancerous shadows on
the film that differ very little in brightness. The image contrast between
cancerous and healthy tissue is poor, making the detection of breast cancers by
the x-ray mammogram less than optimal. If microscopic stones
(microcalcifications) are not present to provide the missing contrast the breast
cancer goes undetected. They frequently are not present. The maximum contrast
available by x-ray with which to discriminate disease is 4%. Brain cancers
differ from surrounding healthy brain by only 1.6%.
On the other hand the soft tissue contrasts with which to distinguish
cancers on images by MRI are up to 180%. This is because the nuclear resonance
signals from the body's tissues differ so dramatically. Liver cancer and healthy
liver signals differ by 180%. Thus there is some urgency to bring to market an
MRI based breast scanner that can overcome the x-ray limitation and assure that
mammograms do not miss serious lesions. The added benefit of MRI mammography
relative to x-ray mammography is the elimination of the need for the patient to
disrobe and the painful compression of the breast typical of the x-ray
mammogram. The patient is scanned in her street clothes in MRI mammography.
Moreover MRI mammogram scans the entire chest wall including the axilla for the
presence of nodes which the x-ray mammogram cannot reach.
Among its other uses, the Company envisions that its Open Sky MRI(TM)
scanner will meet the public need for an MRI breast scanner.
In addition there is a need for a treatment modality that can deal
effectively with the diseased tissue once it has been detected.
The Company's Indomitable(TM) scanner will allow patients to be scanned
while standing or reclining. As a result, for the first time, MRI will be able
to be used to show abnormalities and injuries under full weight-bearing
conditions, particularly the spine and joints.
A floor-recessed elevator brings the patient to the height appropriate
for the targeted image region. A custom-built adjustable bed will allow patients
to sit or lie on their backs, sides or stomachs at any angle.
Full-range-of-motion studies of the joints in virtually any direction
will be possible, an especially promising feature for sports injuries. Maximal
flexion cines of the lumbar spine will be achieved under full body weight.
Indomitable(TM) will also be useful for MR-directed surgical procedures
as the surgeon would have unhindered access to the patient with no restrictions
in the vertical direction.
This easy-entry, mid-field-strength scanner should be ideal for trauma
centers where a quick MRI-screening within the first critical hour of treatment
will greatly improve patients' chances for survival and optimize the extent of
recovery.
The Company is seeking approval from the FDA for Indomitable and
submitted an application on August 9, 2000.
The Company is also developing a superconductive version of its open
iron frame magnets, the "Pinnacle" (TM), and has completed construction of a
prototype with a 0.6 Tesla superconductive magnet. The Company's design of its
superconductive magnet anticipated the possibility of making its other products
available as superconducting magnets. Therefore, it is the Company's objective
to make Indomitable(TM) and the Fonar 360 available to FONAR's customers as
either iron-frame resistive models or iron-frame superconductive magnets
depending on customer preference and pricing.
The Pinnacle will have a field strength between 0.6 to 1.0 Tesla and a
18-inch gap vertical field. This MRI scanner will combine the benefits of its
patented iron-frame, vertical field magnet design with a superconducting magnet.
The Company is negotiating with several universities to install and
commence clinical trials of its new products. The Company is working with these
universities to jointly secure research funding for these products.
PRODUCT MARKETING
The principal markets for the Company's scanners are hospitals and
private scanning centers.
Following a two and a half year period of intense research and
development activity to develop and consolidate the features of its MRI
scanners, the Company is now turning its attention from predominantly research
and development to predominantly sales.
The Company intends to increase its sales force and is seeking
experienced medical equipment sales personnel and distributors. The Company will
conduct domestic sales through its own sales personnel and independent sales
representatives and distributors. In foreign markets, the Company plans to
expand its existing network of independent distributors.
In addition, the Company plans to expand its website to include an
interactive "sales desk" for reaching customers and to commence a program for
providing demonstrations of its products to potential customers on an
international basis.
The Company has exhibited its new products at the annual trade show held
by the Radiological Society of North America ("RSNA") in Chicago since November
1995 and plans to attend the RSNA trade show in November 2000 and future years.
The RSNA trade show is held annually and is attended by most manufacturers of
MRI scanners.
The Company is directing its marketing efforts to meet the demand for
both "open" and high field strength MRI scanners. Utilizing a 6000 gauss (0.6
Tesla field strength) iron core electromagnet, the QUAD 12000 scanner magnet is
the highest field "open MRI" in the industry.
The Company also plans to direct its marketing efforts to meeting the
increasing demand for low price MRI. To date, the increased pressure for lower
scanning prices has come largely from preferred provider organizations, health
maintenance organizations and other private sector group plans and stricter
insurance requirements, but government mandated health care reform is also under
consideration.
To meet this demand, the Company has set competitive prices for the QUAD
12000 and QUAD 7000 scanners. In addition to reducing the health care provider's
equipment cost, the QUAD scanners' improved image processing speed and
extra-bed(s) option (allowing patients to be prepped while another patent is
being scanned) would enable the provider to increase patient volume and further
reduce per scan costs.
The reduced per scan costs will enable the Company to promote the QUAD
7000 in particular for short scan procedures such as MRI mammograms. MRI
mammograms have the advantage over traditional x-rays of involving no radiation,
and an MRI breast scan can be taken in most cases through ordinary street
clothes without any painful compression.
The Company also will seek to introduce new MRI applications for the
QUAD scanners such as MRI-directed surgery and head-to-toe MRI preventive
screening.
The Company will also focus its marketing efforts on Indomitable (TM)
which when commercially available will be the first MRI scanner to enable images
and diagnoses to be made of a patient in the weight-bearing state.
The Company is actively seeking to promote foreign sales and has sold
scanners in various foreign countries. Based on indications of interest,
meetings, sales trips abroad and negotiations, the Company is optimistic that
foreign sales will continue to be an important source of revenue.
The Company believes there are and will be significant market
opportunities abroad, particularly in Asia and Eastern Europe.
During the fiscal year ended June 30, 2000, 0.2% of the Company's
revenues were generated by foreign sales, as compared to 3.4% and 4.6% for
fiscal 1999 and 1998 respectively. See "Note 9 to Notes to Consolidated
Financial Statements" for the percentage of foreign sales as in relation to the
Company's total revenues.
SERVICE AND UPGRADES FOR MRI SCANNERS
The Company's customer base of installed scanners has been and will
continue to be an additional source of income, independent of direct sales.
Income is generated from the installed base in two principal areas
namely, service and upgrades. Service and maintenance revenues from the
Company's installed base were approximately $3.7 million in fiscal 1998, $3.1
million in fiscal 1999 and $2.8 million is fiscal 2000. The decreases in fiscal
1999 and 2000 were principally the result of the retirement of old scanners.
The Company anticipates that its new line of scanners will result in
significant upgrades income in future fiscal years. The potential for upgrades
income originates in the exceptional versatility and productivity of the MRI
technology. New medical uses for the technology are constantly being discovered.
Dramatic new features can often be added to the scanner by the implementation of
little more than versatile new software packages. For example, new software
packages make possible the reformatting of scanner slices so that a stack of
slices across the large bowel allow one to reconstruct the lumen of the bowel
and through the use of software navigators visually carry out a "fly-thru"
through the bowel searching for polyps and tumors. The procedure eliminates the
unpleasant intubation of the bowel for routine colonoscopy. The procedure is
presently operative using a CT scanner and plans are underway to adopt it for
MRI. Software can be added to current MRI angiograms to synchronize the
angiograms to the cardiac cycle. By doing so the dynamics of blood vessel
filling and emptying can be visualized with cine movies. Such enhancements are
attractive to the end users because they extend the useful life of the equipment
and enable the user to avoid obsolescence and the expense of having to purchase
new equipment.
Service and upgrade revenues are expected to increase as sales of QUAD
scanners and the size of the customer base increases.
RESEARCH AND DEVELOPMENT
During the fiscal year ended June 30, 2000, the Company incurred
expenditures of $5,893,648 ($361,323 of which was capitalized) on research and
development, as compared to $6,647,555 (none of which was capitalized) and
$6,506,995 (none of which was capitalized) incurred during the fiscal years
ended June 30, 1999 and June 30, 1998, respectively.
Research and development activities have focused, in large part, on the
development of the new Fonar 360 and Stand-Up MRI(TM) scanners and the continued
development and enhancement of the Company's QUAD MR scanners. The Fonar 360(OR
360 and Open Sky MRI), Stand-Up MRI and QUAD scanners involve significant
software and hardware development as the new products represented entirely new
hardware design and architecture requiring a complete new operating software
system. The Company's research activity includes developing a multitude of new
features for the QUAD series scanners made possible by the QUAD's high speed
processing power.
BACKLOG
The Company's backlog of unfilled orders at September 1, 2000 was
approximately $2.05 million, as compared to $1.4 million at September 1, 1999.
