FONAR CORPORATION
Proxy - Annual Meeting of Stockholders - June 28, 2006
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned, a stockholder of Fonar Corporation (the "Company"), hereby
revoking any proxy heretofore given, does hereby appoint Raymond V. Damadian,
David B. Terry, and Kurt Reimann, and each of them, proxies with full power of
substitution, for and in the name of the undersigned to attend the Annual
Meeting of the Stockholders of the Company to be held at the Double Tree Hotel,
Wilmington Downtown, 700 King Street, Wilmington, Delaware on June 28, 2006 at
10:00 a.m., local time, and at any adjournment(s) thereof, and there to vote
upon all matters specified in the notice of said meeting, as set forth herein,
and upon such other business as may properly and lawfully come before the
meeting, all shares of stock of the Company which the undersigned would be
entitled to vote if personally present at said meeting.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY
THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS GIVEN, SUCH SHARES WILL BE VOTED
FOR ALL PROPOSALS.
No. 1. Election of Directors
For All Nominees listed below WITHHOLD AUTHORITY
(except as marked to the contrary to vote for all Nominees
below listed below)
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/ / / /
/ / / /
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(INSTRUCTION: To withhold authority to vote for any individual nominee strike a
line through the nominee's name in the list below.)
Raymond V. Damadian, Claudette J. V. Chan, Robert J. Janoff, Charles N. O'Data
and Robert Djerejian.
No. 2. To ratify the adoption of the Company's 2005 Supplemental Stock Bonus
Plan.
FOR AGAINST ABSTAIN
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/ / / / / /
/ / / / / /
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No. 3. To ratify the selection of Marcum & Kliegman LLP as the Company's
independent auditors for the fiscal year ended June 30, 2006.
FOR AGAINST ABSTAIN
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/ / / / / /
/ / / / / /
+----------+ +----------+ +----------+
No. 4. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
AUTHORITY AUTHORITY
GRANTED WITHHELD
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/ / / /
/ / / /
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Dated: ______________________, 2006
__________________________________
Signature
__________________________________
Signature if jointly held
Please sign your name(s) EXACTLY as
your name(s) appear(s) on your stock
certificate(s). All joint tenants must
sign. When signing as attorney,
executor, administrator, guardian or
corporate officer, please provide your
FULL title.
The Board of Directors requests that you fill in, date and sign the Proxy and
return it in the enclosed envelope.
FONAR CORPORATION
110 MARCUS DRIVE
Melville, New York 11747
(631) 694-2929
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
June 28, 2006
To The Stockholders:
The Annual Meeting of the stockholders of Fonar Corporation will be held at the
Double Tree Hotel, Wilmington Downtown, 700 King Street, Wilmington, Delaware
19801 (302-655-0400), on June 28, 2006, at 10:00 a.m. local time for the
following purposes:
1. To elect five Directors to the Board of Directors.
2. To ratify the adoption of the Company's 2005 Supplemental Stock Bonus Plan.
3. To ratify the selection of Marcum & Kliegman LLP as the Company's auditors
for the fiscal year ended June 30, 2006.
4. To transact such other business as may properly come before the meeting.
Only stockholders of record at the close of business on May 9, 2006 are entitled
to notice of, and to vote at, this meeting. A list of such stockholders will be
available for examination by any stockholder for any purpose germane to the
meeting, during normal business hours, at the principal office of the Company,
110 Marcus Drive, Melville, New York, for a period of ten days prior to the
meeting.
Whether or not you expect to attend in person, we urge you to sign, date, and
return the enclosed Proxy at your earliest convenience. Sending in your Proxy
will not prevent you from voting your stock at the meeting if you desire to do
so, as your Proxy is revocable at your opinion.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ David B. Terry
David B. Terry, Senior Vice President and
Secretary
PROXY STATEMENT
FOR ANNUAL MEETING OF
STOCKHOLDERS TO BE HELD JUNE 28, 2006
This proxy statement, which is first being mailed to shareholders on or about
May 30, 2006, is furnished in connection with the solicitation of proxies by the
Board of Directors of Fonar Corporation (the "Company"), to be voted at the
annual meeting of the stockholders of the Company to be held at 10:00 a.m. on
June 28, 2006 and any adjournment(s) thereof for the purposes set forth in the
accompanying Notice of Annual Meeting of Stockholders. Stockholders who execute
proxies retain the right to revoke them at any time prior to the exercise of the
powers conferred thereby, by delivering a signed statement to the Secretary of
the Company at or prior to the annual meeting or by executing another proxy
dated as of a later date. The cost of solicitation of proxies is to be borne by
the Company.
