Item 1. Business.
General
FONAR Corporation (the "Company" or "FONAR") is a Delaware corporation which was incorporated on July 17, 1978. The Company's address is 110 Marcus Drive, Melville, New York 11747 and its telephone number is (516) 694-2929.
FONAR is the originator of the iron-core non-superconductive and permanent magnet technology and is engaged in the business of designing, developing, manufacturing, marketing and servicing magnetic resonance imaging ("MRI" or "MR") scanners which utilize that technology for the detection and diagnosis of human disease. 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.
The Company's principal products are its new "Quad" series of MRI scanners. On October 5, 1993, the Company unveiled the "Quad 12000TM" MR scanner, which utilizes a 6000 gauss iron core electromagnet and is accessible from four sides. The Quad 12000 was the first "open" MR scanner above low field (above 600 gauss). Shortly thereafter, on March 1, 1994, FONAR unveiled the "Quad 7000TM," which is similar in design to the Quad 12000 but utilizes a smaller 3,500 gauss electromagnet.
FONAR received FDA approval to market the Quad 7000 in April, 1995 and presently is awaiting FDA approval for the Quad 12000.
In 1990 the Company introduced the Ultimate 7000TM scanner, which was its principal product prior to the introduction of the Quad scanners. The QuadTM and Ultimate TM scanners are revolutionary new MR scanning products representing the culmination of years of total company wide effort to design and construct the "Ultimate MR" scanner product line. These products replaced the Company's traditional principal products, the Beta 3000TM scanner (which utilizes a permanent magnet) and the Beta 3000MTM scanner (which utilizes an iron core electromagnet). All of the Company's scanners create cross-sectional images of the human body.
Recent Developments and Overview.
The "Quad" scanners are unique MR scanners in that four sides are open, thus allowing access to the scanning area from four vantage points. Equipped with up to four beds, the user is able to prep one or more "on deck" patients while another patient is being scanned, thereby increasing throughput and reducing scan prices. The starshaped open design of the Quad will also make possible a host of new applications, particularly MRI mammography and MRI directed surgery (Interventional MRI).
With the Quad's multi-bed patient handling system, many more short scan procedures such as those used in breast imaging can be done in a day, allowing the price of MRI mammography to drop without reducing the scanner's revenue-generating capacity. At the same time, there is not the painful compression of the breast characteristic of X-ray mammography.
MRI directed surgery (laproscopic surgical procedures) is made possible by the Quad's ability to supply images to a monitor positioned next to the patient, enabling a surgeon to view in process surgical procedure from an unlimited number of vantage points.
The vertical patient space in the Quad has been increased by nearly 50%, which is important not only for comfort, but diagnostically, by permitting the utilization of the Company's software for the taking of "moving scans." Those "moving scans" or "CINE," enable the physician to observe the scanned body part (e.g., knee, neck and elbow) in motion. The Quad enables a full range of motion studies that cannot be completely performed in the claustrophobic cylindrical tubes of today's superconductive magnets.
The Quad 7000, utilizing a 3500 gauss iron core electro magnet, is envisioned by the Company as an economical solution to the rising cost of medicine. Priced at $650,000, the Company expects the Quad 7000 to be a success in the market, not only with first time buyers but with users who must now replace their obsolete MRI equipment.
The Quad 12000 scanner will utilize a 6000 gauss (.6 Tesla field strength) iron core electromagnet. The greater field strength of the 6000 gauss magnet, when enhanced by the electronics already utilized by the Company's scanners, produces images of a quality and clarity competitive with high field superconductive magnets. The Quad 12000 scanner magnet is the highest field "open MRI" in the industry.
As a result of these new products and other research and development, the Company is positioning itself to dramatically in crease sales and improve its competitive position in the marketplace.
In tandem with new product and software developments, the Company has been strengthening and continues to strengthen its legal position for the purpose of protecting its proprietary technology as well as other interests. The Company does not intend to permit its competitors and would-be competitors to capitalize, to the detriment of the Company, on its inventions and exhaustive research and development efforts, as the Company believes has happened in the past.
On September 2, 1992, the Company filed a patent infringement suit against Hitachi Ltd., General Electric Company and others in the United States District Court for the Eastern District. In April, 1995, the Company reached a settlement with Hitachi Ltd. and related defendants. In May, 1995, the jury rendered a verdict in FONAR's favor against General Electric Company. In October, 1995, the Court awarded FONAR judgment of $62 million, plus interest and issued an injunction (stayed pending appeal) enjoining General Electric from future violations of Fonar's Multi-Angle Oblique (MAO)TM patent.
Following its favorable jury verdict against General Electric Company, FONAR filed patent infringement suits against Siemens Medical Systems, Inc., Siemens, AG, Philips Electronics, NV, Philips Medical Systems, Inc. and Philips Electronics North America Corporation. The patents sought to be enforced against both defendants include the Multi-Angle Oblique improvement patent (U.S. Patent No. 4,871,966 entitled "Apparatus and Method for Multiple Angle Oblique Magnetic Resonance Imaging").
The Company is optimistic about sales of its new scanner products. At September 1, 1995, the Company's backlog of unfilled orders had increased to $4.0 million as compared to $1.5 million at September 1, 1994. To further promote product recognition and sales, FONAR will attend the RSNA (Radiological Society of North America) trade show in November 1995 to exhibit its new products. The RSNA is the leading trade show in the MRI industry. Approximately 25,000 radiologists, who are among the principal groups to whom the Company directs its marketing efforts, are expected to attend to view MRI industry's most current product developments.
The Company is actively seeking to promote foreign sales, thus enhancing America's competitive position as well as its own. Since commencing its current foreign sales program, the Company has sold scanners in Korea, Mexico and Poland. Based on numerous indications of interest, meetings, sales trips abroad and negotia tions, the Company is cautiously optimistic that foreign sales will produce significant revenues in fiscal 1996 and/or 1997, depending on timing of orders and completion of projects.
The Company believes there are and will be significant market opportunities abroad, particularly in Asia and Eastern Europe.
Products Offered
Both the "Quad" and "Ultimate" scanners are entirely new products. The Quad 12000 and Quad 7000 utilize 6000 gauss and 3500 gauss iron core electromagnets respectively, and the Ultimate 7000 utilizes a 3500 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 7000 is designed to maximize image quality through an optimal combination of signal-to-noise (S/N) and contrast-to-noise (C/N) ratios. The technical improvements realized in the Quad's design over its predecessors also include increased image-processing speed and diagnostic flexibility.
The principal difference between the Quad 7000 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 7000 operates at 3500 gauss, over five times as powerful as some of the others.
Maximal S/N is achieved when the direction of the magnetic field and the direction of the receiving coil axis are perpendicular to one another, as is the case with the Quad scanners. The orientation of the magnetic field is vertical and when combined with any one of Fonar's array of solenoidal (wrap-around) surface coils, the Quad 7000 produces as much S/N as a supercon MRI at twice the field strength. So that prospective buyers can make an accurate comparison, the number 7000 is used to describe the S/N equivalency of the Quad 7000 to 7000-gauss superconductive machines.
Several technological advances have been engineered into the Quad 7000 for extra improvements in S/N, including: new high-S/N Organ SpecificTM 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. At 3500 gauss, the Quad 7000 operates squarely in the mid-field range and, therefore, enjoys the winning combination of abundant S/N and C/N, making its images second to none.
The Quad 7000's state-of-the-art electronics package features five computer processors performing parallel processing. Its incomparable speed is demonstrated by its ability to scan and reconstruct images simultaneously and its ability to reconstruct a 256x256 image in 0.7 seconds, the fastest of any MRI scanner on the market.
The Quad 7000 provides various features allowing for versatile diagnostic capability. For example, SMARTTM 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 valuable feature for scanning parts of the body that include small-structure sub-regions requiring finer slice parameters. There's also Evolving ImagesTM, Multi-Angle Oblique (MAO)TM imaging, and oblique imaging.
Because of the openness of the Quad 7000 and FONAR's coil development and CINE, Quad 7000 users can plan on adding the works-in-progress CINE-FLEXTM option to their scanners. CINE-FLEXTM is a set of specialized coils and matching fixtures that enable full-range CINEs of the knee, shoulder, C-spine, L-spine and TMJ - an impossibility with supercon MRIs.
The Quad 7000 console includes a mouse-driven, multi-window interface for easy operation and a 19-inch, 1280x1280-pixel, 20-up, high-resolution image monitor with features such as electronic magnifying glass and real-time, continuous zoom and pan.
The Quad MR scanner is a top-down new design in computer architecture and high speed image processing that incorporate the latest state-of-the-art chip technology. The time to construct an image, for example, has been reduced from 12 seconds per image to 0.7 seconds.
The Beta 3000 initiated the Company's product line and resulted in over 150 worldwide FONAR installations to date. The effort to achieve the Quad and the Ultimate product line represented a company-wide aspiration to seize the opportunity to incorporate into the Company's product line all of the desirable features FONAR had learned since it opened the industry in 1980. The facility of these features have been achieved in FONAR's "Quad" and "Ultimate" MR machines.
Markets and Marketing
The principal markets for the "Quad" and "Ultimate" scanners are hospitals and private scanning centers, the same as for the Beta 3000 and Beta 3000M. In particular, the Company regards its existing customers as potential purchasers of its new products. The Company has conducted its marketing in the United States through its own sales network and internationally through selected distributors. Direct domestic marketing is accomplished through field solicitation of potential users by Company personnel. The Company intends to make greater use of independent sales representatives and distributors working on a commission basis.
In addition, the Company plans to attend the trade show held by the Radiological Society of North America ("RSNA") in Chicago in November 1995, where it will exhibit its new products. The RSNA trade show is held annually and is attended by most manufacturers of MRI scanners. Attendance in 1995 is expected to reach nearly 60,000, including 25,000 radiologists. Radiologists are among the principal groups to whom the Company directs its marketing.
The Company plans to direct its marketing efforts to meeting the increasing demand for low price MRI. To date, the increased pressure for lower scanning prices has come largely from preferred provider organizations, health maintenance organizations and other private sector group plans and stricter insurance requirements, but government mandated health care reform is also under consideration.
To meet this demand, the Company has set a base price of $650,000 for the Quad 7000 scanner. In addition to reducing the health care provider's equipment cost, the Quad 7000 scanner's 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 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 also seek to introduce new MRI applications for the Quad scanners such as MRI-directed surgery and head-to-toe MRI preventive screening.
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
The Company regards its customer base of over 100 scanners installed or in the process of being installed as a major asset. It has been and will continue to be a significant source of income, independent of direct sales.
Income is generated from the installed base in two principal areas namely, service and upgrades. Service and maintenance revenues from the Company's installed base were approximately $7.7 million in fiscal 1994 and $6.6 million in fiscal 1995. The decrease in fiscal 1995 is principally the result of the retirement of old scanners.
Substantial upgrades income, which is new to the medical instrument industry, originates in the exceptional versatility and productivity of the MRI technology. New medical uses for the technology are constantly being discovered. Dramatic new features can often be added to the scanner by the implementation of little more than versatile new software packages. Such enhancements are attractive to the end users because they extend the useful life of the equipment and enable the user to avoid obsolescence and the expense of having to purchase new equipment.
MRI Scanning Centers
The Company's subsidiary, Advanced Medical Diagnostics Corporation ("AMD") was formed to organize and supervise, as the general partner, limited partnerships which have established diagnostic centers to operate MRI scanners.
Since its inception, AMD has formed four limited partnerships either as the managing general partner or as co-general partner. The partnerships to date have not generated significant distributions to AMD.
AMD's interests in these four limited partnerships were sold to related parties during the 1994 fiscal year. (See Certain Relationships and Related Transactions.) No new AMD sponsored partnerships have been formed since 1986 and none are presently contemplated. Earlier changes in the Internal Revenue Code and recent regulations concerning self-referrals (see "Government Regulations") have worked against the utilization of syndicated limited partnerships as a vehicle for financing and operating MRI centers.