Of these amounts, approximately $0.45 million and $0.35 million had been paid to
the Company as customer advances as at September 1, 2000 and September 1, 1999,
respectively. Of the backlog amounts at September 1, 1999 and September 1, 2000,
none represented orders from affiliates. It is expected that the existing
backlog of orders will be filled within the current fiscal year. The Company's
contracts generally provide that if a customer cancels an order, the customer's
initial down payment for the MRI scanner is nonrefundable.
PATENTS AND LICENSES
There are currently numerous patents in effect which relate to the
technology and components of the MRI scanners, some of which are registered in
the name of the Company and others which are registered in the name of Dr.
Raymond V. Damadian, the President and principal stockholder of the Company. The
Company believes that these patents, and the know-how it developed, are material
to its business.
Dr. Damadian has granted an exclusive world-wide license to the Company
to make, use and sell apparatus covered by certain domestic and foreign patents
relating to his MRI technology. The license continues until the expiration of
the last patent included within the licensed patent rights, but is terminable
earlier, at the option of Dr. Damadian, if he is removed from his position as
Chairman of the Board or President of the Company without his consent, or if any
stockholder or group of stockholders acting in concert becomes the beneficial
owner of Company securities having voting power equal to or greater than the
voting power of the securities held directly by him, his executors,
administrators, successors or heirs. The agreement can also be terminated by Dr.
Damadian upon the commission of an act of bankruptcy by the Company. If Dr.
Damadian is unable to serve the Company by reason of his death or disability,
the license agreement will remain in effect. Only one patent, which will expire
in October, 2000, remains subject to this license. No royalties have been paid
to Dr. Damadian under this license.
One of the patents, issued in the name of Dr. Damadian and covered by
said license, is United States patent No. 3,789,832, Apparatus and Method for
Detecting Cancer in Tissue (the "1974 Patent"). The development of the Beta 3000
was based upon the 1974 Patent, and Management believes that the 1974 Patent was
the first of its kind to utilize MR to scan the human body and to detect cancer.
The 1974 Patent was extended beyond its original 17-year term and expired in
February, 1992. None of the recoveries with respect to the enforcement of this
patent were received by Dr. Damadian.
The Company has significantly enhanced its patent position within the
industry and now possesses a substantial patent portfolio which provides the
Company, under the aegis of United States patent law, "the exclusive right to
make, use and sell" many of the scanner features which FONAR pioneered and which
are now incorporated in most MRI scanners sold by the industry. The Company has
47 patents issued and 32 patents pending. A substantial number of FONAR's
existing patents specifically relate to protecting FONAR's position in the high
field iron frame open MRI market. The patents further enhance Dr. Damadian's
pioneer patent (the 1974 Patent), that initiated the MRI industry and provided
the original invention of MRI scanning.
The Company has entered into a cross-licensing agreement (utilizing
other than FONAR's MRI technology) with another entity to use prior art
developed for nuclear magnetic resonance technology and has entered into a
license to utilize the MRI technology covered by the existing patent portfolio
of a patent holding company. The Company also has patent cross-licensing
agreements with other MRI manufacturers.
PRODUCT COMPETITION
MRI SCANNERS
A majority of the MRI scanners in use in hospitals and outpatient
facilities and at mobile sites in the United States are based on high field air
core magnet technology while the balance are based on open iron frame magnet
technology. In 1998 the size of the MRI market in the United States was
approximately $957 million. The market share of high field air core MRI's was
approximately 57%. In 1999 the size of the MRI market in the United States was
approximately 1.074 billion. FONAR's open iron frame MRI scanners are competing
principally with high field air core scanners. The QUAD 12000 scanner, however,
utilizing a 6,000 gauss (0.6 Tesla field strength) iron core electromagnet, is
the first "open" MR scanner at high field strength. In addition FONAR's
works-in-progress include a superconductive version of its open iron frame
magnets.
FONAR believes that its MRI scanners have significant advantages as
compared to the high field air core scanners of its competitors. These
advantages include:
1. There is no expansive fringe magnetic field. High field air core
scanners require a more expensive shielded room than is required for the iron
frame scanners. The shielded room required for the iron frame scanners is
intended to prevent interference from external radio frequencies.
2. They are more open, quiet and in the case of the QUAD scanners allow
for faster throughput of patients.
3. Their annual operating costs are lower.
4. They can scan the trauma victim, the cardiac arrest patient, the
respirator-supported patient, and premature and newborn babies. This is not
possible with high field air core scanners because their magnetic field
interferes with conventional life-support equipment.
The principal competitive disadvantage of the Company's products is that
they are not "high field strength" (1.0 Tesla +) magnets. As a general
principle, the higher the field strength can produce a faster scan. In some
parts of the body a faster scan can be traded for a clearer picture. Although
the Company believes that the lower cost of its systems plus the benefits of
"openness" provided by its scanners compensate for the lower field strength,
certain customers will still prefer the higher field strength.
FONAR faces competition within the MRI industry from such firms as
General Electric Company\; Picker International, which is a Division of General
Electric Company PLC, of England;\ Philips N.V.\; Toshiba Corporation, Hitachi
Corporation and Siemens A.G. Most competitors have marketing and financial
resources more substantial than those available to the Company and have in the
past, and may in the future, heavily discount the sales price of their scanners.
Such competitors sell both high field air core and iron frame products. FONAR's
current market share of the market for MRI scanners is less than 5%. FONAR
introduced the first "Open MRI" in 1982. "Open MRI" was made possible by FONAR's
introduction of an MRI magnet built on an iron frame. Thus the magnetic flux
generating apparatus of the magnet (magnet coils or permanent magnet bricks) was
built into a frame of steel. The steel frame provided a return path for the
magnetic lines of force and thereby kept the magnetic lines of force contained
within the magnet. This enabled FONAR, from 1982 on, to show that the FONAR
magnet was the only magnet that allowed the patients to stretch out their arms,
the only "open" MRI.
The iron frame, because it could control the magnetic lines of force and
place them where wanted and remove them from where not wanted (such as in the
operating room where surgeons are standing), provided a much more versatile
magnet design than was possible with air core magnets. Air core magnets contain
no iron but consist entirely of turns of current carrying wire. FONAR's patented
work-in-progress superconductive iron frame magnet, however, combines the high
field capability of the air core superconductive magnets with the control and
versatility of the open iron frame magnets, thereby joining the best features of
both designs into a single magnet. Thus the air core superconductive magnets
made by Fonar's large competitors that have dominated the MRI market since 1983
remain the confining "tunnel" design that the public has generally resented.
For an 11 year period, 1983-1994, Fonar's large competitors (with one
exception) generally rejected Fonar's "open" design but by 1994 all (with one
exception) added the iron frame "open" magnet to their MRI product line. In 1997
the sale of iron frame "open" magnets exceeded the sale of traditional air core
superconductive magnets. One principal reason for this market shift, in addition
to patient claustrophobia, is the awareness that the "open" magnet designs
permit access to the patient to perform surgical procedures under MRI image
guidance, a field which is now growing rapidly and is called "interventional
MRI."
Fonar's future OR 360 version of the Fonar 360 explicitly addresses this
growing market reception of MRI guided surgical procedures but is not yet
available as a product. Fonar's Indomitable and QUAD series magnets do also.
Although not enabling a full operating theater as the OR 360 does, the iron
frame "Open" QUAD and Indomitable designs permit ready access to the patient
from four sides and therefore enables a wide range of interventional surgical
procedures such as biopsies and needle or catheter delivered therapies to be
performed under MRI image guidance. The "tunnel" air core superconductive
scanners do not permit access to the patient while the patient is inside the
scanner.
While Fonar's current market share of the domestic MRI market is under
5%, FONAR expects to be a leader in domestic open market for several reasons. In
MRI, scanning speed and image quality is controlled by the strength of the
magnetic field. Fonar's QUAD 12000 scanner operates at almost twice the field
strength of the next highest field strength open magnet, manufactured by Toshiba
(0.6 Tesla vs. 0.35 Tesla). The Company's Fonar 360 and Indomitable scanners
also operate at this field strength. High field MRI manufacturers convinced the
marketplace for FONAR, and the marketplace accepts, that higher field strength
translates directly into superior image quality and faster scanning speeds. This
is the principal reason GE's 1.5 Tesla air core superconductive scanner achieved
market dominance in the MRI market before the marketplace shifted and registered
an increased demand for the iron frame "Open MRI." No companies possess the
Fonar 360 and FONAR possesses the pioneer patents on "Open MRI" technology.
OTHER IMAGING MODALITIES
FONAR's MRI scanners also compete with other diagnostic imaging systems,
all of which are based upon the ability of energy waves to penetrate human
tissue and to be detected by either photographic film or electronic devices for
presentation of an image on a television monitor. Three different kinds of
energy waves - X-ray, gamma and sound - are used in medical imaging techniques
which compete with MRI medical scanning, the first two of which involve exposing
the patient to potentially harmful radiation. These other imaging modalities
compete with MRI products on the basis of specific applications.