Only stockholders of record at the close of business on May 23, 2006 will be
entitled to vote at the meeting. Shares of Common Stock are entitled to one vote
per share, shares of Class B Common Stock are entitled to ten votes per share
and shares of Class C Common Stock are entitled to twenty-five votes per share.
At the close of business on May 9, 2006, there were issued and outstanding
112,470,378 shares of Common Stock held of record by 4,621 stockholders, 3,953
shares of Class B Common Stock held of record by 10 stockholders and 9,562,824
shares of Class C Common Stock held of record by 4 stockholders. The shares of
Class A Nonvoting Preferred Stock, 7,836,287 shares held of record by 3,923
stockholders at the close of business on May 9, 2006, are not entitled to vote.
Any proxy may be revoked at any time before it is exercised by delivery of a
written instrument of revocation or a later dated proxy to the principal
executive office of the Company or, while the meeting is in session, to the
Secretary of the meeting, without, however, affecting any vote previously taken.
The presence of a stockholder at the meeting will not operate to revoke his
proxy. The casting of a ballot by a stockholder who is present at the meeting,
however, will revoke his proxy, but only as to the matters on which the ballot
is cast and not as to any matters on which he does not cast a ballot or as to
matters previously voted upon.
Proxies received by management will be voted at the meeting or any adjournment
thereof. EACH PROXY WILL BE VOTED IN ACCORDANCE WITH THE SPECIFICATIONS MADE
THEREIN BY THE PERSON GIVING THE PROXY. TO THE EXTENT NO CHOICE IS SPECIFIED,
HOWEVER, THE PROXY WILL BE VOTED FOR MANAGEMENT'S PROPOSALS. All of management's
proposals have been unanimously approved by the Board of Directors.
1. ELECTION OF DIRECTORS AND MANAGEMENT INFORMATION
Five directors are to be elected at the annual meeting, to hold office until the
next annual meeting of stockholders and until their successors are elected and
qualified. It is intended that the accompanying proxy will be voted in favor of
the following nominees to serve as directors unless the stockholder indicates to
the contrary on the proxy. Management expects that each of the nominees will be
available for election, but if any of them is not a candidate at the time the
election occurs, it is intended that such proxy will be voted for the election
of another nominee to be designated by the Board of Directors to fill any such
vacancy.
DIRECTORS AND OFFICERS
Raymond V. Damadian, M.D. (age 70), a nominee for Director, has been the
Chairman of the Board and President of FONAR since its inception and Treasurer
since February, 2001. 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 a 1988 recipient of the
National Medal of Technology and in 1989 was inducted into the National
Inventors Hall of Fame, for his contributions in conceiving and developing the
application of magnetic resonance technology to medical applications including
whole body scanning and diagnostic imaging. Dr. Damadian is also the director,
President and Treasurer of the Company's subsidiary, Health Management
Corporation of America ("HMCA").
Claudette J.V. Chan (age 68), a nominee for Director, has been a Director of
FONAR since October 1987. Mrs. Chan has been employed since 1992 by HMCA and its
predecessor, 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. She received a bachelor
of science degree in nursing from Cornell University in 1960. Mrs. Chan is the
sister of Raymond V. Damadian.
Robert J. Janoff (age 78), a nominee for Director, has been a Director of FONAR
since February, 1989. Mr. Janoff has been a self-employed New York State
licensed private investigator for more than thirty-five years and was a Senior
Adjustor in Empire Insurance Group for more than 15 years until retiring from
that position on July 1, 1997. Mr. Janoff also served, from June 1985 to June
1991, as President of Action Data Management Strategies, Ltd., a supplier of
computer programs for use by insurance companies. Mr. Janoff is a member of the
Board of Directors of Harmony Heights of Oyster Bay, New York, which is a
nonprofit residential school for girls with learning disabilities.