Research and Development
During the fiscal year ended June 30, 1995, the Company incurred expenditures of $3,508,101 ($151,981 of which was capitalized) on research and development, as compared to $3,604,785 ($687,551 of which was capitalized) and $3,119,898 ($938,926 of which was capitalized) incurred during the fiscal years ended June 30, 1994 and June 30, 1993, respectively.
Research and development activities have focused, in large part, on the development and enhancement of the Company's "Quad" MR scanners and on the continued enhancement of the Ultimate and Beta 3000 and Beta 3000M products. The "Quad" and "Ultimate" scanners involved significant software and hardware development as the new products represented entirely new hardware design and architecture requiring a complete new operating software system. Most recently, the Company's research activity has centered on developing a multitude of new features for the Quad series scanners made possible by the Quad's high speed processing power.
Backlog
The Company's backlog of unfilled orders at September 1, 1995 increased to approximately $ 4.0 million, as compared to $1.5 million at September 1, 1994. Of these amounts, approximately $2.4 million and $925,000 had been paid to the Company as customer advances as at September 1, 1995 and September 1, 1994, respectively. It is expected that the existing backlog of orders will be filled within the current fiscal year. The Company's contracts generally provide that if a customer cancels an order, the customer's initial down payment for the MRI scanner is nonrefundable.
Patents and Licenses
There are currently numerous foreign and domestic patents in effect which relate to the technology and components of the MRI scanners, some of which are registered in the name of the Company and others which are registered in the name of Dr. Raymond V. Damadian, the President and principal stockholder of the Company. The Company believes that these patents, which expire at various times from 1999 to 2009, and the know-how it developed, are material to its business.
Dr. Damadian has granted an exclusive world-wide license to the Company to make, use and sell apparatus covered by certain domestic and foreign patents relating to his MRI technology. The license continues until the expiration of the last patent included within the licensed patent rights, but is terminable earlier, at the option of Dr. Damadian, if he is removed from his position as Chairman of the Board or President of the Company without his consent, or if any stockholder or group of stockholders acting in concert becomes the beneficial owner of Company securities having voting power equal to or greater than the voting power of the securities held directly by him, his executors, administrators, successors or heirs. The agreement can also be terminated by Dr. Damadian upon the commission of an act of bankruptcy by the Company. If Dr. Damadian is unable to serve the Company by reason of his death or disability, the license agreement will remain in effect.
One of the patents, issued in the name of Dr. Damadian and covered by said license, is United States patent No. 3,789,832, Apparatus and Method for Detecting Cancer in Tissue (the "1974 Patent"). The development of the Beta 3000 was based upon the 1974 Patent, and Management believes that the 1974 Patent was the first of its kind to utilize MR to scan the human body and to detect cancer. The 1974 Patent was extended beyond its original 17-year term and expired in February, 1992.
The Company has significantly enhanced its patent position within the industry and now possesses a substantial patent portfolio which provides the Company, under the aegis of United States patent law, "the exclusive right to make, use and sell" many of the scanner features which FONAR pioneered and which are now incorporated in most MRI scanners sold by the industry. The patents further enhance Dr. Damadian's pioneer patent (the 1974 Patent), that initiated the MRI industry and provided the original invention of MRI scanning.
The Company has entered into a cross- licensing agreement (utilizing other than FONAR's MRI technology) with another entity to use prior art developed for nuclear magnetic resonance technology and has entered into a license to utilize the MRI technology covered by the existing patent portfolio of a patent holding company.
Enforcement Litigation
On September 2, 1992, the Company commenced legal action to enforce its patent rights, filing suit against Hitachi Ltd., General Electric Company and others in the United States District Court for the Eastern District of New York. Prior to trial in April 1995, FONAR settled with Hitachi. On May 26, 1995 the jury rendered a verdict against General Electric Company awarding FONAR $110,575,000 for infringement of its multi-angle oblique patent (Apparatus and Method for Multiple Angle Oblique MRI, 10/3/89, U.S. Patent No. 4,871,966) and Dr. Damadian's pioneer cancer detection patent (Apparatus and Method for Detecting Cancer in Tissue, 2/5/74, U.S. Patent No. 3,789,832). On October 6, 1995, the Court announced its decisions on the parties' respective post-trial motions, awarding FONAR $62 million and an injunction (stayed pending appeal) on the multi-angle oblique patent (U.S. Patent No. 4,871,966). Although finding that the cancer detection patent was valid (U.S. Patent No. 3,789,832), the Court overturned the jury's determination that General Electric Company's MRI scanners infringed the patent. Both the Company and General Electric Company plan to appeal. The Company is represented by Robins, Kaplan, Miller and Ciresi, the Minneapolis based national law firm that represented Honeywell in its lawsuit against Minolta for infringement of Honeywell's autofocus patents.
Following the rendering of the jury's verdict in favor of FONAR against General Electric Company, the Company, represented by Robins, Kaplan, Miller and Ciresi, filed suits against Siemens Medical Systems, Inc., Philips Electronics North America Corporation and related parties for infringement of FONAR's multi-angle oblique patent, Dr. Damadian's pioneer cancer detection patent and, in the case of Siemens Medical Systems, Inc., two additional MRI improvement patents.
The Company believes that it has achieved a significant milestone in protecting and enforcing its proprietary rights in its lawsuit against General Electric Company, and having pioneered the establishment and development of the medical MRI scanning industry, the Company intends to take the steps necessary to enforce its rights and protect its proprietary technology against other infringers as well. (See "Litigation.")
Competition
MRI Scanners
A majority of the MRI scanners in use in hospitals and outpatient facilities and at mobile sites in the United States are based on superconductive magnet technology while the balance are based on non-superconductive magnet technology. FONAR's non-superconductive MRI scanners are competing principally with superconductive scanners.
FONAR believes that its MRI scanners have significant advantages as compared to the superconductive scanners. These advantages include:
1. There is no fringe magnetic field. Super conductive scanners require a more expensive shielded room than is required for the non-superconductive scanners. The shielded room required for the non-superconductive scanners is intended to prevent interference from external radio frequencies.
2. Do not require costly coolants (liquid nitrogen and liquid helium) or highly complex technology to handle them.
3. Are more open, quiet and in the case of the Quad scanners allow for faster throughput of patients.
4. Require smaller space to install.
5. Annual operating costs are lower.
6. The set-up and disconnect time for a Mobile Scanner is shorter than for a mobile superconductive scanner.
7. Can scan the trauma victim, the cardiac arrest patient, the respirator-supported patient, and premature and newborn babies. This is not possible with superconductive scanners because their magnetic field interferes with conventional life-support equipment.
FONAR faces competition within the MRI industry from such firms as General Electric Company; Picker International, which is a Division of General Electric Company PLC, of England; Elscint Ltd; Philips N.V.; Toshiba Corporation, Hitachi Corporation, Shimadzu Corporation and Siemens A.G. Most competitors have marketing and financial resources more substantial than those available to the Company and have in the past, and may in the future, heavily discount the sales price of their scanners.
Other Imaging Modalities
FONAR's MRI scanners also compete with other diagnostic imaging systems, all of which are based upon the ability of energy waves to penetrate human tissue and to be detected by either photographic film or electronic devices for presentation of an image on a television monitor. Three different kinds of energy waves - x-ray, gamma and sound - are used in medical imaging techniques which compete with MRI medical scanning, the first two of which involve exposing the patient to potentially harmful radiation.
X-rays are the most common energy source used in imaging the body and are employed in three imaging modalities:
1. Conventional x-ray systems, the oldest method of imaging, are typically used to image bones and teeth. The image resolution of adjacent structures that have high contrast, such as bone adjacent to soft tissue, is excellent, while the discrimination between soft tissue organs is poor because of the nearly equivalent penetration of x-rays.
2. Computerized Tomography ("CT") systems couple computers to x-ray instruments to produce cross-sectional images of particular large organs or areas of the body. The CT scanner addresses the need for images, not available by conventional radiography, that display anatomic relationships spatially. However, CT images are generally limited to the transverse plane and cannot readily be obtained in the two other planes (sagittal and coronal). Improved picture resolution is available at the expense of increased exposure to x-rays from multiple projections. Furthermore, the pictures obtained by this method are computer reconstructions of a series of projections and, once diseased tissue has been detected, CT scanning cannot be focused for more detailed pictorial analysis or obtain a chemical analysis.
3. Digital radiography systems add computer image processing capability to conventional x-ray systems. Digital radiography can be used in a number of diagnostic procedures which provide continuous imaging of a particular area with enhanced image quality and reduced patient exposure to radiation.
Nuclear medicine systems, which are based upon the detection of gamma radiation generated by radioactive pharmaceuticals introduced into the body, are used to provide information concerning soft tissue and internal body organs and particularly to examine organ function over time.
Ultrasound systems emit, detect and process high frequency sound waves reflected from organ boundaries and tissue interfaces to generate images of soft tissue and internal body organs. These systems have comprised one of the most rapidly growing modalities during recent years due to an increasing number of procedures for established applications, as well as the expansion of ultrasound into new applications. Although the images are substantially less detailed than those obtainable with x-ray methods, ultrasound is generally considered harmless and therefore has found particular use in imaging the pregnant uterus.
X-ray machines, ultrasound machines, digital radiography systems and nuclear medicine compete with the MRI scanners by offering significantly lower price and space requirements. However, FONAR believes that the quality of the images produced by its MRI scanners is generally superior to the quality of the images produced by those other methodologies.
FONAR believes that the introduction of its Quad 7000 scanner will enable MRI users to compete on the basis of cost, as well as quality, with those methodologies, thereby expending the range of economically feasible MRI applications and demand for FONAR's products. In addition, only MRI scanners and ultrasound systems do not produce harmful ionizing radiation.
Government Regulation
Under the Medical Device Amendments of 1976 to the Federal Food, Drug and Cosmetic Act, all medical devices are classified by the Food and Drug Administration (the "FDA") into one of three classes. A Class I device is subject only to certain controls, such as labeling requirements and manufacturing practices; a Class II device must comply with certain performance standards established by the FDA; and a Class III device must obtain pre-market approval from the FDA prior to commercial marketing. The Company received approval to market its Beta 3000 and Beta 3000M scanners as Class III devices on September 26, 1984. On July 28, 1988, the Magnetic Resonance Diagnostic Device which includes MR Imaging and MR Spectroscopy was reclassified by the FDA to Class II status. On June 25, 1992, the Company received FDA approval to market the Ultimate Magnetic Resonance Imaging Scanner as a Class II device, and on April 10, 1995, the Company received FDA approval to market its latest product, the Quad 7000, as a Class II device. The Company presently is awaiting FDA approval to market the Quad 12000.
The FDA has authority to conduct detailed inspections of manufacturing plants, to establish "good manufacturing practices" which must be followed in the manufacture of medical devices, to require periodic reporting of product defects and to prohibit the exportation of medical devices that do not comply with the law.
Effective November 22, 1985, the Department of Health and Human Services authorized reimbursement of MRI scans under the Federal Medicare program. In addition, most private insurance companies have authorized reimbursement for MRI scans.
Proposed and enacted legislation at the State and Federal levels has restricted referrals by physicians to medical and diagnostic centers in which they or their family members have an interest. In addition, regulations have been adopted by the Secretary of Health and Human Services which provide limited "safe harbors" under the Medicare Anti-Kickback Statute. These safe harbors describe payments and transactions which are permitted between an entity receiving reimbursement under the Medicare program and those having an interest in or dealings with the entity. Although the Company cannot predict the overall effect of the adoption of these regulations on the medical equipment industry, the use and continuation of limited partnerships (where investors may be referring physicians) to own and operate MRI scanners could be greatly diminished.
Employees
As of September 1, 1995, the Company employed 165 persons on a full-time basis. Of such employees, 10 were engaged in marketing and sales, 26 in research and development, 47 in manufacturing, 47 in customer support services, and 35 in administration.
Item 2.
Item 2. Properties
The Company leases approximately 93,240 square feet of office and plant space at its principal office in Melville, New York and at one other location in Farmingdale, New York at a current aggregate rental rate of approximately $671,000, excluding utilities, taxes and other related expenses. The terms of the various leases extend through 1997. Management believes that these premises are adequate for its current needs.