X-rays are the most common energy source used in imaging the body and
are employed in three imaging modalities:
1. Conventional X-ray systems, the oldest method of imaging, are
typically used to image bones and teeth. The image resolution of adjacent
structures that have high contrast, such as bone adjacent to soft tissue, is
excellent, while the discrimination between soft tissue organs is poor because
of the nearly equivalent penetration of x-rays.
2. Computerized Tomography ("CT") systems couple computers to x-ray
instruments to produce cross-sectional images of particular large organs or
areas of the body. The CT scanner addresses the need for images, not available
by conventional radiography, that display anatomic relationships spatially.
However, CT images are generally limited to the transverse plane and cannot
readily be obtained in the two other planes (sagittal and coronal). Improved
picture resolution is available at the expense of increased exposure to x-rays
from multiple projections. Furthermore, the pictures obtained by this method are
computer reconstructions of a series of projections and, once diseased tissue
has been detected, CT scanning cannot be focused for more detailed pictorial
analysis or obtain a chemical analysis.
3. Digital radiography systems add computer image processing capability
to conventional x-ray systems. Digital radiography can be used in a number of
diagnostic procedures which provide continuous imaging of a particular area with
enhanced image quality and reduced patient exposure to radiation.
Nuclear medicine systems, which are based upon the detection of gamma
radiation generated by radioactive pharmaceuticals introduced into the body, are
used to provide information concerning soft tissue and internal body organs and
particularly to examine organ function over time.
Ultrasound systems emit, detect and process high frequency sound waves
reflected from organ boundaries and tissue interfaces to generate images of soft
tissue and internal body organs. Although the images are substantially less
detailed than those obtainable with x-ray methods, ultrasound is generally
considered harmless and therefore has found particular use in imaging the
pregnant uterus.
X-ray machines, ultrasound machines, digital radiography systems and
nuclear medicine compete with the MRI scanners by offering significantly lower
price and space requirements. However, FONAR believes that the quality of the
images produced by its MRI scanners is generally superior to the quality of the
images produced by those other methodologies.
GOVERNMENT REGULATION
Under the Medical Device Amendments of 1976 to the Federal Food, Drug
and Cosmetic Act, all medical devices are classified by the Food and Drug
Administration (the "FDA") into one of three classes. A Class I device is
subject only to certain controls, such as labeling requirements and
manufacturing practices\; a Class II device must comply with certain performance
standards established by the FDA\; and a Class III device must obtain pre-market
approval from the FDA prior to commercial marketing. The Company received
approval to market its Beta 3000 and Beta 3000M scanners as Class III devices on
September 26, 1984. On July 28, 1988, the Magnetic Resonance Diagnostic Device
which includes MR Imaging and MR Spectroscopy was reclassified by the FDA to
Class II status. On June 25, 1992, the Company received FDA clearance to market
the Ultimate Magnetic Resonance Imaging Scanner as a Class II device. The
Company received FDA clearance to market the QUAD 7000 in April 1995 and for the
QUAD 12000 in November 1995. On March 16, 2000, the Company received FDA
approval to market the Fonar 360 for diagnostic imaging (the Open Sky version).
On August 9, 2000, the Company applied for FDA approval for the Stand-Up MRI.
The Company anticipates that it will need additional FDA approvals or clearances
for the OR 360 version of the Fonar 360 and Pinnacle MRI scanners.
The FDA has authority to conduct detailed inspections of manufacturing
plants, to establish "good manufacturing practices" which must be followed in
the manufacture of medical devices, to require periodic reporting of product
defects and to prohibit the exportation of medical devices that do not comply
with the law. The Company is subject to these requirements and has received the
necessary approvals. In addition, the Company needs to obtain any necessary
approvals from the appropriate foreign governmental and other authorities in
connection with its export sales.
Effective November 22, 1985, the Department of Health and Human Services
authorized reimbursement of MRI scans under the Federal Medicare program. In
addition, most private insurance companies have authorized reimbursement for MRI
scans.
Proposed and enacted legislation at the State and Federal levels has
restricted referrals by physicians to medical and diagnostic centers in which
they or their family members have an interest. In addition, regulations have
been adopted by the Secretary of Health and Human Services which provide limited
"safe harbors" under the Medicare Anti-Kickback Statute. These safe harbors
describe payments and transactions which are permitted between an entity
receiving reimbursement under the Medicare program and those having an interest
in or dealings with the entity. Although the Company cannot predict the overall
effect of the adoption of these regulations on the medical equipment industry,
the use and continuation of limited partnerships (where investors may be
referring physicians) to own and operate MRI scanners could be greatly
diminished.
The Company obtains approvals as necessary in connection with the sales
of its products in foreign countries. In some cases, U.S. Food and Drug
Administration approval has been sufficient for foreign sales as well. The
Company's standard practice has been to require either the distributor or the
customer to obtain any such foreign approvals or licenses which may be required.
Commencing in fiscal 1998 export sales to most European countries and
certain other countries have required CE certification (essentially safety
requirements for electrical products). On May 25, 1999, the Company obtained CE
certification. Previously, on April 9, 1999, the Company was approved for ISO
9001 Certification for its Quality Management System. The Quality Management
System is applicable to the design, manufacture, administration of installation
and servicing of magnetic resonance imaging scanner systems.
HEALTH MANAGEMENT CORPORATION OF AMERICA
(PHYSICIAN AND DIAGNOSTIC MANAGEMENT SERVICES BUSINESS)
Health Management Corporation of America (formerly known as U.S. Health
Management Corporation and referred to as "HMCA") was organized by the Company
in March 1997 as a wholly-owned subsidiary for the purpose of engaging in the
business of providing comprehensive management services to physicians' practices
and other medical providers, including diagnostic imaging centers and ancilliary
services. The services provided by the Company include development,
administration, leasing of office space, facilities and medical equipment,
provision of supplies, staffing and supervision of non-medical personnel, legal
services, accounting, billing and collection and the development and
implementation of practice growth and marketing strategies.
Since its formation, HMCA has completed five acquisitions. HMCA became
actively engaged in the physician and diagnostic management services business
through its initial two acquisitions which were consummated effective June 30,
1997. Following these two initial acquisitions, HMCA completed two additional
acquisitions in fiscal 1998 and one additional acquisition in fiscal 1999.
The first acquisition was of a group of several interrelated
corporations, limited liability companies and a partnership engaged in the
business of managing three diagnostic imaging centers and one multi-specialty
practice in New York State. The transaction was effected through a merger
between a wholly-owned subsidiary of HMCA (formed for the purpose of effecting
the transaction) and Affordable Diagnostics, Inc., one of the acquired companies
which immediately prior to the merger had acquired the assets and assumed the
liabilities of the other acquired companies (together, the "Affordable
Companies"). The consideration paid for the Affordable Companies consisted of
2,340,000 shares of the common stock of Fonar.
The business of the Affordable Companies, which is being continued by
HMCA, consisted of providing management, space, equipment, personnel and other
resources to the four managed facilities. The services provided at the
facilities include MRI scans, CAT scans, x-rays, physical rehabilitation, and in
connection with physical rehabilitation, ultra-sound and SSEP/EMG
electromygographic diagnostics. The four managed facilities are located in
Brewster, New York (MRI), Yonkers, New York (MRI and x-ray), Bronx, New York
(MRI and CT) and Riverdale, New York (multi-specialty practice, ultra-sound and
SSEP/EMG electromygographic diagnostics). The assets acquired through the
acquisition include three MRI scanners, one CT scanner, one x-ray machine,
rehabilitation equipment and ultra-sound and electromygographic machines. The
equipment is leased to and used at the managed facilities. In addition, HMCA
consummated the acquisition of an additional MRI scanner pursuant to a contract
entered into prior to the acquisition.
The second completed acquisition was of Raymond V. Damadian, M.D. MR
Scanning Centers Management Company ("RVDC"). Pursuant to the terms of the
transaction, HMCA purchased all of the issued and outstanding shares of stock of
RVDC from Raymond V. Damadian in exchange for 10,000 shares of the Common Stock
of FONAR. Raymond V. Damadian, the principal stockholder, President and Chairman
of the Board of FONAR, was the sole stockholder, director and President of RVDC
immediately prior to the acquisitions. The business of RVDC, which is being
continued by HMCA, was the management of MRI diagnostic imaging centers in New
York, Florida, Georgia and other locations. The assets of RVDC included nine MRI
scanners, office equipment and office furnishings. RVDC also held partnership
interests in three partnerships owning MRI scanning centers.
As a result of these transactions with Dr. Damadian, HMCA has acquired
the business of managing 19 MRI scanning centers. Sixteen of the scanning
centers are managed pursuant to management agreements, and 3 of the centers are
partnerships with RVDC as the general partner. Effective July 1, 1997, HMCA
entered into new management agreements with the centers. Pursuant to the
management agreements, HMCA is providing comprehensive management services,
including administrative services, office facilities, office equipment, supplies
and personnel (except for physicians) to the centers. Service for the centers'
MRI scanning equipment is provided under the management agreements in these
cases. MRI scanning systems are provided to 9 of the centers pursuant to scanner
leases entered into effective July 1, 1997.