Charles N. O'Data (age 70), a nominee for Director, has been a Director of FONAR
since February, 1998. From 1968 to 1997, Mr. O'Data was the Vice President for
Development for Geneva College, a liberal arts college located in western
Pennsylvania. In that capacity, he acted as the College's chief investment
officer. His responsibilities included management of the College's endowment
fund and fund raising. In July 1997, Mr. O'Data retired from Geneva College
after 36 years of service to assume a position of National Sales Executive for
SC Johnson Company's Professional Markets Group (a unit of SC Johnson Wax), and
specialized in healthcare and education sales, a position he held until the
spring of 1999. Mr. O'Data presently acts an independent financial consultant to
various entities. He founded The Beaver County Foundation, a Community
Foundation, in 1992, and serves as its President. Mr. O'Data served as a
director of Heritage Valley Health System, The Medical Center, Beaver for 25
years, three years as Chairman. Mr. O'Data is a graduate of Geneva College,
where he received a B.S. degree in Economics in 1958.
Robert Djerejian (74), a nominee for Director, has been a Director of Fonar
since June, 2002. Since 1996 Mr. Djerejian has served as a senior consultant for
Haines, Lundberg & Waehler International, an architecture, design and
engineering firm, which among other specialties designs hospitals and
laboratories. Prior to that time he was the senior managing partner of the firm.
Mr. Djerejian serves on the Board of Trustees of Pratt Institute, as Trustee
Emeritus and on the Board of Directors of the Delaware College of Art and
Design, of which he was one of the founding directors. He is a graduate of Pratt
Institute, where he received a B.A. in Architecture in 1955.
David B. Terry (59) is the Senior Vice President and Secretary of the Company.
Mr. Terry has been serving as Vice President since December 1998 and as
Secretary since May, 1990. Previously, he served as Treasurer from May 1990 to
December, 1998, as Secretary from July 1978 through June 1987 and as Treasurer
from August 1981 through June 1987. From July 1978 through June 1987, he was
also a Director of the Company. Mr. Terry is a brother in-law of Raymond V.
Damadian.
INFORMATION REGARDING THE BOARD AND ITS COMMITTEES
The five nominees will be elected to hold office for the ensuing year or until
their respective successors are elected and qualified.
During the year ended June 30, 2005 the Board of Directors unanimously consented
to take action in lieu of a meeting on five occasions, and the audit committee
met four times.
Dr. Damadian receives no cash compensation for serving on the Board. The other
directors are each paid $20,000 per year in their capacities as directors.
The Company's Board of Directors has an audit committee. There is no standing
compensation committee or nominating committee.
In accordance with the Nasdaq Marketplace Rules, the Board of Directors adopted
a written charter for the audit committee which took effect in June, 2001 and
was revised on November 17, 2004. All of the directors on the audit committee
are independent.
AUDIT COMMITTEE
The Audit Committee, which is comprised of independent directors, is governed by
a Board approved charter that contains, among other things, the Committee's
membership requirements and responsibilities. The audit committee oversees the
Company's accounting, financial reporting process, internal controls and audits,
and consults with management and the independent public accountants on, among
other items, matters related to the annual audit, the published financial
statements and the accounting principals applied. As part of its duties, the
audit committee appoints, evaluates and retains the Company's independent public
accountants. It also maintains direct responsibility for the compensation,
termination and oversight of the Company's independent public accountants and
evaluates the independent public accountants' qualifications, performance and
independence.
Financial Expert on Audit Committee: The Board has determined that Mr. O'Data,
who currently is a financial consultant and finance associate in the Middle
States Association, and who previously was the Vice President for Development
for Geneva College, is the audit committee financial expert. The Board made a
qualitative assessment of Mr. O'Data's level of knowledge and experience based
on a number of factors, including his formal education and experience.
AUDIT COMMITTEE REPORT
The audit committee has (a) reviewed and discussed the audited financial
statements with management, (b) discussed with the independent auditors the
matters required to be discussed by SAS 61 and (c) has received the written
disclosures and the letter from the independent accountants required by
Independence Standards Board, Standard No. 1 and has discussed with the
independent accountants the independent accountant's independence.
Based on the foregoing review and discussions, the audit committee recommended
to the Board of Directors that the audited financial statements be included in
the Company's Annual Report on Form 10-K for the fiscal year ended June 30,
2005.
The members of the audit committee are Messrs. Charles N. O'Data, Robert J.
Janoff and Mr. Robert Djerejian. Messrs. O'Data, Janoff and Djerejian are
independent directors, as defined in the Nasdaq Market Place Rules.