Item 3.
Item 3. Legal Proceedings
On September 2, 1992, the Company filed an action against General Electric Company, ("General Electric"), Hitachi Ltd. ("Hitachi") and other defendants for patent infringement in the United States District Court for the Eastern District of New York seeking injunctive relief and damages. (FONAR Corporation and Dr. Raymond V. Damadian v. Hitachi Ltd. et. al. Civil Action No. 92-4196). The defendants contested the Company's claims, and Hitachi counterclaimed, alleging infringement by the Company of two of its patents. In April, 1995, prior to the commencement of trial FONAR and Hitachi settled. On May 26, 1995, the jury rendered a verdict against General Electric Company awarding FONAR $110,575,000 for infringement of two of its patents: United States Patent Number 3,789,832 entitled "Apparatus and Method for Detecting Cancer in Tissue" and United States Patent Number 4,871,966 entitled "Apparatus and Method for Multiple Angle Oblique Magnetic Resonance Imaging." Subsequent to the verdict General Electric made motions to the Court to enter judgment as a matter of law in its favor and against FONAR with respect to both patents notwithstanding the jury's verdict. FONAR made a motion to the Court for an injunction restraining General Electric Company from using the multi-angle oblique imaging technology covered by U.S. Patent No. 4,871,966. On October 6, 1995 the Court announced its decision. In its decision, the Court awarded FONAR $62 million in damages against General Electric for direct infringement of U.S. Patent No. 4,871,966 (Multiple Angle Oblique Magnetic Resonance Imaging) and granted an injunction against General Electric prohibiting future violations of the patent. The injunction was stayed pending appeal, however, subject to the posting of a bond. With respect to U.S. Patent No. 3,789,832 (Cancer Detection Patent), the judge agreed with the jury's finding that the patent was valid, but disagreed with the jury finding of infringement and determined that General Electric's MRI scanners did not infringe the patent. The Court also rejected the jury's finding that General Electric had induced others to infringe U.S. Patent No. 4,871,966. General Electric is expected to appeal the portion of the judgment upholding the jury's award of damages to FONAR for direct infringement of U.S. Patent No. 4,871,966 and the issuance of the injunction. FONAR intends to appeal the portion of the judgment overturning the jury's findings of infringement on U.S. Patent No. 3,789,832 and contributory infringement in respect of U.S. Patent No. 4,871,966.
On June 16, 1995, the Company filed an action against Siemens Medical Systems, Inc., Phillip Electronics North America Corporation, Philips Electronics, N.V. and other defendants for patent infringement in the United States District Court for the Eastern District of New York. FONAR is seeking injunctive relief and damages (FONAR Corporation and Dr. Raymond V. Damadian V. Siemens Medical Systems, Inc. et al. Civil Action No. CV 95-2469 (LJW). In its suit, FONAR has alleged that four of its patents were infringed, including U.S. Patent Nos. 3,789,832 (Apparatus and Method for Detecting Cancer in Tissue) and 4,871,966 (Apparatus and Method for Multiple Angle Oblique Magnetic Resonance Imaging).
Previously, in May 1995, Siemens Medical Systems, Inc. had filed a complaint against FONAR in the United States District Court for the District of Delaware seeking a declaratory judgment that the four patents were invalid and unenforceable, as well as an adjudication that Siemens was not infringing the four patents. On June 14, 1995, Siemens Medical Systems, Inc. amended the Complaint to add Siemens AG as a plaintiff, to add Raymond V. Damadian, M.D. MR Scanning Centers Management Company as a defendant and to include a claim against FONAR for infringement of one of Siemens' MRI patents (Siemens Medical Systems, Inc. and Siemens AG, v. FONAR Corporation and Raymond V. Damadian, M.D. MR Scanning Centers Management Company, Civil Action No. 95-261.
Thereafter, on June 30, 1995, Philips Electronics North America Corporation and Philips Electronics, N.V. filed a complaint against FONAR in the United States District Court for the District of Delaware seeking a declaratory judgment that FONAR's U.S. Patents Nos. 3,789,832 and 4,871,966 are invalid, unenforceable and not infringed (Philips Electronics North America Corporation and Philips Electronics, N.V. v. FONAR Corporation, Case No. 95-431).
Motions have been made by the Siemens affiliates and Philips affiliates to transfer the action commenced by FONAR in District Court for the Eastern District of New York to the Delaware District Court and FONAR has moved to transfer the actions commenced against it in the Delaware District Court to the Eastern District of New York. The respective parties are expected to vigorously contest the claims against them.
Separately, U.S. Philips Corporation, an affiliate of Philips Electronics North America Corporation and Philips Electronics, N.V., commenced an action in the United States Court for the District of Delaware alleging infringement by FONAR of two of its patents. FONAR has answered the complaint denying plaintiff's claims of infringement and will vigorously contest the case. The case is in discovery.
On March 4, 1987, Philip B. Kivitz, M.D. and Rad-Sonic Diagnostic Medical Clinics, Inc., filed a complaint against AMD, FONAR, Raymond V. Damadian and others in the San Francisco County Superior Court (Case Action No. 870407) seeking $10,000,000 in compensatory damages and $10,000,000 in punitive damages. In January 1993, the case went to trial and the jury returned a verdict of $880,000 against AMD and $120,000 against FONAR. On June 17, 1993, the Court granted FONAR's and AMD's motion for judgment notwithstanding the verdict, thereby vacating the entire award against both FONAR and AMD. The plaintiffs appealed the Court's granting of judgment notwithstanding the verdict. On February 27, 1995, the appellate court affirmed the lower court's judgment notwithstanding the verdict as to FONAR, but reversed the judgment as to AMD. As a result, the trial court's determination that the plaintiffs could not recover against FONAR was upheld, but the jury verdict against AMD was reinstated. AMD filed a petition for review with the California Supreme Court. AMD's petition was denied on May 17, 1995.
On April 3, 1990, Summit, Rovins and Feldesman commenced an action in the Supreme Court of the State of New York, County of New York against the Company and its President, Raymond V. Damadian. The complaint alleges unpaid fees for legal services and disbursements in the amount of $664,371.65. The Company is contesting the plaintiff's claims as excessive and improper charges for legal services, and has asserted various defenses and a counterclaim of $100,000 for a refund of fees. The plaintiff made a motion for summary judgment which was granted as to the existence of liability but denied as to the amount. Dr. Damadian's cross-motion to dismiss the action against him per sonally was granted. Both parties appealed the court's decisions. On March 9, 1995, the appellate court reversed the granting of summary judgment against FONAR. The appellate court also upheld the dismissal of the action against Dr. Damadian personally. The case is in discovery.
On June 18, 1990, Medical Equipment Fund II, Limited Partnership commenced an action against the Company and others in the Supreme Court of the State of New York, New York County. The complaint alleged that one of the Company's former lenders borrowed monies from the plaintiff for the express purpose of financing the construction of one of the Company's scanning systems, and that the defendants, with the Company's lender, conspired to divert the application of the loan proceeds to other projects. The complaint sought compensatory damages of $1,758,000 and punitive damages of $10,000,000. The defendants had had no dealings with the plaintiff and had no knowledge of any of the alleged arrangements between the plaintiff and the lender. Consequently, the defendants regarded the claim as meritless and contested the claim vigorously. Finding that even the plaintiff's evidence did not make a valid case against the defendants, the Court dismissed the complaint following plaintiff's presentation of its case and entered judgment in the Company's favor dismissing the complaint.
In January, 1991, Myheal Technologies and a former employee commenced an action against the Company in the United States District Court for the Eastern District of New York (Index No. 91 CIV 0204). The amount claimed was $5,000,000 in compensatory damages and $5,000,000 in punitive damages. The claim arose out of an alleged breach of an agreement between the Company and a former research and development employee of the Company. A jury verdict rendered in December, 1993 against the Company for $1,150,000 was set aside, and a second trial was ordered and held. On March 24, 1995 the jury rendered a verdict in favor of Myheal Technologies in the amount of $250,000. On April 21, 1995, the Company made a motion requesting judgment as a matter of law dismissing the plaintiffs' claim or in the alternative a new trial or reduction of damages. The Company's motion was denied and judgment was entered against the Company in August, 1995. The Company is appealing the District Court's decision.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company's annual meeting of shareholders was held on April 3, 1995. At the meeting, the stockholders reelected the sitting Board of Directors, Raymond V. Damadian, Claudette Chan, Robert Janoff and Herbert Maisel. The stockholders also approved a recapitalization proposal, the creation of a new class of preferred stock to be issued to holders of the Company's Common Stock as a stock dividend, a stock bonus plan and two stock option plans, and the selection of Tabb, Conigliaro & McGann, P.C. as the Company's auditors for fiscal 1995.
Part II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's Common Stock is traded in the over-the-counter market under the National Association of Securities Dealers Automated Quotation System ("NASDAQ") symbol FONR. The following table sets forth the high and low bid and asked prices reported in NASDAQ System for the periods shown. The prices represent quotations between dealers and do not include certain mark-ups, mark-downs or commissions, and do not necessarily represent actual transactions.
Fiscal Quarter
Bid Ask High Low High Low
July - September 1993 3.28 1.13 3.38 1.16 October - December 1993 3.53 1.81 3.59 1.84 January - March 1994 2.63 1.59 2.66 1.66 April - June 1994 1.72 1.22 2.00 1.25 July - September 1994 1.91 1.22 2.00 1.25 October - December 1994 2.50 1.28 2.53 1.31 January - March 1995 2.50 1.53 2.53 1.63 April - June 1995 4.50 2.38 4.56 2.41 July - September 1995 3.84 2.56 4.00 2.63
On September 15, 1995, the Company had approximately 4,828 and 19 stockholders of record of the Company's Common Stock and Class B Common Stock, respectively.
The Company has paid no dividends to date. The Company anticipates, however, based on the results of its lawsuit against General Electric Company and Hitachi Ltd., paying dividends on monies it receives from the enforcement of its patents in that case. Except for these dividends, it is expected that the Company will continue to retain earnings to finance the development and expansion of its business.
Item 7. Management's Discussion and Analysis of Financial Conditions and Results of Operations.
Results of Operations.
Fiscal 1995 Compared to Fiscal 1994
In fiscal 1995 the Company experienced a loss of $1,762,971 on gross revenues of $14.1 million, while in fiscal 1994 a loss of $334,574 was reported on gross revenues of $15.4 million.
Contributing to the Company's net loss of $1,762,971 were the recognition in the fourth quarter of unfavorable judgments in excess of $1.5 million in the aggregate. The most significant of these actions were the $880,000 judgment against Fonar's subsidiary AMD in the Kivitz et ano v. AMD et al. action (approximately $1.1 million with accrued interest) and, notwithstanding that Fonar is appealing the court's decision, the $250,000 judgment rendered against the Company in Myheal Technologies et ano. v. Fonar (approximately $369,000 with accrued interest). (See "Litigation"). Also significantly contributing to the Company's net loss for the year were the continuing losses of its Israeli subsidiary, Medical SNI (formerly Vonar Ltd.). These losses were in the amount of $867,100 for fiscal 1995 and $558,892 for fiscal 1994 (after giving effect to the minority interest).
The Company continues to benefit as a result of programs that the Company set in motion in fiscal 1989; namely strict cost containment initiatives and the redirecting of corporate business into other profitable enterprises within the MRI industry. As a result of these programs, the percentage of the Company's revenue derived from sources other than scanner sales (customer service and upgrades) was approximately 48% for fiscal 1995 as compared to 33% for fiscal 1990. The Company believes, however, that this trend may have peaked in fiscal 1991 and 1992 when the percentage was approximately 61%. The trend has reversed in part because of the retirement of old scanners. Management expects that this trend may be reversed further as a result of the introduction into the market of its new Quad scanner products following the Company's receipt of FDA approval for the Quad 7000 in the fourth quarter of fiscal 1995. Customer service and upgrades, however, are and will continue to be priorities for the Company.