All of the facilities previously managed by RVDC are MRI scanning centers.
The third completed acquisition, consummated on January 20, 1998, was an
acquisition of the business and assets of Central Health Care Services
Management Company, LLC (Central Health). Central Health is a management service
organization (MSO) managing a multi-specialty practice in Yonkers, New York. The
assets acquired include therapy and rehabilitation equipment, x-ray equipment,
office equipment and office furnishings. The purchase price of Central Health
was $1,454,160, of which $601,665 was paid in cash, $551,665 by notes, $25,000
by assumptions of liabilities and the balance in shares of Fonar common stock
valued at $275,830.
The fourth completed acquisition, consummated effective March 20, 1998,
was the acquisition of A & A Services, Inc. ("A & A Services"), an MSO managing
four primary care practices in Queens County, New York. A & A Services provides
the practices with management services, office space, equipment, repair and
maintenance service for the equipment and clerical and other non medical
personnel. The office locations for the practices are located in Woodhaven,
Richmond Hill, Corona and Ridgewood in Queens County, New York and account for
over 40,000 primary care patient visits per year. The assets owned by A&A
Services included medical and office equipment and office furnishings. The
purchase price for A&A was $10 million, $4 million of which was paid in cash at
closing and $6 million of which is payable pursuant to promissory notes over a
total of six years from closing. Additional consideration is payable if net
income for the acquired business exceeds $2.3 in any of the five years following
the closing as follows: in each year, 75% of net income between $2.3 million and
$2.8 million; 50% of net income between $2.8 million and $3.5 million and 25% of
net income in excess of $3.5 million.
The fifth completed acquisition, consummated effective August 20, 1998,
was the acquisition of Dynamic Health Care Management, Inc. ("Dynamic"). Dynamic
is an MSO which manages three physician practices in Nassau and Suffolk Counties
on Long Island, New York. The office locations for these practices are in
Bellmore and Hempstead in Nassau County and Deer Park in Suffolk County and
account for approximately 85,000 patient visits per year. The assets of Dynamic
included therapy and rehabilitation equipment, office equipment and office
furnishings. The purchase price for Dynamic was $11,576,231, consisting of $2.0
million in cash and the balance payable pursuant to promissory notes over an
aggregate period of five years from the closing.
HMCA GROWTH STRATEGY
In addition, HMCA may also pursue acquisitions pursuant to which HMCA
would purchase the assets of physicians' practices. Simultaneously with the
acquisition of the assets, HMCA would enter into agreements with the physicians
(or a professional corporation employing the physicians) pursuant to which HMCA
would lease the use of the assets and provide management services to the
physicians or their professional corporations. The professional corporation
could be either affiliated with HMCA or owned by the selling physicians.
HMCA believes that there are numerous existing medical practices that
could benefit from improved management techniques which would allow the
physicians to spend more time treating patients (thereby increasing their
revenue) and less time being concerned with the day to day tasks of managing the
business. Although the disadvantage to physicians would be the increased
administrative costs in the form of management fees payable to HMCA, the Company
believes the ability of the physicians to spend more time practicing medicine
will more than compensate for these costs.
In addition, expansion plans for HMCA's clients include opening more
offices and expanding existing offices so as to enable practices to treat more
patients more efficiently.
HMCA is seeking to create a network of physicians to participate in
managed care and to promote an expansion of the medical services offered by its
medical practice clients.
HMCA believes that the creation of this network will be particularly
helpful to its clients where capitated fee agreements are negotiated with
insurers since its clients will be able to offer more services from more
locations and thereby obtain a higher capitation rate than they might otherwise
have been able to obtain. Capitated fee arrangements are arrangements with HMO's
whereby the physician or physician practice is paid a fixed monthly fee based on
the age and gender of covered person. The fees vary from HMO to HMO and are
essentially set by the HMO's.
HMCA's growth strategy is intended to enable its medical practice
clients to retain and enhance revenues and to offer patients cost-effective
medical care within an integrated practice offering a broad range of evaluation,
testing, diagnostic, treatment and therapeutic services. In the longer term, as
the network of offices to which it provides its management services grows, HMCA
believes that it will be in an excellent position to attract managed care
contracts for its clients from employers and insurance carriers.
PHYSICIAN AND DIAGNOSTIC MANAGEMENT SERVICES
HMCA's services to the facilities it manages encompass substantially all
of the facilities' operations. These services include:
(1) Offices and Equipment. HMCA provides office space and
equipment to its clients. This includes technologically sophisticated medical
equipment. HMCA also provides improvements to leaseholds, assistance in site
selection and advice on improving, updating, expanding and adapting to new
technology.
(2) Personnel. HMCA staffs all the non-medical positions of its
clients with its own employees, eliminating the client's need to interview,
train and manage non-medical employees, as well as process the necessary tax,
insurance and other documentation relating to employees.
(3) Administrative. HMCA assists in the scheduling of patient
appointments, purchasing of medical supplies and equipment and handling of
reporting, accounting, processing and filing systems. It prepares and files the
physician portions of complex forms to ensure full and timely regulatory
compliance and appropriate cost reimbursement under no-fault insurance and
workers' compensation guidelines.
(4) Billing and Collections. HMCA is responsible for the billing
and collection of revenues from third-party payors including those governed by
no-fault and workers' compensation statutes.
(5) Cost Saving Programs. Based on available volume discounts,
HMCA seeks to obtain favorable pricing for medical supplies, equipment,
pharmaceuticals and other inventory for its clients.
(6) Diagnostic Imaging and Ancillary Services. HMCA can offer
access to diagnostic imaging equipment through diagnostic imaging facilities
managed by it. The Company is expanding the ancillary services offered in its
network to include CT-scans, x-rays, ultrasound, and other ancillary services
useful to its clients.
(7) Marketing Strategies. HMCA is responsible for developing
marketing plans for its clients.
HMCA provides its services pursuant to negotiated contracts with its
clients. While HMCA believes it can provide the greatest value to its clients by
furnishing the full range of services appropriate to that client, HMCA would
also be willing to enter into contracts providing for a more limited spectrum of
management services.
HMCA MARKETING
HMCA's marketing strategy is to increase the size, number and locations
of medical practices and facilities which it manages. HMCA will also seek to
broaden the types of medical practices which it services and to develop a client
base of primary care and specialty practices as well as diagnostic imaging
facilities and other ancillary services. HMCA will seek to promote growth of its
clients' patient and revenue bases by developing a network of medical providers
and assisting its clients in the development of multi-specialty medical
practices.
Marketing activities include locating medical practices which meet the
size, quality and operating parameters set by HMCA. HMCA will focus on
opportunities for expanding the services clients offer and expanding into new
geographic areas. HMCA will also seek to increase the patient volume of clients.
DIAGNOSTIC IMAGING CENTERS AND OTHER ANCILLIARY SERVICES
Diagnostic imaging centers managed by HMCA provide diagnostic imaging
services to patients referred by physicians who are either in private practice
or affiliated with managed care providers or other payor groups. The centers are
operated in a manner which eliminates the admission and other administrative
inconveniences of in-hospital diagnostic imaging services. Imaging services are
performed in an outpatient setting by trained medical technologists under the
direction of interpreting physicians. Following diagnostic procedures, the
images are reviewed by the interpreting physicians who prepare a report of these
tests and their findings. These reports are transcribed by HMCA personnel and
then delivered to the referring physician.
In addition, HMCA is expanding the ancillary services offered in its
network to include CT scans, virtual colonoscopies, x-rays, ultrasound and other
modalities as may be appropriate for the physician practice mix.
HMCA develops marketing programs in an effort to establish and maintain
profitable referring physician relationships and to maximize reimbursement
yields. These marketing approaches identify and target selected market segments
consisting of area physicians with certain desirable medical specialties and
reimbursement yields. Corporate and center managers determine these market
segments based upon an analysis of competition, imaging demand, medical
specialty and payor mix of each referral from the local market. HMCA also
directs marketing efforts at managed care providers.
Managed care providers are becoming an increasingly important factor in
the diagnostic imaging industry. To further its position, HMCA will seek to
expand the imaging modalities offered at its managed centers or to create
networks with other imaging centers. The planned introduction of virtual
colonoscopy at one of the managed centers is considered by HMCA to be one of the
most promising new modalities. The device is used with a CT scanner and enables
the physician to conduct a colonoscopy without using any invasive instruments.
If it proves successful, HMCA will introduce it to other managed centers as
appropriate.
COMPETITION (HMCA)
The physician and diagnostic management services field is highly
competitive. A number of large hospitals have acquired medical practices and
this trend may continue. HMCA expects that more competition will develop. Many
competitors have greater financial and other resources than HMCA.
With respect to the diagnostic imaging centers managed by HMCA, the
outpatient diagnostic imaging industry is highly competitive. Competition
focuses primarily on attracting physician referrals at the local market level
and increasing referrals through relationships with managed care organizations.