VOTE REQUIRED AND BOARD RECOMMENDATION
The directors will be elected by the vote of a plurality of the votes
represented at the meeting. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ALL OF
THE NOMINEES FOR DIRECTOR.
INFORMATION REGARDING BENEFICIAL OWNERSHIP OF PRINCIPAL STOCKHOLDERS,
DIRECTORS, AND MANAGEMENT
The following table sets forth information regarding the beneficial ownership of
the Company's common shares by the nominees for directors, the Company's Chief
Executive Officer, and the directors and executive officers as a group as of May
9, 2006.
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 2,588,274 2.30%
Class C Stock 9,561,174 99.98%
Class A Preferred 477,328 6.09%
Claudette Chan
Director
Common Stock 2,648 *
Class A Preferred 800 *
Robert J. Janoff
Director
Common Stock 90,000 *
Class A Preferred 1,999 *
Charles N. O'Data
Director
Common Stock 700 *
Robert Djerejian
Director
Common Stock 0 *
All Officers, Directors and Nominees
as a Group (6 persons) (2) (3)
Common Stock 2,703,287 2.40%
Class C Stock 9,561,174 99.98%
Class A Preferred 480,165 6.13%
___________________________
* Less than one percent
1. Address provided for each beneficial owner owning more than five percent of
the voting securities of the Company.
2. Includes 101 shares of the Company's Common Stock and 19 shares of the
Company's Class A Non-voting Preferred Stock held by an officer jointly with his
wife, and 192 shares of the Company's Common Stock and 38 shares of the
Company's Class A Non-voting Preferred Stock held in trust by an officer for his
children.
3. Includes options to purchase 21,372 shares of Common Stock held by an
officer.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Item 13, "Certain Relationships and Related Transactions" of the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 2005 which is
specifically incorporated by reference herein. A copy of the Form 10-K is
included in the Annual Report to Stockholders which is being sent to the
Company's stockholders with this Proxy Statement.)
The Company believes that each of the related transactions described therein
were on terms at least as favorable to the Company as were available from non-
affiliated parties.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS.
With the exception of the Chief Executive Officer, Dr. Raymond V. Damadian, 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.
As noted above, the Company's compensation policy is primarily based upon the
practice of pay-for-performance. Section 162(m) of the Internal Revenue Code
imposes a limitation on the deductibility of nonperformance-based compensation
in excess of $1 million paid to the Chief Executive Officer. No officer of the
Company received compensation in excess of $1 million in fiscal 2005 or in any
previous fiscal year. The Board currently believes that the Company should be
able to continue to manage its executive compensation program for others so as
to preserve the related federal income tax deductions.
The following table discloses compensation received for the three years ended
June 30, 2005 by the Company's Chief Executive Officer.
Name and Annual Compensation Long-Term
Principal Position ------------------- Compensation All Other
Position Year Salary Other Awards Compensation
------------------- ---- ---------- ----- ------------ ------------
Raymond V. Damadian 2005 $86,799.98 0 0 0
Chairman of the; 2004 $86,799.99 0 0 0
Board; President;
Chief Executive
Officer; 2003 $86,799.98 0 0 0
Director
COMPENSATION PURSUANT TO STOCK OPTIONS AND SAR GRANTS
No stock options or stock appreciation rights were granted to the Company's
Chief Executive Officer during fiscal 2005.
OPTION/SAR EXERCISES AND YEAR END VALUES
No options or stock appreciation rights were exercised by the Company's Chief
Executive Officer during fiscal 2005. The Company's Chief Executive Officer did
not hold any unexercised stock options or stock appreciation rights at the end
of fiscal 2005.
PERFORMANCE GRAPH
The following graph compares the annual change in the Company's cumulative total
shareholder return on its Common Stock during a period commencing on June 30,
2000 and ending on December 30, 2005 (as measured by dividing (i) the sum of (A)
the cumulative amount of dividends for the measurement period, assuming dividend
reinvestment and (B) the difference between the Company's share price at the end
and the beginning of the measurement period; by (ii) the share price at the
beginning of the measurement period) with the cumulative total return of each
of: (a) the CRSP Total Return Index for Nasdaq U.S. companies ("Nasdaq"); (b)
the CRSP Total Return Index for Nasdaq Medical Device Manufacturers ("Nas-
MDM"); and (c) the CRSP Total Return Index for Nasdaq Health companies ("Nas-
Hea.") during such period, assuming a $100 investment on June 30, 2000. The
stock price performance on the graph below is not necessarily indicative of
future price performance.