Lower revenues experienced in fiscal 1995, as in fiscal 1994, were the principal reason for the operating losses experienced in both fiscal years ($6.4 million in fiscal 1995 and $2.5 in fiscal 1994). Lower revenues reflected strong competition and a continued weak domestic demand for MRI scanners in a marketplace eager to see new products that would address both the heightened cost pressures on MRI and the patient demand for non-claustrophobic scanners.
Having received FDA approval for its Quad 7000 scanner in April 1995 and anticipating FDA approval for its Quad 12000 scanner in the near future, the Company believes it is in a position to aggressively seek new sales. At .6 Tesla field strength, FONAR's 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 Quad 12000 magnet has three times the field strength of General Electric Company's recently introduced "open MRI" scanner which has a field strength of .2 Tesla.
FONAR is uniquely positioned to take advantage of the rapidly expanding "open MRI" market which FONAR pioneered and which a host of multi-national corporations acknowledged when all introduced "open MRI" products at the industry's annual trade show, RSNA (Radiological Society of North America), in November 1994. Consequently, the Company will be attending the RSNA show in November 1995, where it will exhibit its new products. The RSNA is one of the largest medical meetings in the world with total attendance expected to reach 60,000, including 25,000 radiologists, who are among the principal groups to whom the Company will direct its marketing efforts.
As at September 1, 1995, the Company's backlog of unfilled orders was approximately $4.0 million, as compared to $1.5 million at September 1, 1994.
The Company also believes that efforts to reduce infringement of its intellectual property rights by competitors have begun to produce material benefits, as reflected in the $62 million judgment rendered in its favor against General Electric Company. During the 1995 fiscal year the Company commenced similar patent infringement suits against other major competitors (See "Litigation").
Lower service and repair fees in fiscal 1995, as in fiscal 1994 (approximately $6.6 million in fiscal 1995 as compared to approximately $7.7 million in fiscal 1994) indirectly resulted from reduced sales, as well as from competition, as older scanners were retired without offsetting new scanners to maintain or increase the Company's customer base.
Overall, expenses increased from approximately $10.0 million in fiscal 1994 to $11.5 million in fiscal 1995. General and administrative expenses decreased from approximately $5.8 million in fiscal 1994 to approximately $5.3 million in fiscal 1995, but research and development expenses increased from approximately $2.8 million in fiscal 1994 to $3.4 million in fiscal 1995 (exclusive of the portion of such expenses capitalized), and selling and marketing expenses increased from approximately $1.3 million in fiscal 1994 to $1.5 million in fiscal 1995. The greatest part of the overall increase in expenses resulted from an increase in the compensatory element of stock issuances from $193,527 in fiscal 1994 to $1,363,194 in fiscal 1995. This increase resulted mostly from non-recurring bonuses granted to a large number of employees. The Company notes that maintaining or increasing expenses are necessary for the Company to realize its objective to develop and market new scanner products.
In fiscal 1992 the Company began laying the ground work for increased scanner sales, in foreign countries as well as domestically. The Company has continued these efforts through fiscal 1995, and based on sales to date, further indications of interest, meetings, sales trips abroad and negotiations, the Company is cautiously optimistic that foreign sales will produce significant revenues in fiscal 1996 and/or 1997 depending on the timing of orders and completion of projects. Having received FDA approval for its Quad 7000 Scanner, the Company also anticipates increased demand for its new Quad MR scanner products.
The Company maintains an installed base of over 100 scanners which generates revenue in two principal areas: namely on-going service and equipment upgrades.
The exceptional versatility and productivity of MRI tech nology creates the impetus for new uses. As a result, dramatic new features are developed and sold to the Company's customer base thereby extending the useful life of their equipment, avoiding obsolescence and minimizing capital expenditures. Upgrades consist of hardware, software and pulse sequences designed to maximize throughput while maintaining image quality and patient comfort. This income resource is considered to be a major asset of the company.
As a result of its upgrade program, the Company derived approximately $1.7 million in upgrades income in fiscal 1992, $1.3 million in 1993, $61,000 in 1994 and $338,000 in 1995. Significant research and development of new programs have been undertaken, which emphasize the development of new features for the Company's scanner upgrade program. More specifically, products derived from the Company's new scanners are expected to generate substantial upgrade revenue in fiscal 1996 as customers upgrade their existing scanners to take advantage of the improved image quality and high speed image processing capabilities.
The Company is optimistic that its new Quad 12000 and Quad 7000 scanners will significantly improve the Company's competitive position. The Quad scanners are highly competitive and totally new high field non-claustrophobic scanners not previously available in the MRI market. The Company expects vigorous sales from these new products.
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 1995 the Company continued its investment in the development of its new MRI scanners together with software and upgrades, with an investment of $3,508,101 in R&D ($151,981 of which was capitalized) as compared to $3,604,785 in R&D ($687,551 of which was capitalized in fiscal 1994. The R&D expenditure was approximately 25% of revenues in 1995 and 23% of revenues in 1994.
Fiscal 1994 Compared to Fiscal 1993
In fiscal 1994 a loss of $334,574 was experienced on gross revenues of $15.4 million, while in fiscal 1993 earnings of $238,283 were reported on gross revenues of $16.8 million.
The percentage of the Company's revenue derived from sources other than scanner sales (customer service, fee-for-service, upgrades and scanning center management) was approximately 51% for fiscal 1994, 60% for fiscal 1993, 61% for fiscal 1992 and 1991 and 33% for fiscal 1990.
Significantly, the net loss of $699,568 ($558,892 after giving effect to the minority interest) suffered by the Company's Israeli subsidiary, Medical SNI (formerly Vonar Ltd.), in fiscal 1994, as compared to Medical SNI's net income of $45,212 in fiscal 1993, contributed to the consolidated net loss in fiscal 1994 for the Company and its subsidiaries. The expenses incurred by Medical SNI in fiscal 1994 included a non-recurring $188,655 in connection with a public offering which was canceled.
Lower revenues experienced in fiscal 1994, as in fiscal 1993, were the principal reason for the operating losses experienced in both fiscal years ($2.5 million in fiscal 1994 and $2.0 in fiscal 1993). Lower revenues reflected strong competition and a continued weak domestic demand for MRI scanners. The Company strongly believes, however, that some of its competitors are unfairly competing by infringing the Company's patents, copyrights and other intellectual property rights. Consequently, the Company commenced legal action against its most significant competitors (see "Litigation).
Lower service and repair fees in fiscal 1994 (approximately $7.7 million in fiscal 1994 as compared to approximately $8.3 million in fiscal 1993) indirectly resulted from reduced sales, as well as from competition, as older scanners were retired without offsetting new scanners to maintain or increase the Company's customer base.
Overall, expenses increased from approximately $9.2 million in fiscal 1993 to $10 million in fiscal 1994. Small decreases from fiscal 1993 to fiscal 1994 in selling and marketing expenses ($1,325,393 to $1,282,328) and increases in research and development expenses ($2,180,892 to $2,803,221, exclusive of the portion of such expenses capitalized) were not indicative of any trends but were within the scope of normal variation. Notwithstanding the Company's cost containment policies, general and administrative expenses increased from $5,409,965 in fiscal 1993 to $5,765,598 in fiscal 1994 (approximately 6.5%). The Company does not believe the increases in general and administrative expenses from fiscal 1993 to fiscal 1994 were indicative of any material trend but were the result of the specific circumstances encountered by the Company in the fiscal periods. The Company notes that maintaining or increasing expenses are necessary for the Company to realize its objective to develop and market new scanner products.
Offsetting reduced revenues from operations, the Company recognized a significant nonrecurring gain of approximately $1.27 million on the sale to related parties of its interests in four limited partnerships (see Item 13, Certain Relationships and Related Transactions and Note 3 to Financial Statements). Nevertheless, the smaller amount of gain recognized from this transaction as compared to the nonrecurring gain recognized in fiscal 1993 ($3.3 million) on the sale of certain joint venture and limited partnership interests to related parties, was insufficient to offset the Company's operating loss and resulted in a loss for fiscal 1994.
Continuing its tradition as the originator of MRI, in fiscal 1994 the Company continued its investment in the development of its new MRI scanners together with software and upgrades, with an investment of $3,604,785 in R&D ($687,551 of which was capitalized) as compared to $3,119,898 ($938,926 of which was capitalized) in fiscal 1993. The R&D expenditure in 1994 was 23% of revenues and in 1993 was 18.6% of revenues.
Liquidity and Capital Resources
At June 30, 1995, the Company's liquidity and capital resources position had changed from June 30, 1994 as follows:
___________ June 30 _____________ 1995 1994 Change Working Capital (deficiency) (5,077,477) (7,748,904) 2,671,427
The improvement in the Company's working capital position resulted primarily from a decrease in current liabilities (from $17.8 million in fiscal 1994 to $14.6 million in fiscal 1995). The decrease in current liabilities as well as the decrease in the Company's long-term debt and capital lease obligations ($1.46 million in fiscal 1994 as compared to $528,543 million in fiscal 1995) is attributable to the Company continuing to pay down its debt obligations and in part to the assumption of a portion of the Company's obligations to a secured lender by a related party in connection with the exercise of a purchase option under a scanner lease covering the encumbered scanner. (See Certain Relationship and Related Transactions.)
The Company offers its products for sale or lease to cus tomers. Cash flows from leasing transactions are derived under the terms of the underlying agreements. Over the long term, the Company expects enhanced cash flows and increased revenues from such transactions while in the short term, such transactions impair cash flow. In order to mitigate the short term effect on cash flow, the Company previously had borrowed money secured by the leases and the underlying equipment. Such debt comprises substantially all of the remaining long-term debt in the accompanying financial statements.
During the fiscal years from 1990 through 1995 the Company restructured various long-term loans and notes. The significant changes included extended maturity dates, and the addition of unpaid interest to the note and loan balances.
Since June, 1989 a principal objective of the Company has been to reduce and ultimately eliminate its debt. Since the inception of the plan interest bearing debt was reduced from $23.1 million in fiscal 1989 to $18.5 million in fiscal 1990. From June 30, 1990 to June 30, 1991 interest bearing debt was reduced by $3.3 million to $15.2 million. Through June 30, 1992 interest bearing debt was reduced by an additional $3.1 million to $12.1 million and through June 30, 1993 interest bearing debt was further reduced by $2.3 million to $9.8 million. Through June 30, 1994 interest bearing debt was reduced by an additional $3.8 million to approximately $6.0 million and through June 30, 1995 interest bearing debt was reduced by an additional $2.1 million to $3.9 million.
As of June 30, 1995, the Company had no unused credit facilities with banks or financial institutions.
Capital expenditures for 1995 and 1994 approximate $1.8 million and $1.9 million, respectively, and substantially consisted of capitalized computer software costs in connection with the development of scanner products, patent costs and copyright costs and production equipment.
The Company's business plan, initiated during September 1989, addressed its financial objectives. The plan is based to a substantial extent, on the successful implementation of several new programs designed to position the Company for long-term growth and expansion. The plan has, as its objective, the enhancement and stabilization of revenue streams through the generation of additional income from its installed base of over 100 scanners and leasing programs. In addition, the Company instituted strict cost containment programs. While continuing to focus on new sources of income, the Company, with its new "Quad" scanners, expects to re-emphasize MRI scanner sales.
Such cost containment programs primarily focused on the restructuring of employee staffing levels and manufacturing facilities to bring them into line with current requirements. These programs have resulted in significant reductions in expenses since fiscal 1989. The cost containment programs will be continued.
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 $8.3 million for the year ended June 30, 1993, $7.7 for the year ended June 30, 1994 and $6.6 for the year ended June 30, 1995. The Company will continue to aggressively develop and market upgrades and enhancements for previously installed scanners.
The Company's working capital deficiency as of June 30, 1995 approximates $5.1 million, down from $7.7 million as of June 30, 1994. The Company expects to reduce this deficiency further by June 30, 1996. This is to be accomplished by internally generated cash from operating profits and the refinancing and/or restructuring of maturity terms of certain loans now classified as short term obligations. The Company also will pursue equity financing alternatives.