HMCA believes that principal competitors for the diagnostic imaging centers are
hospitals and independent or management company-owned imaging centers.
Competitive factors include quality and timeliness of test results, ability to
develop and maintain relationships with managed care organizations and referring
physicians, type and quality of equipment, facility location, convenience of
scheduling and availability of patient appointment times.
GOVERNMENT REGULATION APPLICABLE TO HMCA
Various States prohibit business corporations from practicing medicine.
Consequently, HMCA leases space and equipment to clients and provides clients
with a range of non-medical administrative and managerial services. HMCA does
not engage in the practice of medicine or establish standards of medical
practice or policies for its clients in any such State.
Under the federal Self-Referral Law (the "Stark Law") (which is
applicable to Medicare and Medicaid patients) and the self-referral laws of
various States, certain health practitioners (including physicians,
chiropractors and podiatrists) are prohibited from referring their patients for
the provision of designated health services (including diagnostic imaging and
physical therapy services) to any entity with which they or their immediate
family members have a financial relationship, unless the referral fits within
one of the specific exceptions in the statutes or regulations. Statutory
exceptions under the Stark Law include, among others, direct physician services,
in-office ancillary services rendered within a group practice, space and
equipment rental and services rendered to enrollees of certain prepaid health
plans. Some of these exceptions are also available under the State self-referral
laws.
HMCA's clients generate revenue from patients covered by no-fault
insurance and workers' compensation programs. In the event that changes in these
laws alter the fee structures or methods of providing service, or impose
additional or different requirements, HMCA could be required to modify its
business practices and services in ways that could be more costly to HMCA or in
ways that decrease the revenues which HMCA receives from its clients.
HMCA believes that it is in compliance with applicable Federal, State
and local laws. HMCA does not believe that such laws will have any material
effect on its business.
EMPLOYEES
As of July 1, 2000, the Company employed 568 persons on a full-time and
part-time basis. Of such employees, 13 were engaged in marketing and sales, 43
in research and development, 72 in prodution, 44 in customer support services,
356 in administration (including 201 on site at facilities and offices managed
by HMCA and 85 performing billing, collection and transcription services for
those facilities) and 40 professional MRI technicians on site at diagnostic
imaging centers managed by HMCA.
ITEM 2. PROPERTIES
Fonar leases approximately 135,240 square feet of office and plant space
at its principal offices in Melville, New York and at two other locations in
Melville and Farmingdale, New York at a current aggregate annual rental rate of
approximately $834,000, excluding utilities, taxes and other related expenses.
The term of one of the leases extends through 2002 with options to renew up
through 2008 and the term of the other lease extends to the beginning of 2009.
The Company also leases space in Harrisburg, Pennsylvania at a rental of $1350
per month. Management believes that these premises are adequate for its current
needs. HMCA leases approximately 16,850 square feet for its headquarters in
Melville, New York at a current annual rental rate of $369,865. The term of the
lease extends through September, 2009. In addition, HMCA maintains leased office
premises for its clients at approximately 38 site locations having an aggregate
annual rental rate of approximately $1.9 million under leases having various
terms.
ITEM 3. LEGAL PROCEEDINGS
In January 1998, the Company filed an action against Health South, Inc.,
in the United States District Court for the Eastern District of New York (Civil
Action No. CV-98-0679) alleging infringement of the Company's Multi-Angle
Oblique Imaging Patent (U.S. Patent No. 4,871,966). Health South, Inc. filed a
declaratory judgment counterclaim for non-infringement and invalidity and a
third party claim against a manufacturer of certain of the scanners. The case
was settled with the manufacturer in December, 1999 and with Health South, Inc.
in June, 2000.
There is no material litigation pending, or to its knowledge, threatened
against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the "Small Cap" market under the
National Association of Securities Dealers Automated Quotation System ("NASDAQ")
symbol FONR. The following table sets forth the high and low bid and asked
prices reported in NASDAQ System for the periods shown. The prices represent
quotations between dealers and do not include certain mark-ups, mark-downs or
commissions, and do not necessarily represent actual transactions.
Fiscal Quarter
Bid Ask
High Low High Low
---- ---- ---- ----
July - September 1997 3.87 2.72 3.94 2.75
October - December 1997 4.03 2.63 4.06 2.66
January - March 1998 3.03 2.38 3.13 2.41
April - June 1998 2.72 1.94 2.75 2.00
July - September 1998 2.47 1.25 2.50 1.31
October - December 1998 1.97 0.97 2.00 1.00
January - March 1999 1.72 1.19 1.78 1.22
April - June 1999 1.41 1.03 1.50 1.09
July - September 1999 1.16 0.91 1.16 0.94
October - December 1999 3.19 0.69 3.25 0.72
January - March 2000 4.91 1.63 4.94 1.66
April - June 2000 3.31 1.44 4.00 1.50
July - September 25 2000 3.44 1.50 3.47 1.81
On September 6, 1999, the Company had approximately 5,387 stockholders
of record of its Common Stock, 12 stockholders of record of its Class B Common
Stock, 4 stockholders of record of its Class C Common Stock and 4,637
stockholders of record of its Class A Non-voting Preferred Stock.
At the present time, the only class of the Company's securities for
which there is a market is the Common Stock.
The Company paid cash dividends in fiscal 1998 and the first three
quarters of fiscal 1999 on monies it received from the enforcement of its
patents. Prior to these dividends, the Company had not paid any cash dividends.
The Company anticipates paying additional dividends on monies it receives from
the enforcement of its patents. Except for these dividends, however, it is
expected that the Company will continue to retain earnings to finance the
development and expansion of its business.
Item 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data has been extracted
from the Company's consolidated financial statements for the five years ended
June 30, 2000. This consolidated selected financial data should be read in
conjunction with the consolidated financial statements of the Company and the
related notes included in Item 8 of this form. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for a discussion of
the Company's business plan.
As of, or For the Period Ended June 30,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
STATEMENT OF
OPERATIONS
Revenues $39,073,797 $36,945,044 $ 27,554,357 $17,633,066 $13,915,725
Cost of $30,431,069 $29,391,682 $ 23,841,844 $18,428,574 $14,417,384
revenues
Research and $5,532,325 $ 6,647,555 $ 6,506,995 $ 3,928,035 $ 3,607,703
Development
Expenses
Net Income
(loss) $(10,955,987) $(14,215,763) $ (5,653,086) $56,068,771 $(11,407,444)
Net income
(loss) per $ (.17) $ (.22) $ (.09) $ 1.00 $ (.22)
common share
Weighted 66,304,716 64,071,151 61,175,986 56,097,965 51,516,470
average number
Of shares
outstanding *
BALANCE SHEET
DATA
Working
capital $24,934,609 $37,863,029 $ 54,426,483 $ 62,659,470 $(1,575,857)
(deficit)
Total $84,599,039 $97,648,168 $108,447,780 $ 106,690,561 $28,057,384
assets
Long-term $20,969,186 $24,821,834 $ 16,003,479 $ 4,626,269 $ 4,204,935
debt and
obligations
under capital
leases
Stockholders' $51,284,758 $59,303,773 $72,572,486 $ 73,245,262 $11,412,629
equity
* Adjusted for stock dividend of Class A Non-voting Preferred Stock declared in
October, 1995.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION.
INTRODUCTION.
The Company was formed in 1978 to engage in the business of designing,
manufacturing and selling MRI scanners. In 1997, the Company formed a
wholly-owned subsidiary, Health Management Corporation of America ("HMCA"),
formerly known as U.S. Health Management Corporation, in order to expand into
the physician and diagnostic management services business.
FONAR's principal MRI products are its Fonar 360, QUAD and Echo MRI
scanners. Fonar also considers it Stand-Up MRI ("Indomitable(TM)") which has
been submitted to the FDA for approval, to be one of its most promising new
products. The Company believes it is in a position to aggressively seek new
sales. The Fonar 360, QUAD and Stand-Up MRI scanners are highly competitive and
totally new non-claustrophobic scanners not previously available in the MRI
market. At 0.6 Tesla field strength, the QUAD 12000 magnet is the highest field
"Open MRI" in the industry, offering non-claustrophobic MRI together with
high-field image quality for the first time. The Fonar 360 and Stand-Up MRI(TM)
share the fundamental technology of the QUAD scanners and also have a field
strength of 0.6 Tesla. The Company's work-in-progress Pinnacle MRI scanner will
combine Fonar's iron frame magnet with a superconducting driver, and is expected
to have a field strength between 0.6 and 1.0 Tesla. The Company expects vigorous
sales from its new products. Fonar also offers the Echo, a low cost open MRI
scanner. (See "Description of Business - Products, Works-in-Progress and Product
Marketing.")
As part of its scanner marketing program, the Company has attended the
industry's annual trade show, RSNA (Radiological Society of North America) since
1995 and plans to do so again in November 1999. The Company believes that it is
uniquely positioned to take advantage of the rapidly expanding "Open MRI"
market, as the manufacturer of the only high-field "Open MRI" in the industry.