RELATIVE DOLLAR VALUES
6/30/00 6/30/01 6/29/02 6/28/03 6/30/04 6/30/05 12/30/05
Fonar Common ------- ------- ------- ------- ------- ------- --------
Stock $100.00 $95.52 $97.00 $64.01 $63.02 $59.08 $33.48
NASDAQ-US $100.00 $54.30 $85.14 $50.62 $51.76 $52.32 $56.26
NAS-MDM $100.00 $93.73 $36.99 $91.20 $130.11 $133.74 $147.39
NAS-Hea. $100.00 $142.70 $140.10 $147.49 $218.99 $276.74 $319.25
2. RATIFICATION OF SUPPLEMENTAL STOCK BONUS PLAN
On July 14, 2005, the Board of Directors adopted the Company's 2005 Supplemental
Bonus Plan (the "2005 Supplemental Bonus Plan"). The stockholders are being
asked to ratify the adoption of the 2005 Supplemental Bonus Plan (the "Plan").
Approximately 500 people are eligible to receive awards under the Plans. The
persons who will receive awards and the amount of the awards are not
determinable.
The Plan was effective as of July 14, 2005. The 2005 Supplemental Bonus Plan
covers 3,000,000 shares of the Company's Common Stock.
The 2005 Supplemental Bonus Plan permits the granting of stock bonuses through
July 13, 2015, in the discretion of the Stock Bonus Committee or the Board of
Directors of the Company, to employees, directors, advisors and consultants for
services rendered or to be rendered to the Company or any of its subsidiaries.
The purpose of the Plan is to enable persons performing valuable services for
the Company to acquire a proprietary interest in the Company through the
ownership of its Common Stock. Management believes that such ownership provides
such persons with a more direct stake in the future welfare of the Company and
encourages them to remain in the service of the Company or its subsidiaries and
that the Plan will assist the Company in obtaining and retaining the services of
such persons.
Restrictions may be imposed on resale (by officers, directors and 10%
stockholders) of the shares of Common Stock purchased under the Plan by the
provisions of Section 16 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). In addition, any participant who may be deemed an affiliate of
the Company, as defined by the Securities and Exchange Commission, may be
required to utilize a separate prospectus to reoffer or resell such shares
unless an exemption is applicable. The Stock Bonus Committee or Board of
Directors may impose restrictions on shares of Common Stock issued pursuant to
the 2005 Supplemental Bonus Plan.
THE PLAN
The following is a summary of certain provisions of the Plan. The summary does
not purport to be complete and is qualified in its entirety by reference to the
provisions of the Plan. A copy of the 2005 Supplemental Bonus Plan is attached
hereto as Exhibit A.
The Plan is administered by a Committee appointed by the Board of Directors of
the Company, consisting of individuals who serve at the discretion of the Board
and who are eligible to receive stock bonuses under the 2005 Supplemental Bonus
Plan. In the absence of any Committee, the Plan will be administered directly by
the Board of Directors. The Committee determines, among other things, who will
receive stock bonuses and when the stock bonuses will be received. The two
members of the Committees are officers of the Company, and Dr. Raymond V.
Damadian, one of the members of the Committee, is also Chairman of the Board of
Directors and the principal stockholder of the Company.
Bonus stock awards granted under the 2005 Supplemental Bonus Plan are not
assignable except by will or the laws of descent and distribution.
The 2005 Supplemental Bonus Plan will remain in effect until the earlier of such
time as all shares covered by the 2005 Supplemental Bonus Plan have been issued
or through July 13, 2015, and no stock bonuses may be granted under the 2005
Supplemental Bonus Plan after that date. Common Stock covered by the Plan may be
either treasury shares or authorized and unissued shares.
The Board of Directors has the right to amend, suspend or terminate the Plan at
any time, except that it may not, without stockholder approval, increase the
maximum number of shares covered by the 2005 Supplemental Bonus Plan.
In the event of stock dividends, stock splits and similar changes involving the
Common Stock of the Company, the Committee shall take such action as in its
judgment is necessary to provide for an increase or decrease in the number of
shares of Common Stock subject to the aggregate number of shares of Common Stock
available under the 2005 Supplemental Bonus Plan.