The Company believes that the above mentioned financing arrangements and programs will provide the cash flows needed to achieve the sales, service and production levels necessary to support its operations. In addition, the Company is exploring other more permanent financing alternatives which may become available during fiscal 1996 as the success of the previously described programs accelerates.
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA FONAR CORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Page No. ------------ INDEPENDENT AUDITORS' REPORT
CONSOLIDATED BALANCE SHEETS to At June 30, 1995 AND 1994
CONSOLIDATED STATEMENTS OF OPERATIONS ; For the Three Years Ended June 30, 1995, 1994 and 1993
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY to For the Three Years Ended June 30, 1995, 1994 and 1993
CONSOLIDATED STATEMENTS OF CASH FLOWS to For the Three Years Ended June 30, 1995, 1994 and 1993
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS to
SUPPLEMENTARY SCHEDULES:
INDEPENDENT AUDITORS' REPORT ON SCHEDULES S-1
SCHEDULE II - Amounts Receivable from Related Parties and Underwriters, Promoters and Employees Other than Related Parties S-2 For the Years Ended June 30, 1995, 1994 and 1993 SCHEDULE VIII - Valuation and Qualifying Accounts For the Three Years Ended S-3 June 30, 1995, 1994 and 1993
SELECTED FINANCIAL DATA (*)
For the Five Years Ended June 30, 1995 (*) Included in Part II, Item 6
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
Directors serve from the date of their election until the next annual meeting of stockholders and until their successors are elected and qualify. Officers serve at the discretion of the Board of Directors.
The officers and directors of the Company are set forth below:
Raymond V. Damadian, M.D. 59 President, Chairman of the Board and a Director
Luciano B. Bonanni 40 Executive Vice President
Timothy R. Damadian 31 Vice President of Operations
David B. Terry 48 Secretary and Treasurer
Claudette J.V. Chan 58 Director
Robert J. Janoff 68 Director
Herbert Maisel 51 Director
Raymond V. Damadian, M.D. has been the Chairman of the Board and President of FONAR since its inception. Dr. Damadian was employed the State University of New York, Downstate Medical Center, New York, as an Associate Professor of Biophysics from 1967 until September 1979. Dr. Damadian received an M.D. degree in 1960 from Albert Einstein College of Medicine, New York, and a B.S. degree in mathematics from the University of Wisconsin in 1956. In addition, Dr. Damadian conducted post-graduate work at Harvard University, where he studied extensively in the fields of physics, mathematics and electronics. Dr. Damadian is the author of numerous articles and books on the nuclear magnetic resonance effect in human tissue, which is the theoretical basis for the FONAR MRI scanners. Dr. Damadian is a 1988 recipient of the National Medal of Technology and in 1989 was inducted into the National Hall of Fame, for his contributions in conceiving and developing the application of magnetic resonance technology to medical applications including whole body scanning and diagnostic imaging.
Luciano B. Bonanni has been a Vice President of FONAR since 1981. Mr. Bonanni was an Electrical Engineer with the Aviation Systems Group of Cardion Electronics (a subsidiary of General Signal Corp.) for approximately two years before joining FONAR in April 1979. He received his bachelor of science degree in electrical engineering from Manhattan College in 1977.
Timothy R. Damadian has been a Vice President of FONAR since July 1992. He has been employed by FONAR since 1981, initially on a part-time basis. Mr. Damadian served as a field service technician for FONAR, after graduating from Suburban Technical School in 1982, where he studied digital computer technology. Mr. Damadian became Director of Manufacturing in October 1989 and was promoted to Vice President of Operations in July 1992. Timothy Damadian is the son of Raymond V. Damadian and nephew of David Terry and Claudette Chan.
David B. Terry is the Secretary and Treasurer of the Company. Mr. Terry has been serving as Secretary and Treasurer since May 1990, and previously served as Secretary from July 1978 through June 1987 and as Treasurer from August 1981 through June 1987. From July 1978 through June 1987, he was also a Director of the Company. Between July 1987 and January 1990, Mr. Terry was a co-owner and actively engaged in the business of Carman-Terry Realty, a real estate brokerage firm. In January 1990, Mr. Terry resumed his employment with the Company. Mr. Terry is the brother-in-law of Raymond V. Damadian and uncle of Timothy R. Damadian.
Claudette J.V. Chan has been a Director of FONAR since October 1987. Mrs. Chan has been employed since 1992 by Raymond V. Damadian, M.D. MR Scanning Centers Management Company as "site inspector," in which capacity she is responsible for supervising and implementing standard procedures and policies for MRI scanning centers. From 1989 to 1994 Mrs. Chan was employed by St. Matthew's and St. Timothy's Neighborhood Center, Inc., as the director of volunteers in the "Meals on Wheels" program, a program which cares for the elderly. In approximately 1983, Mrs. Chan formed the Claudette Penot Collection, a retail mail-order business specializing in women's apparel and gifts, of which she was the President until she stopped operating the business in approximately 1989. Mrs. Chan practiced and taught in the field of nursing until 1973, when her son was born. She received a bachelor of science degree in nursing from Cornell University in 1960. Mrs. Chan is the sister of Raymond V. Damadian and aunt of Timothy R. Damadian.
Robert J. Janoff has been a Director of FONAR since February, 1989. Mr. Janoff has been a self-employed New York State licensed private investigator for more than thirty-five years and has been a Senior Adjustor in Empire Insurance Group for more than 10 years. Mr. Janoff also served, from June 1985 to June 1991, as President of Action Data Management Strategies, Ltd., a supplier of computer programs for use by insurance companies.
Herbert Maisel has been a Director of FONAR since February, 1989. Mr. Maisel has been the manager of Melville MRI, P.C., an MRI scanning center located in Melville, New York, since January, 1992, and of Damadian MRI in Garden City, P.C., an MRI scanning center located in Garden City, New York since April, 1995. Mr. Maisel was also manager of Damadian MRI in Islandia, P.C. from December, 1993 to March, 1995. Prior to that time Mr. Maisel had been the President and owner of Bagel World, Inc., a bagel bakery, from March 1984 to January 1992. Prior thereto, Mr. Maisel served as a supervisor of a commercial printing plant.
Item 11.
Item 11. Executive Compensation.
With the exception of the Chief Executive Officer, the compensation of the Company's executive officers is based on a combination of salary and bonuses based on performance. The Chief Executive Officer's compensation consists only of a salary which has remained constant for more than the past three fiscal years. The Board of Directors does not have a compensation committee. Dr. Raymond V. Damadian, President, Chief Executive Officer and Chairman of the Board, is the only executive officer who is a member of the Board of Directors. Dr. Damadian participates in the determination of executive compensation for the Company's officers.
There is set forth in the following Summary Compensation Table the compensation provided by the Company during fiscal 1995 to its Chief Executive Officer and executive officer whose salary and bonus were equal to at least $100,000, and there is set forth in the following Option Grant Table and Option Exercise Table the stock options granted and exercised by those individuals during fiscal 1995.
Employee Compensation Plans
The Company's 1984 Incentive Stock Option Plan, adopted as of August 24, 1984, permitted the issuance of stock options covering an aggregate of 312,500 shares of Common Stock to employees of the Company. The options had an exercise price equal to the fair market value of the underlying stock on the date the option was granted, were nontransferrable, were exercisable for a period not exceeding ten years and expired upon the voluntary termination of employment. The 1984 Incentive Stock Option Plan terminated on August 23, 1994. As of June 30, 1995 no options were available for future grant under the plan.
The Company's 1986 Nonstatutory Stock Option Plan, adopted on January 17, 1986, permitted the issuance of stock options covering an aggregate of 1,250,000 shares of Common Stock. The options may be issued at such price and upon such terms and conditions as are determined by the Company. The 1986 Nonstatutory Stock Option plan will terminate on January 16, 1996. As of June 30, 1995, no options were available for future grant under the plan.
The Company's 1986 Incentive Stock Option Plan, adopted on January 17, 1986, is intended to qualify as an incentive stock option plan under Section 422A of the Internal Revenue Code of 1954, as amended. The 1986 Incentive Stock Option Plan permits the issuance of stock options covering an aggregate of 1,250,000 shares of Common Stock. The options have an exercise price equal to the fair market value of the underlying stock on the date the option is granted, are nontransferrable, are exercisable for a period not exceeding ten years and expire upon the voluntary termination of employment. The 1986 Incentive Stock Option Plan will terminate on January 16, 1996. As of June 30, 1995, options to purchase 157,302 shares of Common Stock were available for future grant under the plan.
The Company's 1993 Incentive Stock Option Plan, adopted on March 26, 1993, is intended to qualify as an incentive stock option plan under Section 422A of the Internal Revenue Code of 1954, as amended. The 1993 Incentive Stock Option Plan permits the issuance of stock options covering an aggregate of 1,500,000 shares of Common Stock. The options have an exercise price equal to the fair market value of the underlying stock on the date the option is granted, are nontransferrable, are exercisable for a period not exceeding ten years and expire upon the voluntary termination of employment. The 1993 Stock Option Plan will terminate on March 25, 2003. As of June 30, 1995, options to purchase 1,112,000 shares of Common Stock were available for future grant under the plan.
The 1994 Stock Bonus Plan, adopted on December 1, 1993, permits the Company to issue an aggregate of 5,000,000 shares of Common Stock as a bonus or compensation. The Company selects the persons to whom bonus stock will be issued, the number of shares awarded and such other terms and conditions as it deems advisable. The 1994 Stock Bonus Plan will terminate on November 30, 2003. As of June 30, 1995, 524,745 shares of Common Stock were available for future grant.
The Company's 1995 Nonstatutory Stock Option Plan, adopted on April 1, 1995, permits the issuance of stock options covering a aggregate of 5,000,000 shares of Common Stock. The options may be issued at such price and upon such terms and conditions as are determined by the Company. The 1995 Nonstatutory Stock Option Plan will terminate on March 31, 2005. As of June 30, 1995, options to purchase 5,000,000 shares of Common Stock were available for future grant.
The Company's 1995 Stock Bonus Plan, adopted on April 1, 1995, permits the Company to issue an aggregate of 5,000,000 shares of Common Stock as a bonus or compensation. The Company selects the persons to whom bonus stock will be issued, the number of shares awarded and such other terms and conditions as it deems advisable. The 1995 Stock Bonus Plan will terminate on March 31, 2005. As of June 30, 1995, 4,641,000 shares of Common Stock were available for future grant.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth the number and percentage of shares of the Company's securities held by each director, by each person known by the Company to own in excess of five percent of the Company's voting securities and by all officers and directors as a group as of September 15, 1995.
Name and Address of Shares Percent Beneficial Owner (1) Beneficially Owned of Class
Raymond V. Damadian, M.D. c/o FONAR Corporation Melville, New York Director, President CEO, 5% + Stockholder Common Stock 2,366,637.5 6.06% Class B Stock 3,187,058 99.80%
Claudette Chan Director Common Stock 4,000 *
Robert J. Janoff 25,000 * Director Common Stock (2) * Herbert Maisel 100 Director Common Stock (3)
Luciano Bonanni 160,661 * Executive Vice President
All Officers and Directors as a Group (7 persons) (2)(3)(4) Common Stock 2,625,398.5 6.72% Class B Stock 3,187,058 99.80% ___________________________ * Less than one percent
1. Address provided for each beneficial owner owning more than five percent of the voting securities of the Company.
2. Includes presently exercisable options to purchase 15,000 shares of the Company's Common Stock.
3. Includes 50 shares of the Company's Common Stock which are held in the name of Mr. Maisel as trustee for his minor daughter and 50 shares of the Company's Common Stock which are held by Mr. Maisel's wife.
4. Includes options to purchase 4,000 shares of the Company's Common Stock held by an officer.
Item 13.
Item 13. Certain Relationships and Related Transactions.