The Company expects marked demand for its products since image quality increases
as a direct proportion to magnetic field strength. When commercially available,
Fonar's Stand-Up MRI is expected to be the only MRI capable of producing images
in the weight bearing state. In addition, the Company's new scanners provide
improved image quality and high speed imaging at costs that are significantly
less than the competition and more in keeping with the medical cost reduction
demands being made by our national leaders on behalf of the public.
HMCA generates revenues from providing comprehensive management services
(including development, administration, accounting and billing and collection
services) together with office space, medical equipment, supplies and
non-medical personnel to its clients. Revenues are in the form of management and
leasing fees. HMCA has completed five acquisitions since it was formed in March
1997.
The first acquisition was of a group of companies engaged in the
business of managing three diagnostic imaging centers and one multi-specialty
practice in New York State (the "Affordable Companies"). The second acquisition
was of Raymond V. Damadian, M.D. MR Scanning Centers Management Company
("RVDC"), a company owned by FONAR's principal stockholder, President and
Chairman of the Board, Raymond V. Damadian. The business of RVDC, which is being
continued by HMCA, was the management of MRI diagnostic imaging centers in New
York, Florida, Georgia and other locations. The third acquisition was the
acquisition of the business and assets of Central Health Management Co., LLC
("Central Health") a multi-specialty management service organization (MSO) in
Yonkers, New York. The fourth acquisition was the acquisition of A & A Services,
Inc. ("A & A"), an MSO managing four primary care practices in Queens County,
New York, and the fifth acquisition was the acquisition of Dynamic Health Care
Management, Inc. ("Dynamic"), an MSO managing three multi-specialty physician
practices in Nassau and Suffolk Counties in New York.
In addition, HMCA sponsored the opening of and manages two
multi-specialty facilities. These facilities are located in Orlando, Florida and
Elmhurst, New York.
HMCA did not actively engage in business until after June 30, 1997,
which was the effective date of its acquisitions of the Affordable Companies and
RVDC. As separate businesses, the Affordable Companies had been engaged in
business since 1994 and RVDC had been engaged in business since 1990. For
financial statement presentation the results of operations, assets and
liabilities of the Company and RVDC have been consolidated for prior periods.
The Affordable Companies, Central Health, A & A and Dynamic, have been
consolidated effective as of the dates of their respective acquisitions (June
30, 1997, January 23, 1998, March 20, 1998 and August 20, 1998, respectively).
The Company has assessed the impact of the Year 2000 Issue (Y2K) on its
financial reporting systems and operations. The Year 2000 Issue was the result
of computer programs being written using two digits (rather than four) to define
the applicable year. The Company developed a plan to meet this issue, and
reviewed all in-house computer based systems and its existing customer base of
MRI Scanners. The Company has successfully implemented the Y2K plan and all
systems were upgraded or replaced with little or no impact on operations. Y2K
compliant software was installed on the Company's MRI scanners. The scanners
transitioned to the year 2000 successfully. Costs of addressing these items did
not have a material adverse impact on the Company's financial position.
RESULTS OF OPERATIONS. FISCAL 2000 COMPARED TO FISCAL 1999
In fiscal 2000, the Company experienced a net loss of $11.0 million on
revenues of $39.1 million as compared to net loss of $14.2 million on revenues
of $36.9 million for fiscal 1999.
Revenues attributable to the Company's physician and diagnostic
management services segment (HMCA) increased to $34.0 million in fiscal 2000
from $31.3 million in fiscal 1999. Operating income of $2.5 million was
recognized from the Company's physician and diagnostic management services in
fiscal 2000, as compared to an operating income of $3.1 million in fiscal 1999.
Revenues attributable to the Company's medical equipment segment
declined to $6.2 million in fiscal 2000 from $6.5 million in fiscal 1999,
reflecting lower sales volume in fiscal 2000. Results of operations for the
medical equipment segment improved, however, from a loss of $18.7 million in
fiscal 1999 to a loss of $18.9 million in fiscal 2000.
The Company's consolidated operating loss increased to a loss of $16.4
million for fiscal 2000 from a loss of $15.6 million for fiscal 1999, a further
improvement from the operating loss of $17.6 million for fiscal 1998.
Other income of $1.0 million (principally the net proceeds from the
Company's patent enforcement lawsuits) and investment income of $2.1 million
were recognized by the Company in fiscal 1999 as compared to other income of
approximately $5.6 million (principally the net proceeds from the Company's
patent enforcement lawsuits) and investment income of $1.9 million in fiscal
2000.
Costs of revenues and expenses increased from $52.6 million in fiscal
1999 to $55.5 million in fiscal 2000, reflecting principally the expansion of
the Company's physician and diagnostic management services operations. Costs of
revenue and expenses for the Company's physician and diagnostic management
services increased to $23.6 million in fiscal 2000 from $21.8 million in fiscal
1999. Research and development expenses decreased to $5.5 million in fiscal 2000
as compared to $6.6 million in fiscal 1999.
Overall, costs of revenues and expenses for the Company's medical
equipment segment, however, declined to $24.3 million in fiscal 2000 from $25.1
million in fiscal 1999 reflecting, most significantly, reductions in costs of
product sales ($4.4 million in fiscal 2000 as compared to $4.9 million in fiscal
1999) and an increase in general and administrative expenses ($8.7 million in
fiscal 2000 as compared to $7.7 million in fiscal 1999) and costs of revenue
($7.9 million in fiscal 2000 as compared to $9.5 million in fiscal 1999).
Revenues generated by sales of QUAD MRI scanners were $2.6 million (7%
of total revenues) in fiscal 1999 and $3.2 million (8.4% of total revenues) in
fiscal 2000. Revenues attributable to sales of the Company's Ultimate scanners
during the same period were $0.00.
Sales of Beta scanners were $430,000 in fiscal 1999 (approximately 1%
of total revenues) and $84,255 (approximately 0.2% of total revenues) in fiscal
2000.
Sales to affiliated parties represented approximately 4.5% ($1,752,298)
of the Company's revenues in fiscal 2000, as compared to 0.4% ($150,000) of the
Company's revenues in fiscal 1999.
Gross profit margins on product sales to unrelated parties were negative
(49%) in fiscal 1999 and negative (86.7%) in fiscal 2000. This reflected the
losses on sales of the Company's QUAD scanners. The Company's strategy is to
attempt to hold down the price of its QUAD scanners and to increase
profitability by reducing manufacturing costs and increasing volume. The
effectiveness of this strategy will not be discernible until higher sales volume
for the Company's QUAD scanners is achieved.
To reduce the cost of manufacturing its QUAD scanners, the Company
expanded its manufacturing capacity in fiscal 2000 and 1999 by acquiring
approximately $2.1 million and $3.8 million, respectively, worth of new capital
equipment. In addition, the Company expanded its operating capacity by hiring
additional personnel.
Notwithstanding the Company's increased manufacturing activities,
revenues attributable to the Company's medical equipment segment declined to
approximately $6.2 million in fiscal 2000 from approximately $6.5 million in
fiscal 1999. These trends reflected a decline in service revenue from $2.3
million in fiscal 1999 to $1.7 million in fiscal 2000 and a constant level in
product sales in fiscal 2000 ($3.4 million) from fiscal 1999 ($3.4 million). The
decline in service revenue reflects the retirement of old scanners by the
Company's customers. The Company does not expect the decline in revenue to
continue. The Company is enthusiastic about the future of its FONAR 360 product
line and Indomitable(TM) scanners which will bring a new plateau of "openness"
to diagnostic MRI and a new frontier in surgery for performing surgical
treatments using MRI images to guide surgery.
Continuing its tradition as the originator of MRI, the Company remained
committed to maintaining its position as the leading innovator of the industry
through aggressive investing in research and development. In fiscal 2000 the
Company continued its investment in the development of its new MRI scanners,
together with software and upgrades, with an investment of $5,893,648 in
research and development ($361,323 of which was capitalized) as compared to
$6,647,555 (none of which was capitalized) in fiscal 1999. The research and
development expenditure was approximately 116.7% of revenues attributable to the
Company's medical equipment segment (and 15.1% of total revenues) in 2000 and
$102% of medical equipment segment revenues in 1999 (and 18% of total revenues).
The Company has continued its efforts to increase scanner sales in
foreign countries as well as domestically. Based on sales to date, further
indications of interest, meetings, sales trips abroad and negotiations, the
Company is optimistic that foreign sales will continue to prove a significant
source of revenue.
The Company continued to benefit as a result of programs set in motion
in fiscal 1989; namely strict cost containment initiatives and expanding the
corporate business into a greater number of profitable enterprises within and
related to the MRI and medical industries (e.g., physician and diagnostic
management services, customer service, upgrades). As a result of this expansion,
the percentage of the Company's revenue derived from sources other than scanner
sales was approximately 91.4% for fiscal 2000 and 90.9% for fiscal 1999.
During the fiscal year ended June 30, 2000, the Company realized income
of approximately $5.6 million from the settlement of various legal disputes
(essentially its patent infringement actions) as compared to approximately $1.0
million in fiscal 1999.
RESULTS OF OPERATIONS. FISCAL 1999 COMPARED TO FISCAL 1998
In fiscal 1999, the Company experienced a net loss of $14.2 million on
revenues of $36.9 million as compared to a net loss of $5.7 million on revenues
of $27.6 million for fiscal 1998. As a result of HMCA's acquisitions, revenues
attributable to the Company's physician and diagnostic management services
segment (HMCA) increased dramatically, to $31.3 million in fiscal 1999 from
$21.1 million in fiscal 1998. Operating income of $3.1 million was recognized
from the Company's physician and diagnostic management services in fiscal 1999,
as compared to income of $2.7 million in fiscal 1998. Revenues attributable to
the Company's medical equipment segment declined to $6.5 million in fiscal 1999
from $7.8 million in fiscal 1998, reflecting lower sales volume in fiscal 1999.
Results of operations for the medical equipment segment improved, however, from
a loss of $20.3 million in fiscal 1998 to a loss of $18.7 million in fiscal
1999. Other income of $8.6 million (principally the net proceeds from the
Company's patent enforcement lawsuits) and investment income of $3.7 million
were recognized by the Company in fiscal 1998 as compared to other income of
$1.0 million (principally the net proceeds from the Company's patent enforcement
lawsuits) and investment income of $2.1 million in fiscal 1998.
Costs of revenues and expenses increased from $45.1 million in fiscal
1998 to $52.6 million in fiscal 1999, reflecting the expansion of the Company's
physician and diagnostic management services operations and an increase in
research and development in the medical equipment segment. Costs of revenue and
expenses for the Company's physician and diagnostic management services
increased to $21.8 million in fiscal 1999 from $13.7 million in fiscal 1998.
Research and development expenses increased to $6.6 million in fiscal 1999 as
compared to $6.5 million in fiscal 1998.
Overall, costs of revenues and expenses for the Company's medical
equipment segment, however, declined to $25.1 million in fiscal 1999 from $28.1
million in fiscal 1998 reflecting, most significantly, costs of product sales
($4.9 million in fiscal 1999 as compared to $7.8 million in fiscal 1998)
reductions in general and administrative expenses ($7.7 million in fiscal 1999
as compared to $7.5 million in fiscal 1998) and costs of revenue ($8.5 million
in fiscal 1999 as compared to $11.4 million in fiscal 1998).
Revenues generated by sales of QUAD MRI scanners were $4.1 million
(approximately 15% of total revenues) in fiscal 1998 and $2.6 million (7% of
total revenues) in fiscal 1999. Revenues attributable to sales of the Company's
Ultimate scanners during the same period were $0.00.
Sales of Beta scanners were $0.00 in fiscal 1998 and $430,000 in fiscal
1999.
Sales to affiliated parties represented approximately 0.4% ($150,000) of
the Company's revenues in fiscal 1999, as compared to approximately 0.3%
($100,000) in fiscal 1998.
Gross profit margins on product sales to unrelated parties were negative
(98%) in fiscal 1998 and negative (49%) in fiscal 1999. This reflected the
losses on sales of the Company's QUAD scanners.
To reduce the cost of manufacturing its QUAD scanners, the Company
expanded its manufacturing capacity in fiscal 1999 and 1998 by acquiring
approximately $3.8 million and $1.4 million, respectively, worth of new capital
equipment. In addition, the Company expanded its operating capacity by hiring
additional personnel.
Notwithstanding the Company's increased manufacturing activities,
revenues attributable to the Company's medical equipment segment declined to
approximately $6.5 million in fiscal 1999 from approximately $7.8 million in
fiscal 1998. These trends reflected a decline in service revenue from $2.5
million in fiscal 1998 to $2.3 million in fiscal 1999 and a decrease in product
sales in fiscal 1999 ($3.4 million) from fiscal 1998 ($3.9 million).
In fiscal 1999 the Company continued its investment in the development
of its new MRI scanners, together with software and upgrades, with an investment
of $6,647,555 in research and development (none of which was capitalized) as
compared to $6,506,995 (none of which was capitalized) in fiscal 1998. The
research and development expenditure was approximately 102% of revenues
attributable to the Company's medical equipment segment (and 18% of total
revenues) in 1999 and $83.3% of medical equipment segment revenues in 1998 (and
23.6% of total revenues).
During the fiscal year ended June 30, 1999, the Company realized income
of approximately $1.0 million from the settlement of various legal disputes
(essentially its patent infringement actions) as compared to approximately $8.6
million in fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and marketable securities declined from $35.4
million at June 30, 1999 to $23.3 million at June 30, 2000. Principal uses of
cash during fiscal 2000 included capital expenditures of $2.8 million, repayment
of indebtedness and capital lease obligations in the amount of $3.8 million,
purchase of treasury stock of $79,000 and $4.7 million to fund the losses for
the fiscal year.
Marketable securities approximated $11.5 million as of June 30, 2000 as
compared to $20.2 million as of June 30, 1999. From June 30, 1999 to June 30,
2000 the Company reduced its investments in equity securities from approximately
$100,000 to $0, reduced its investments in U.S. Government obligations from
approximately $11.0 million to $10.2 million and reduced its investments in
corporate and government agency bonds from approximately $9.3 million to $1.5
million. This has had the intended effect of reducing the volatility of the
Company's investment portfolio.
Cash used in operating activities for fiscal 2000 approximated $4.7 million.
Cash used in operating activities was attributable substantially to the funding
of the net loss for fiscal 2000.
Cash provided by investing activities for fiscal 2000 approximated $5.5
million. The principal source of cash from investing activities during fiscal
2000 consisted of the proceeds from the sale of marketable securities of $8.6
million (less expenditures for property and equipment of approximately $2.8
million).
Cash used in financing activities for fiscal 2000 approximated $4.1
million. The principal uses of cash in financing activities during fiscal 2000
consisted of repayment of principal on long-term debt of approximately $3.8
million.
Total liabilities decreased since June 30, 1999 by approximately $5.0
million to approximately $33.3 million at June 30, 2000. The decrease in
liabilities from June 30, 1999 was attributable to a reduction of approximately
$5.6 million in long-term debt.
As at June 30, 2000, the Company's past due obligations consisted of
approximately $643,534 in past due taxes (various state taxes). The Company is
seeking to enter into payment plans with taxing authorities with respect to past
due taxes and to restructure its other past due indebtedness.
As of June 30, 2000, the Company had an unused credit facility with a
bank in the approximate amount of $863,000.
The Company's business plan currently includes an aggressive program for
manufacturing and selling its new line of scanners which are achieving success
in the marketplace. In addition the Company plans, through its subsidiary,
Health Management Corporation of America, to develop and expand its physician
and diagnostic management services) business (See "Description of Business").
The Company believes its present financial resources are sufficient to
achieve the sales, service and production levels necessary to support its
operations.
The Company has developed and begun to implement a new program to
finance a portion of the purchase price of its scanners through a newly formed
subsidiary, Fonar Acceptance Corporation, and to assist the customer in
obtaining the remaining portion of its financing through an independent source
or sources. The new program is intended to increase the overall profitability of
the Company by assisting in the sale of scanners and participating in the
profits derived from financing those sales.
Advances and notes to affiliates and related parties increased by
approximately $597,000 from June 30, 1999 to June 30, 2000. As these are
long-term assets, they tend to reduce the Company's liquidity.
Capital expenditures for each of fiscal 2000 and 1999 approximated $2.8
million and $5.5 million, respectively, and substantially consisted of office
and production equipment.
The Company's business plan initiated in September 1989, had as its
objective the enhancement and stabilization of revenue streams through the
generation of additional income from its installed base of scanners and leasing
programs. In addition, the Company instituted strict cost containment programs.
While continuing to focus on new sources of income, the Company now has
commenced aggressive sales and manufacturing of its new generation of Open MRI
scanners and is reemphasizing MRI Scanner sales. In addition, the Company is
enhancing its revenue by entering into the physician and diagnostic management
services business through its new subsidiary, HMCA.
Cost containment programs continue in force notwithstanding an increase
in costs and expenses resulting from increased manufacturing activity and
marketing of its MRI scanners and the expansion of HMCA's physician and
diagnostic management services business. These programs, which include
increasing the portion of manufacturing conducted on the Company's premises,
have enabled the Company to achieve significantly lower manufacturing costs than
would have otherwise been experienced in the production of its QUAD scanners.
This has enabled the Company to pass on to customers a much needed reduction in
the sales price of MRI scanners.