On April 7, 1989, at a time when the Company lacked both the financing and working capital to establish its own centers, Donna Damadian, the wife of Raymond V. Damadian, M.D., Chairman of the Company, purchased from FONAR a scanner for a purchase price of $1,508,000 (the price paid by FONAR's customers for like equipment). $1.2 million was paid in cash, providing a much needed cash infusion for the Company, and the balance was paid over time with interest pursuant to a promissory note of even date. The scanner is being leased to Macon Magnetic Resonance Imaging, P.C. ("Macon Center"), a Georgia professional corporation wholly-owned by, and of which Dr. Damadian is, the President.
Since May, 1990, Raymond V. Damadian M.D., MR Scanning Centers Management Company, a Delaware corporation of which Raymond V. Damadian is the sole shareholder, director and President ("RVDC"), has been party to a standard service agreement with the Company for the servicing of the scanner at the Macon Center. The current annual price is $123,760, which is the standard price charged to the Company's other customers for like equipment. The term of the current one-year service agreement runs from April, 1995 to April, 1996. The current annual price was also in effect during the prior year from April, 1994 to April, 1995.
By agreement dated June 27, 1990, Tallahassee Magnetic Resonance Imaging, P.A., a Florida corporation of which Raymond V. Damadian is the sole shareholder, director and President ("TMRI"), agreed to support the Company's financial obligations to one of its secured lenders by agreeing to be the lessee of one of its mobile scanners for a period of five years, subject to the superior rights of the Company's secured lender. Effective June 30, 1991, the lease arrangements were restructured to provide for a five year term, commencing June 30, 1991, and the monthly payment was fixed at $43,217, eliminating the previous per scan fee (with a minimum monthly payment of $43,200). In addition, since service and maintenance for the scanner is not included under the new lease, TMRI has been party to a standard service agreement with the Company for the scanner since June 30, 1991. The annual price is currently $120,000, and the term of the current one-year service agreement runs from June 30, 1995 to June 29, 1996. The current annual price was also in effect during the prior year from June 30, 1994 to June 29, 1995.
In addition, in fiscal years 1990 and 1992, RVDC leased four MRI scanners previously leased by the Company to unrelated parties, where the original lessees had defaulted or were unwilling to continue to perform. RVDC thereby preserved the leases for the Company and rescued the Company from defaulting with the lender. The following is a description of these transactions.
By agreement dated April 1, 1990, RVDC agreed to assume the financial and other obligations of the original lessee under a lease for a mobile scanner dated June 29, 1988, on the same terms and conditions as the original lessee. Effective June 30, 1991, the lease arrangements were restructured to provide for a five year term, commencing June 30, 1991 and the monthly payment was fixed at $35,167, eliminating the previous per scan fee (with a minimum monthly payment of $40,000). In addition, since service and maintenance for the scanner was not included under the terms of the new lease, RVDC obtained a standard service agreement with the Company for the scanner, the price for which was $122,256 for the period from June 30, 1993 to June 29, 1994. RVDC in turn provided the use of the scanner to Albany Magnetic Imaging Center, P.C., a Georgia professional corporation of which Raymond V. Damadian is the sole stockholder, director and President ("Albany Center"). Effective December 1, 1993, RVDC assigned its purchase option under the lease to the Albany Center, and the Albany Center concurrently exercised the option and purchased the scanner from the Company for a purchase price of $1,128,844. Of the purchase price, $574,077 was paid by the assumption and payment of the Company's indebtedness to the lender secured by the scanner. Such indebtedness to the lender was retired pursuant to a new equipment finance lease between the lender and the Albany Center, guaranteed by the Company, providing for 18 monthly payments of $35,000 each. Following payment of the lease, the remaining $554,767 of the purchase price due to the Company is required to be paid pursuant to a promissory note, with interest at 10% per annum, over an 18 month term (17 payments of $35,000 each and one final payment of $2,454.08). Effective December 1, 1993, the Albany Center also assumed RVDC's service agreement for the scanner for the balance of the contract year, and upon expiration of the agreement entered into a new service agreement with the Company for the period from June 30, 1994 to June 29, 1995 at a price of $122,256. The term of the current one-year service contract runs from June 30, 1995 to June 29, 1996 at the same price.
Pursuant to an agreement dated March 7, 1990, RVDC agreed to assume the financial and other obligations of the original lessee under a lease for a mobile scanner dated December 13, 1988, on the same terms and conditions as the original lessee. Effective June 30, 1991, the lease arrangements were restructured to provide for a five year term commencing June 30, 1991, and the monthly payment was fixed at $42,387, eliminating the previous per scan fee (with a minimum monthly payment of $52,000). In addition, since service and maintenance for the scanner is not included under the terms of the new lease, RVDC has been party to a standard service agreement with the Company for the scanner since June 30, 1991. The annual price is currently $105,000, which was reduced from $120,000 in the previous year to bring the price into line with the Company's standard pricing for like equipment. The term of the current one-year service agreement runs from June 30, 1995 to June 29, 1996. RVDC in turn has provided the use of the scanner to Central Island MRI, P.C., a New York professional corporation of which Raymond V. Damadian is the sole shareholder, director and President ("Staten Island Center").
By agreement dated March 7, 1990, RVDC agreed to assume the financial and other obligations of the original lessee under a lease for a mobile scanner dated August 16, 1988, on the same terms and conditions as the original lessee. Effective June 30, 1991, the lease arrangements were restructured to provide for a five year term, commencing June 30, 1991 and the monthly payment was fixed at $31,373, eliminating the previous per scan fee (with a minimum monthly payment of $41,500.) In addition, since service and maintenance for the scanner was not included under the terms of the new lease, RVDC obtained a standard service agreement with the Company for the scanner, the price for which was $120,000 for the period from June 30, 1993 to June 29, 1994. RVDC in turn provided the use of the scanner to Deerfield Magnetic Resonance Imaging P.A., a Florida professional association, of which Raymond V. Damadian is the sole shareholder, director and President ("Deerfield Center"). In July 1994, the lease between FONAR and RVDC was terminated, and the Deerfield Center concurrently purchased the scanner from the Company by assuming the Company's indebtedness to the lender secured by the scanner in the amount of $508,180.07. This amount is to be paid pursuant to a note, guaranteed by the Company, with interest at 10% per annum, providing for 17 monthly payments of $30,519.81 each and a final payment of the remaining principal balance plus unpaid interest. In connection with assuming the debt to the lender, the Deerfield Center assumed the remaining outstanding lease obligation of RVDC to the Company respecting the scanner in the amount of $454,005.11. This amount is to be paid pursuant to a promissory note, bearing interest at the rate of 10% per annum, in 17 monthly installments (16 installments of $30,000 each and one installment of $7,274.79) commencing January 1, 1996, following the final scheduled payment by the Deerfield Center of the obligation to the lender. The Deerfield Center also entered into a service agreement with the Company for the period from June 30, 1994 to June 29, 1995 at a price of $120,000. The term of the current one-year service contract runs from June 30, 1995 to June 29, 1996 at the same price.
During fiscal 1992, RVDC agreed to assume the financial and other obligations of the original lessee under a lease for a mobile scanner dated June 30, 1989 and restructured the terms to provide for a monthly payment of $24,421.44 commencing April 1, 1992 and extended the term of the lease seven years from that date. In addition, RVDC entered into a standard service contract with the Company for the Scanner, the price for which was $105,105.60 for the period from May 6, 1993 to May 5, 1994. RVDC in turn provided the use of the scanner to Daytona Beach Magnetic Resonance Imaging, P.A., a Florida professional association of which Raymond V. Damadian is the sole shareholder, director and President ("Daytona Beach Center"). Effective December 1, 1993, RVDC assigned its purchase option under the lease to the Daytona Beach Center, and the Daytona Beach Center exercised the option and purchased the scanner from the Company for a purchase price of $1,416,717. Of the purchase price, $328,044 was paid by the assumption and payment of the Company's indebtedness to the lender secured by the scanner. Such indebtedness to the lender was retired pursuant to a new equipment finance lease between the lender and the Daytona Beach Center, guaranteed by the Company, providing for 18 monthly payments of $20,000 each. The remaining $1,088,673 of the purchase price due to the Company is required to be paid pursuant to a promissory note, with interest at 10% per annum, over a 45 month term commencing July 1, 1994 as follows: eleven installments of $15,000 each, thirty-three installments of $35,000 each and one installment of $19,097.26. Effective December 1, 1993, the Daytona Beach Center also assumed RVDC's service agreement with the Company for the scanner for the balance of the contract year, and upon its expiration, entered into a new service agreement with the Company for the period from May 6, 1994 to May 5, 1995 at a price of $105,105.60. The term of the current one-year service agreement runs from May 6, 1995 to May 5, 1996 at the same price.
RVDC supported the Company's business by leasing two and agreeing to purchase four MRI scanners from the Company in fiscal 1992.
By agreement dated September 30, 1991, RVDC agreed to lease one of the Company's mobile scanners for a term of five years at a monthly lease payment of $36,119.98 commencing January 1, 1992. RVDC also maintained a service agreement with the Company on the scanner, the price for which was $125,000 for the period from December 15, 1992 to December 14, 1993. RVDC in turn provided the use of the scanner to Melville MRI, P.C., a New York professional corporation of which Raymond V. Damadian is the sole shareholder, director and President ("Melville Center").
Effective June 30, 1994, RVDC assigned its purchase option under the lease to the Melville Center, and the Melville Center concurrently exercised the option and purchased the scanner from the Company for a purchase price of $1,011,431.12. Of the purchase price, $900,000 is to be paid by the assumption and payment of the Company's indebtedness to the lender secured by the scanner pursuant to a note bearing interest at 14% per annum and providing for 60 monthly payments of $20,700 each. The remaining $111,431.12 of the purchase price is to be paid concurrently with the payments to the lender pursuant to a note, with interest at 10% per annum, providing for 60 monthly payment of $2,367.58 each. In addition the Melville Center assumed RVDC's current service contract with the Company for the scanner, the fee for which was $125,000 for the period from December 15, 1993 to December 14, 1994. The term of the current one-year service agreement runs form December 15, 1994 to December 14, 1995 at the same price.
Pursuant to an agreement dated December 31, 1991, RVDC agreed to lease one of the Company's scanners for a monthly lease payment of $18,081.92 for a period of seven years commencing April 1, 1992. RVDC in turn provided the use of the scanner to Damadian MRI at Astoria, P.C. (the "Astoria Center"), a New York professional corporation of which Raymond V. Damadian is the sole shareholder, director and President. Effective November 13, 1993, the lease between the Company and RVDC was terminated, and the scanner was leased directly by the Company to the Astoria Center pursuant to a new lease providing for 84 monthly payments of $16,978.43 each commencing February 1, 1994. In addition, the Astoria Center is party to a service agreement with the Company for the scanner, the fee for which is $105,000 for the period from October 27, 1995 to October 26, 1996.
RVDC agreed to purchase four MRI scanners from the Company pursuant to sales agreements dated April 29, 1992, May 26, 1992, June 3, 1992 and June 18, 1992, for sites in Bayside (Queens County), Islandia (Suffolk County), Elmhurst (Queens County) and Forest Hills (Queens County), New York. Each of the four sales agreements provided for a purchase price of $1,000,000 payable in installments as follows: (1) 10% down payment within 30 days of execution, (2) 10% within 30 days of delivery of the magnet and shielded room and (3) 80% in 84 monthly installments of $12,468.97 each (inclusive of interest at 8% per annum) pursuant to a promissory note to be executed by RVDC upon acceptance of the scanner.
Effective November 13, 1993, the sales agreement for the scanner to be utilized in Islandia, New York was terminated, and the Company instead leased the scanner to Damadian MRI at Islandia, P.C. (the "Islandia Center"), a New York professional corporation of which Raymond V. Damadian is the sole shareholder, director and President. The lease provides for monthly payments of $15,586.21 for a term of 84 months commencing February 1, 1994. In addition, the Islandia Center is party to a service agreement with the Company for the scanner, the fee for which is $105,000 for the period from December 6, 1994 to December 5, 1995.