The Company's plan calls for a continuing emphasis on providing its
customers with enhanced equipment service and maintenance capabilities and
delivering state-of-the-art, innovative and high quality equipment upgrades at
competitive prices. Fees for on-going service and maintenance from the Company's
installed base of scanners were $2.3 million for the year ended June 30, 1999
and $1.7 million for the year ended June 30, 2000 (transactions between the
Company and its subsidiaries are eliminated in the consolidation). The Company
will continue to aggressively develop and market upgrades and enhancements for
previously installed scanners.
The Company's working capital surplus as of June 30, 2000 approximates
$24.9 million, as compared to a working capital surplus of $37.9 million as of
June 30, 1999.
The change in the Company's working capital position resulted primarily
from its investments in new equipment ($2.8 million), note payments on the
purchase prices for HMCA's acquisitions ($3.7 million), its overall operating
losses, and an increase in its current liabilities of $560,099 ($18.4 million as
at June 30, 2000 as compared to $17.8 million as at June 30, 1999.
The Company believes that the above mentioned financial resources will
provide the cash flows needed to achieve the sales, service and production
levels necessary to support its operations. In addition, the Company is
exploring other financing alternatives which may become available as the success
of the previously described programs accelerates.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET
RISK
The Company has investments in fixed rate instruments. None of the
fixed rate instruments in which the Company invests extend beyond June 30, 2005.
Below is a tabular presentation of the maturity profile of the fixed rate
instruments held by the Company at June 30, 2000.
INTEREST RATE SENSITIVITY
PRINCIPAL AMOUNT BY EXPECTED MATURITY
WEIGHTED AVERAGE INTEREST RATE
Date Investments in Fixed Rate Weighted Average
Instruments Interest Rate
6/30/01 4,156,967 6.0%
6/30/02 2,514,105 6.5%
6/30/03 3,378,037 7.0%
6/30/04 1,446,141 6.1%
6/30/05 253,734 7.1%
Total: 11,748,984
Fair Value
at 6/30/00 11,484,176
All of the Company's revenue, expense and capital purchasing activities
are transacted in United States dollars.
See Note 11 to the Company's Financial Statements for information on
long term debt.
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FONAR CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Page No.
-------
INDEPENDENT AUDITORS' REPORT F2
CONSOLIDATED BALANCE SHEETS F3 - F5
At June 30, 2000 AND 1999
CONSOLIDATED STATEMENTS OF OPERATIONS F6
For the Three Years Ended June 30, 2000, 1999 and 1998
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY F7 - F12
For the Three Years Ended June 30, 2000, 1999 and 1998
CONSOLIDATED STATEMENTS OF CASH FLOWS F13 - F14
For the Three Years Ended June 30, 2000, 1999 and 1998
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F15 - F52
SELECTED FINANCIAL DATA (*)
For the Five Years Ended June 30, 2000
(*) Included in Part II, Item 6 of the Form.
Information required by other schedules called for under Regulation S-X is
either not applicable or is included in the consolidated financial statements
or notes thereto.
F-1
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors
FONAR Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of FONAR
Corporation and Subsidiaries as at June 30, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended June 30, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of FONAR Corporation and Subsidiaries at June 30, 2000 and 1999, and the
consolidated results of their operations and cash flows for each of the years
in the three-year period ended June 30, 2000, in conformity with generally
accepted accounting principles.
During each of the years in the three-year period ended June 30, 2000, a
significant portion of the Company's revenues was from related parties (see
Notes 2, 3, 5, 8 and 20).
/S/ TABB, CONIGLIARO & McGANN, P.C.
New York, New York
September 25, 2000
F2
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
------
June 30,
---------------------------
2000 1999
------------ ------------
Current Assets
Cash and cash equivalents $11,810,519 $15,175,804
Marketable securities 11,484,176 20,197,698
Accounts receivable, net 14,388,662 13,936,734
Costs and estimated earnings in excess of
billings on uncompleted contracts 968,159 1,463,450
Inventories 3,536,169 4,237,778
Investment in sales-type lease with related
party 57,832 -
Prepaid expenses and other current assets 604,059 701,433
------------ ------------
Total Current Assets 42,849,576 55,712,897
Restricted Cash 5,000,000 5,000,000
Property and Equipment - Net 11,227,454 11,442,493
Advances and Notes to Related Parties,
Net of discounts and allowance for
doubtful accounts of $904,000 at June 30,
2000 and 1999 1,158,998 1,434,689
Investment in Sales-Type Lease with Related
Party 872,603 -
Notes Receivable, Net of allowance for
doubtful accounts of $477,456 at June 30,
2000 and 1999 500,810 24,796
Excess of Cost Over Net Assets of
Businesses Acquired, Net of accumulated
amortization of $2,716,859 and $1,498,166
at June 30, 2000 and 1999, respectively 21,656,990 22,875,683
Other Intangible Assets, Net 1,035,924 888,992
Other Assets 296,682 268,618
------------ ------------
Total Assets $84,599,037 $97,648,168
============ ============
See accompanying notes to consolidated financial statements.
F-3
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
June 30,
---------------------------
2000 1999
------------ ------------
Current Liabilities
Current portion of debt
and capital leases $ 6,224,727 $ 4,474,293
Accounts payable 1,738,847 2,401,926
Other current liabilities 8,966,929 9,920,991
Customer advances 582,551 95,518
Income taxes payable 896,913 957,140
------------ ------------
Total Current Liabilities 18,409,967 17,849,868
------------ ------------
Long-term Debt and Capital Leases,
Less Current Maturities 14,744,459 20,347,541
Other Liabilities 138,338 131,629
------------ ------------
14,882,797 20,479,170
------------ ------------
Minority Interest 21,515 15,357
------------ ------------
Commitments, Contingencies and Other
Matters (Notes 1, 2, 3, 5, 10, 11,
12, 14,17 and 19)
See accompanying notes to consolidated financial statements.
F-4
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
(Continued)
June 30,
-------------------------------
2000 1999
------------ ------------
Stockholders' Equity
Common stock - $.0001 par value; authorized
- 60,000,000 shares; issued -
56,604,735 and 53,998,906 shares at June
30, 2000 and 1999, respectively;
outstanding - 56,315,471 and 53,793,042
shares at June 30, 2000 and 1999,
respectively $ 5,631 $ 5,378
Class B common stock (10 votes per share) -
$.0001 par value; authorized - 4,000,000
shares; issued and outstanding - 4,211
and 5,211 shares at June 30, 2000 and 1999,
respectively - -
Class C common stock (25 votes per share) -
$.0001 par value; authorized - 10,000,000
shares; issued and outstanding - 9,562,824
shares at June 30, 2000 and 1999 956 956
Class A non-voting preferred stock - $.0001
par value; authorized - 8,000,000 shares;
issued and outstanding - 7,836,286 shares
at June 30, 2000 and 1999 784 784
Preferred stock - $.001 par value;
authorized - 10,000,000 shares; issued
and outstanding - none - -
Paid-in capital in excess of par value 98,581,757 95,385,863
Accumulated other comprehensive income (264,808) (203,106)
Accumulated deficit (44,816,824) (33,860,837)
Notes receivable from stockholders (1,338,005) (1,226,148)
Unearned compensation (213,374) (206,878)
Treasury stock - 289,264 and 205,864 shares
of common stock at June 30, 2000 and 1999,
respectively (671,359) (592,239)
------------ ------------
Total Stockholders' Equity 51,284,758 59,303,773
------------ ------------
Total Liabilities and Stockholders' Equity $ 84,599,037 $ 97,648,168
============ ============
See accompanying notes to consolidated financial statements.
F-5
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30,
------------------------------------------
2000 1999 1998
------------ ------------ -----------
Revenues
Product sales - net $ 1,606,229 $ 3,380,467 $ 3,937,726
Product sales - related parties
- net 1,752,298 - -
Service and repair fees - net 1,692,537 2,301,488 2,520,637
Management and other fees -
related parties - net 34,022,733 31,263,089 21,095,994
------------ ------------ -----------
Total Revenues - Net 39,073,797 36,945,044 27,554,357
------------ ------------ -----------
Costs and Expenses
Costs related to product sales 2,849,046 4,931,803 7,800,569
Costs related to product sales
- related parties 1,573,870 - -
Costs related to service and
repair fees 2,396,609 2,697,695 2,373,808
Costs related to management and
other fees - related parties 23,611,544 21,762,184 13,667,467
Research and development 5,532,325 6,647,555 6,506,995
Selling, general and administrative 16,211,414 14,383,842 12,489,539
Compensatory element of stock
issuances for selling, general
and administrative expenses 1,929,706 275,242 1,108,362
Provision for bad debts 177,162 628,836 929,786
Amortization of excess of cost
over net assets of businesses
acquired 1,218,693 1,225,942 272,224
------------ ------------ -----------
Total Costs and Expenses 55,500,369 52,553,099 45,148,750
------------ ------------ -----------
Loss from Operations (16,426,572) (15,608,055) (17,594,393)
Interest Expense (1,710,188) (2,051,290) (728,327)
Investment Income 1,919,744 2,110,780 3,708,938
Other Income, Principally Gain on
Litigation Awards