The scanner purchased by RVDC for Bayside (Queens County), New York, is being provided to Bayside MRI, P.C. (the "Bayside Center"), a New York professional corporation of which Raymond V. Damadian is the sole stockholder, director and President, and the scanner purchased by RVDC for Elmhurst (Queens County), New York, is being provided to Elmhurst MRI, P.C. (the "Elmhurst Center"), a New York professional corporation of which Raymond V. Damadian is the sole stockholder, director and President. RVDC is party to a service agreement with the Company for the scanner being provided to the Bayside Center for the period January 11, 1995 to January 10, 1996 at a price of $105,000. The current annual price was also in effect during the prior year from January 11, 1994 to January 10, 1995.
In fiscal 1993, RVDC and its affiliates supported the Company and its objectives by leasing one MRI scanner, purchasing one MRI scanner and purchasing the Company's interest in three MRI scanning centers.
Pursuant to an agreement dated December 31, 1992, RVDC agreed to lease from the Company a mobile scanner, which is in turn being leased to a third party in Bethesda, Maryland. The term of the lease is for 84 months and the monthly lease payment of $15,586.21 (commencing January 1, 1993) is based on a principal amount of $1,000,000 amortized over 84 months with an interest rate of 8% per annum. The lease includes an option to RVDC to purchase the scanner. RVDC is party to a standard service agreement with the Company for the scanner, the annual rate for which was $120,000 for the period from June 22, 1994 to June 21, 1995 and is $120,000 for the period from June 22, 1995 to June 21, 1996.
Pursuant to an agreement dated March 31, 1993, RVDC agreed to purchase the Company's general partnership interest (approximately 92% of the partnership) in a partnership owning and operating an MRI scanning center in Bensonhurst (Brooklyn), New York ("the "Bensonhurst Center"). The purchase price of $923,000 is payable in 84 equal monthly installments of $14,386.07 each commencing May 1, 1993, which amount includes principal and interest at the rate of 8% per annum amortized over the term. The partnership is also party to a standard service agreement with the Company. The current annual rate is $105,000 for the one year service contract from May 18, 1995 to May 17, 1996. The current annual price was also in effect during the prior year from May 18, 1994 to May 17, 1995.
Pursuant to a sales agreement dated June 30, 1993 RVDC agreed to purchase an MRI scanner from the Company which RVDC is planning to utilize at a site located in Coral Gables, Florida (the "Coral Gables Center"). The sales agreement provides for a purchase price of $1,000,000 payable in installments as follows: (1) 10% down payment within 30 days of execution, (2) 10% within 30 days of delivery of the magnet and shielded room, and (3) 80% in 84 monthly installments of $12,468.97 each (inclusive of interest at 8% per annum) pursuant to a promissory note to be executed by RVDC upon acceptance of the Scanner.
Pursuant to an agreement dated April 6, 1993, First Coast Magnetic Resonance Imaging, P.A., ("First Coast") a professional association of which Dr. Damadian is the stockholder, director and President, purchased the Company's partnership/joint venture interests in two MRI scanning centers in Florida (one in Jacksonville and one in Fort Meyers) for a purchase price of $3,200,000. The agreement provided for payment of the purchase price as follows: $200,000 no later than June 30, 1993 and the balance in (a) 36 equal monthly installments of principal and interest (8% per annum) in the amount of $46,758.64 each and (b) one final 37th installment of principal in the amount of $1,915,323.60. The centers are parties to service agreements with the Company with prices as follows: Jacksonville: $105,416 for each of the periods from February 15, 1994 to February 14, 1995 and May 18, 1995 to May 17, 1996; Fort Myers $100,000 for the period from August 10, 1994 to August 9, 1995 and $65,000 for each of the periods from July 19, 1995 to July 18, 1996 and July 19, 1996 to July 18, 1997.
In fiscal 1994, RVDC and its affiliates supported the Company and its objectives by purchasing five MRI scanners and purchasing the interests of a subsidiary of the Company in four limited partnerships.
Pursuant to a sales agreement dated February 3, 1994 and amended April 1, 1994, RVDC agreed to purchase an MRI scanner from the Company which RVDC is planning to utilize at a site located in Manhattan, New York (the "West Side Center"). The sales agreement provides for a purchase price of $800,000 payable in installments as follows: (1) $100,000 down payment within 30 days of execution, and (2) $700,000 in 84 monthly installments, commencing January 1, 1995, of $11,346.73 each (inclusive of interest at 8% per annum) pursuant to a promissory note.
Pursuant to a sales agreement dated March 31, 1994, RVDC agreed to purchase an MRI scanner from the Company which RVDC is planning to utilize at a site located in Israel (the "Israel Center"). The sales agreement provides for a purchase price of $1,000,000 payable in 84 monthly installments, commencing January 1, 1995, of $16,209.66 each (inclusive of interest at 8% per annum) pursuant to a promissory note.
Pursuant to a sales agreement dated April 1, 1994, RVDC agreed to purchase an MRI scanner from the Company which RVDC is planning to utilize at a site located in Cape Coral, Florida (the "Cape Coral Center"). The sales agreement provides for a purchase price of $1,000,000 payable in installments as follows: (1) $100,000 down payment within 30 days of execution, and (2) $900,000 in 84 monthly installments of $14,027.59 each (inclusive of interest at 8% per annum) pursuant to a promissory note to be executed by RVDC upon acceptance of the scanner.
Pursuant to a sales agreement dated May 18, 1994, RVDC agreed to purchase an MRI scanner from the Company which RVDC is planning to utilize at a site located in Orlando, Florida (the "Orlando Center"). The sales agreement provides for a purchase price of $1,000,000 payable in installments as follows: (1) $100,000 within 30 days of execution, and (2) $900,000 in 84 monthly installments of $14,027.59 each (inclusive of interest at 8% per annum) pursuant to a promissory note to be executed by RVDC upon acceptance of the scanner.
Pursuant to an agreement dated March 31, 1994, the Company sold an MRI scanner to Ellwood City MRI Center Limited Partnership, a Pennsylvania limited partnership of which RVDC is the general partner. The sales agreement provided for a purchase price of $400,000, the first $200,000 of which was paid subsequent to the fiscal year end and the second $200,000 of which will be paid by the transfer of RVDC's distributions until the sum of $200,000 is reached. The partnership is utilizing the scanner to set up an MRI scanning center in Ellwood City, Pennsylvania.
Pursuant to an agreement dated September 30, 1993, Advanced Medical Diagnostics Corporation ("AMD"), a subsidiary of FONAR, sold its interests in a partnership operating an MRI scanning center in Southfield Michigan to RVDC for $600,000. The purchase price is payable with interest at 10% per annum, over a period of 48 months commencing October 1, 1993 as follows: $2,000 per month for the first year, $8,333.33 per month for the second year, $16,666.67 per month for the third year and $20,909.91 for the fourth and fifth years. The partnership is party to a service agreement for the scanner at a current annual fee of $144,000, for the period January 29, 1995 to January 28, 1996. For the prior year, from January 29, 1994 to January 28, 1995, the fee also was $144,000.
Pursuant to an agreement dated September 30, 1993, AMD sold its interests in a partnership operating an MRI scanning center in Melbourne, Florida to Melbourne Magnetic Resonance Imaging, P.A. (the "Melbourne Center"), for a purchase price of $150,000. The purchase price is payable, with interest at 10% per annum, over a period of fifteen months commencing September 1, 1995 as follows: $13,500 per month for the first fourteen months and $1,185.60 for the fifteenth month. The Melbourne Center is a Florida professional corporation of which Raymond V. Damadian is the sole stockholder, director and President. The partnership has been party to a service agreement for the scanner at an annual fee of $108,200 for the periods from May 19, 1994 to May 18, 1995 and May 19, 1995 to May 18, 1996.
Pursuant to an agreement dated September 30, 1993, AMD sold to Dade County MRI, P.A. (the "Dade County Center") its interests in a partnership which had formerly operated an MRI scanning center in Miami, Florida, but is now inactive. The purchase price of $100,000 is payable, with interest at 10% per annum, in sixty (60) equal consecutive monthly installments of principal and interest (including interest accrued from September 30, 1993), commencing 90 days after the scanner is placed in service. The Dade County Center is a Florida professional association of which Raymond V. Damadian is the sole stockholder, director and President.
Pursuant to an agreement dated December 31, 1993, AMD sold its interests in a partnership operating an MRI scanning center in San Francisco to RVDC. The purchase price of $265,000 is payable, with interest at 10% per annum, at the rate of $9,405.88 per month over a period of 36 months commencing January 1, 1995. The partnership has been party to a service agreement with the Company for the scanner at an annual fee of $110,384 for the periods from March 20, 1995 to March 19, 1996 and March 20, 1994 to March 19, 1995.
Pursuant to an agreement dated December 31, 1993, AMD sold its interest in a joint venture operating an MRI scanning center in Philadelphia, Pennsylvania to Liberty MRI, P.C. (the "Liberty Center"). The purchase price of $400,000 is payable, with interest at 10% per annum, at a rate of $9,348.70 per month over a period of 60 months commencing January 1, 1995. The Liberty Center is a Pennsylvania professional corporation of which Raymond V. Damadian is the sole stockholder, director and President. The Liberty Center has been party to a service agreement with the Company for the scanner at an annual fee of $102,700 for the period from November 2, 1994 to November 1, 1995 and from November 2, 1993 to November 1, 1994.
West Palm Beach MRI, P.A. (the "West Palm Beach Center"), a Florida professional association of which Raymond V. Damadian is the sole stockholder, director and President, has been party to a service agreement with the Company for its scanner at an annual fee of $105,000 for the periods from March 1, 1994 to February 28, 1995 and March 1, 1995 to February 28, 1996.
In fiscal 1995, RVDC supported the Company and its objectives by purchasing seven MRI scanners.
Pursuant to a sales agreement dated July 12, 1994, RVDC agreed to purchase an MRI scanner from the Company which RVDC is planning to utilize at a site located in Ft. Lauderdale, Florida (the "Ft. Lauderdale Center"). The sales agreement provides for a purchase price of $800,000 payable in installments as follows: (1) $80,000 down payment within 30 days of execution and (2) $720,000 in 84 monthly installments of $11,222.07 each (inclusive of interest at 8% per annum) pursuant to a promissory note to be executed by RVDC upon acceptance of the scanner.
Pursuant to a sales agreement dated July 12, 1994, RVDC agreed to purchase an MRI scanner from the Company which RVDC is planning to utilize at a site located in Leeds, England (the "Leeds Center"). The sales agreement provides for a purchase price of $800,000 payable in installments as follows: (1) $80,000 down payment within 30 days of execution and (2) $720,000 in 84 monthly installments of $11,222.07 each (inclusive of interest at 8% per annum) pursuant to a promissory note to be executed by RVDC upon acceptance of the scanner.
Pursuant to a sales agreement dated October 1, 1994, RVDC agreed to purchase an MRI scanner from the Company which RVDC is planning to utilize at a site located in St. Petersburg, Florida (the "St. Petersburg Center"). The sales agreement provides for a purchase price of $800,000 payable in installments as follows: (1) $80,000 down payment within 30 days of execution and (2) $720,000 in 84 monthly installments of $11,222.07 each (inclusive of interest at 8% per annum) pursuant to a promissory note to be executed by RVDC upon acceptance of the scanner.
Pursuant to a sales agreement dated October 4, 1994, RVDC agreed to purchase an MRI scanner from the Company which RVDC is planning to utilize at a site located in Boca Raton, Florida (the "Boca Raton Center"). The sales agreement provides for a purchase price of $800,000 payable in installments as follows: (1) $80,000 down payment within 30 days of execution and (2) $720,000 in 84 monthly installments of $11,222.07 each (inclusive of interest at 8% per annum) pursuant to a promissory note to be executed by RVDC upon acceptance of the scanner.
Pursuant to a sales agreement dated November 25, 1994, RVDC agreed to purchase an MRI scanner from the Company which RVDC is planning to utilize at a site located in Birmingham, England (the "Birmingham Center"). The sales agreement provides for a purchase price of $800,000 payable in installments as follows: (1) $80,000 down payment within 30 days of execution and (2) $720,000 in 84 monthly installments of $11,222.07 each (inclusive of interest at 8% per annum) pursuant to a promissory note to be executed by RVDC upon acceptance of the scanner.
Pursuant to a sales agreement dated January 4, 1995, RVDC agreed to purchase an MRI scanner from the Company which RVDC is planning to utilize at a site located in Sarasota, Florida (the "Sarasota Center"). The sales agreement provides for a purchase price of $800,000 payable in installments as follows: (1) $80,000 down payment within 30 days of execution and (2) $720,000 in 84 monthly installments of $11,222.07 each (inclusive of interest at 8% per annum) pursuant to a promissory note to be executed by RVDC upon acceptance of the scanner.
Pursuant to a sales agreement dated January 16, 1995, RVDC agreed to purchase an MRI scanner from the Company which RVDC is planning to utilize at a site located in Largo, Florida (the "Largo II Center"). The sales agreement provides for a purchase price of $800,000 payable in installments as follows: (1) $80,000 down payment within 30 days of execution and (2) $720,000 in 84 monthly installments of $11,222.07 each (inclusive of interest at 8% per annum) pursuant to a promissory note to be executed by RVDC upon acceptance of the scanner.
In addition, pursuant to an agreement dated April 1, 1995, RVDC assigned its right to purchase an MRI scanner from a third party for $85,000 and FONAR assumed the obligations of RVDC under the agreement. RVDC also sold FONAR an MRI machine for $23,000 pursuant to an agreement dated April 1, 1995.
For the year ended June 30, 1995 total receipts by the Company from RVDC and its affiliates were $4,013,100, as compared to receipts of $4,913,968 in fiscal 1994 and receipts in fiscal 1993 of $2,665,000.
RVDC executed and delivered to the Company a promissory note, dated June 30, 1992 in the principal amount of $4,284,692 with interest thereon at the rate of 10% per annum, payable in quarterly installments of interest only during the first year and thereafter, amortized over a five-year period. The note represented the indebtedness of RVDC to the Company incurred during fiscal 1992 for lease payments, service contract fees, management fees and reimbursable expenses and incorporated and superseded the outstanding balance of the note to the Company from RVDC dated June 30, 1991 in the principal amount of $1,996,100 (which was amortized over five years with interest at 10%). The note is guaranteed by the Macon Center, Albany Center, Staten Island Center, Deerfield Center, Daytona Beach Center and Melville Center and is secured by certain assets of RVDC and the guarantors. These security interests are in certain cases subordinate to the security interests of unrelated lenders.
TMRI executed and delivered to the Company a promissory note dated June 30, 1992 in the principal amount of $803,272, with interest thereon at the rate of 10% per annum, payable in quarterly installments of interest only during the first year and thereafter, amortized over a five year period. The note represents the indebtedness of TMRI to the Company during fiscal 1992 for lease payments, service contract fees and reimbursable expenses and incorporates and supersedes the outstanding balance of the note to the Company from TMRI dated June 30, 1991 in the principal amount of $169,200 (which was amortized over five years with interest at 10%).
Pursuant to an agreement dated March 3, 1994, Network MRI, Inc. ("Network") engaged the Company to disassemble, transport and reinstall an MRI scanner purchased by Network from a third party. Luciano Bonanni, the Executive Vice President of the Company, is the President, director and shareholder of Network. The agreement provides for a price of $120,000 payable as follows: (1) $5,000 upon the giving of notice by Network to commence the deinstallation, (2) $15,000 upon the completion of the installation of the magnet and shielded room and (3) $100,000 in 36 monthly installments of $3,133.64 each (inclusive of interest at 8% per annum) pursuant to a note executed upon completion of the reinstallation.
Pursuant to an agreement dated June 20, 1994, MRI Enterprises, Inc. ("Enterprises"), a New York corporation of which Luciano Bonanni is the stockholder, director and President, engaged the Company to disassemble, transport and reinstall an MRI scanner purchased by Enterprises from a third party. The agreement provided for a price of $120,000 payable as follows: (1) $5,000 upon the giving of notice by Enterprises to commence the deinstallation, (2) $15,000 upon the completion of the installation of the magnet and shielded room and (3) $100,000 with interest at 8% per annum pursuant to a note executed upon completion of the reinstallation.
In addition, as of June 30, 1995, Enterprises assumed the liability of a third party to FONAR which had defaulted in its obligation to pay for service for an MRI scanner being provided by Enterprises to the third party. The liability, in the amount of $50,604.00 was assumed by Enterprises in exchange for FONAR assigning the account receivable to Enterprises. The liability is payable by Enterprises to FONAR amortized over a period of thirty-six months with interest at 8% per annum commencing on January 1, 1996.
Enterprises was indebted to the Company as at June 30, 1995, in the amount of $204,539 pursuant to a promissory note due January 15, 1995 in the original principal amount of $324,235 with interest at the rate of 10% per annum. The original principal amount of this note represents the liability of a third party to the Company for service and other items which was assumed by Enterprises in connection with Enterprises' acquisition of an MRI scanner and assumption of said party's finance lease covering the scanner.
The aggregate indebtedness of Enterprises and Network to the Company as at June 30, 1995 was $432,339.00.
Pursuant to an agreement dated August 3, 1993 MRI Specialties, Inc. ("Specialties") engaged the Company to deinstall, transport and reinstall an MRI scanner purchased from a third party. Timothy Damadian, a Vice President of the Company, is the stockholder, director and President of Specialities. The agreement provides for a price of $120,000 payable in 36 monthly installments of $3,760.36 each (inclusive of interest at 8% per annum) pursuant to a note executed and delivered by Specialties upon the completion of the reinstallation. The scanner is owned by Canarsie MRI Associates ("Canarsie"), a joint venture partnership of which Specialties is an owner, and Canarsie is party to a service agreement for the scanner with the Company at an annual fee of $70,000 for the period September 1, 1994 through August 31, 1995 and $73,500 for the period September 1, 1995 through August 31, 1996. The annual fee for the following two annual periods will not exceed $77,000 and $80,500, respectively.
The aggregate indebtedness of Specialties and Canarsie to the Company as at June 30, 1995 was $142,925.00.
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PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
a) Financial Statements and Schedules
The following consolidated financial statements are included in Part II, Item 8.
Report of Independent Certified Public Accountants.
Consolidated Balance Sheets as at June 30, 1995 and 1994.
Consolidated Statements of Operations for the Three Years Ended June 30, 1995, 1994 and 1993.
Consolidated Statements of Stockholders' Equity for the Three Years Ended June 30, 1995, 1994 and 1993.
Consolidated Statements of Cash Flows for the Three Years Ended June 30, 1995, 1994 and 1993.
Notes to Consolidated Financial Statements.
The following consolidated financial statement schedules are included in Item 14 (d).
Supplementary Schedules
Report of Independent Certified Public Accountants on Schedules.
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.
b) Reports on Form 8-K
None.
c) Exhibits
3.1 Certificate of Incorporation, as amended, of the Company incorporated herein by reference to Exhibit 3.1 to the Registrant's registration statement on Form S-1, Commission File No. 33-13365.
3.2 Article Fourth of the Certificate of Incorporation, as amended, of the Company incorporated by reference to Exhibit 4.1 to the Registrant's registration statement on Form S-8, Commission File No. 33-62099.
3.3 By-Laws, as amended, of the Company incorporated herein by reference to Exhibit 3.2 to the Registrant's registration statement on Form S-1, Commission File No. 33-13365.
4.1 Specimen Common Stock Certificate incorporated herein by reference to Exhibit 4.1 to the Registrant's registration statement on Form S-1, Commission File No. 33-13365.
4.2 Specimen Class B Common Stock Certificate incorporated herein by reference to Exhibit 4.2 to the Registrant's registration statement on Form S-1, Commission File No. 33-13365.
10.1 License Agreement between FONAR and Raymond V. Damadian incorporated herein by reference to Exhibit 10 (e) to Form 10-K for the fiscal year ended June 30, 1983, Commission File No. 0-10248.
10.2 1983 Nonstatutory Stock Option Plan incorporated herein by reference to Exhibit 10 (a) to Form 10-K for the fiscal year ended June 30, 1983, Commission File No. 0-10248, and amendments thereto dated as of March 7, 1984 and dated August 22, 1984, incorporated herein by referenced to Exhibit 28 (a) to Form 10-K for the year ended June 30, 1984, Commission File No. 0-10248.
10.3 1984 Incentive Stock Option Plan incorporated herein by reference to Exhibit 28 (c) to Form 10-K for the year ended June 30, 1984, Commission File No. 0-10248.
10.4 1986 Nonstatutory Stock Option Plan incorporated herein by reference to Exhibit 10.7 to Form 10-K for the fiscal year ended June 30, 1986, Commission File No. 0-10248.
10.5 1986 Stock Bonus Plan incorporated herein by reference to Exhibit 10.8 to Form 10-K for the fiscal year ended June 30, 1986, Commission File No. 0-10248.
10.6 1986 Incentive Stock Option Plan incorporated herein by reference to Exhibit 10.9 to Form 10-K for the fiscal year ended June 30, 1986, Commission File No. 0-10248.
10.7 Lease Agreement, dated as of August 18, 1987, between FONAR and Reckson Associates incorporated herein by reference to Exhibit 10.26 to Form 10-K for the fiscal year ended June 30, 1987, Commission File No. 0-10248.
10.8 1993 Incentive Stock Option Plan incorporated herein by reference to Exhibit 28.1 to the Registrant's registration statement on Form S-8, Commission File No. 33-60154.
10.9 1993 Non-Statutory Stock Option Plan incorporated herein by reference to Exhibit 28.2 to the Registrant's registration statement on Form S-8, Commission File No. 33-60154.
10.10 1993 Stock Bonus Plan incorporated herein by reference to Exhibit 28.3 to the Registrant's registration statement on Form S-8, Commission File No. 33-60154.
10.11 1994 Non-Statutory Stock Option Plan incorporated herein by reference to Exhibit 28.1 to the Registrant's registration statement on Form S-8, Commission File No. 33-81638.
10.12 1994 Stock Bonus Plan incorporated herein by reference to Exhibit 28.2 to the Registrant's registration statement on Form S-8, Commission File No. 33-81638.
10.13 1995 Non-Statutory Stock Option Plan incorporated herein by reference to Exhibit 28.1 to the Registrant's registration statement on Form S-8, Commission File No. 33-62099.
10.14 1995 Stock Bonus Plan incorporated herein by reference to Exhibit 28.2 to the Registrant's registration statement on Form S-8, Commission File No. 33-62099.
11. Statement Re Computation Of Per Share Earnings. See Exhibits.
22.1 Subsidiaries of the Registrant. Incorporated herein by reference to Exhibit 22.1 Form 10-K for the fiscal year ended June 30, 1989, Commission File No. 0-10248.
d) Financial Statement Schedules
[See pages S-1 through S-3]
INDEPENDENT AUDITORS' REPORT ON SCHEDULES
To the Board of Directors FONAR Corporation and Subsidiaries
In connection with our audit of the consolidated financial statements of FONAR Corporation and Subsidiaries as at June 30, 1995 and 1994, and for the years in the three-year period ended June 30, 1995, we have also audited the supplemental schedules listed in the accompanying index to consolidated financial statements and schedules. Our audit was made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. These schedules are presented for purposes of complying with the Securities and Exchange Commission's rules and regulations under the Securities Exchange Act of 1934 and are not otherwise a required part of the basic consolidated financial statements. The supplemental schedules have been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.
TABB, CONIGLIARO & McGANN, P.C.
New York, New York November 3, 1995 S-1
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FONAR CORPORATION
Dated: November 7, 1995
By: /s/ Raymond Damadian Raymond V. Damadian, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Raymond Damadian Chairman of the November 7, 1995 Raymond V. Damadian Board of Directors, President and a Director (Principal Executive Officer)
/s/ Claudette J.V. Chan Director November 7, 1995 Claudette J.V. Chan
/s/ Robert J. Janoff Director November 7, 1995 Robert J. Janoff
/s/ Herbert Maisel Director November 7, 1995 Herbert Maisel