The Plan is not subject to any provisions of the Employee Retirement Income
Security Act of 1974, as amended, nor does the Plan qualify under Section 401(a)
of the Code.
FEDERAL INCOME TAX CONSEQUENCES
STOCK BONUSES. The grant of stock bonuses under the 2005 Supplemental Bonus Plan
will result in compensation to the employee which must be recognized as ordinary
income on the date the stock bonus is granted. The amount of income will be the
fair market value of the stock on the date the stock bonus is granted. The
Company will be entitled to a deduction (provided applicable withholding or
reporting requirements are met) for Federal income tax purposes at the same time
in the same amount as the employee is required to recognize income.
Upon a subsequent sale or taxable exchange of the shares acquired as a result of
stock bonuses, an employee will realize long or short-term capital gain or loss
equal to the difference between the amount realized on the sale and the amount
of income recognized on the grant of the stock bonus (his tax basis).
The foregoing is only a brief summary of the applicable federal income tax laws
and should not be relied upon as being a complete statement. The federal tax
laws are complex, and they are subject to legislative changes and new or revised
judicial or administrative interpretations. In addition to the federal income
tax consequences described herein, the receipt of shares under the Plan may also
have state and local tax consequences.
The affirmative vote of shares holding a majority of the votes represented at
the meeting is required to ratify the adoption of the Plan. THE BOARD OF
DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL.
3. RATIFICATION OF SELECTION OF AUDITORS
The Board of Directors has selected Marcum & Kliegman LLP, as the Company's
independent auditors for the fiscal year ending June 30, 2006. The stockholders
will be asked to ratify this action by the Board. Marcum & Kliegman LLP were the
Company's auditors for the fiscal years ended June 30, 2003, June 30, 2004 and
June 30, 2005.
One or more representatives of Marcum & Kliegman LLP, are expected to be present
at the Meeting with the opportunity to make a statement if they desire to do so,
and to be available to respond to appropriate questions.
The affirmative vote of shares holding a majority of the votes represented at
the meeting is required to ratify the selection of auditors by the Board of
Directors. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL.
AUDIT FEES
The aggregate fees billed by Marcum & Kliegman LLP for the audit of the
Company's annual financial statements for the fiscal year ended June 30, 2005
and the reviews of the financial statements included in the Company's Forms 10-
Q for the fiscal year ended June 30, 2005 were $542,643.
The aggregate fees billed by Marcum & Kliegman for the audit of the Company's
annual financial statements for the fiscal year ended June 30, 2004 and the
reviews of the financial statements included in the Company's Forms 10-Q for the
fiscal year ended June 30, 2004 were $418,276.
All work on the audits in each of the last two fiscal years was performed by
full-time permanent employees of Marcum & Kliegman LLP.
AUDIT-RELATED FEES
No audit-related fees were billed by Marcum & Kliegman LLP for the fiscal years
ended June 30, 2005 and June 30, 2004.
TAX FEES
The aggregate fees billed by Marcum & Kliegman LLP for tax compliance, tax
advise and tax planning in the fiscal years ended June 30, 2005 and June 30,
2004 were $149,793 and $172,542, respectively.
ALL OTHER FEES
The aggregate fees billed by Marcum & Kliegman LLP for all other services
rendered by them during the fiscal years ended June 30, 2005 and June 30, 2004
were $264,646 and $106,452, respectively, which included services in connection
with the registration of securities and the accounting consequences of other
possible corporation transactions.
Since January 1, 2003, the audit committee has adopted policies and procedures
for pre-approving all non-audit work performed by its auditors. Specifically,
the committee must pre-approve the use of the auditors for all such services.
The audit committee has pre-approved all non-audit work since that time and in
making its determination has considered whether the provision of such services
was compatible with the independence of the auditors.
No fees were billed by Marcum & Kliegman LLP for the fiscal years ended June 30,
2005 or June 30, 2004 for designing, operating, supervising or implementing any
of our financial information systems or any hardware or software systems for our
financial information.
The Company's audit committee believes that the provision by Marcum & Kliegman
LLP of services in addition to audit services in fiscal 2005 and 2004 were
compatible with maintaining their independence. The services to be performed are
presented by Marcum & Kliegman LLP to the committee or its chairman. The matter
is then evaluated and a decision made.
PROPOSALS OF STOCKHOLDERS
Proposals of stockholders intended to be presented at the 2007 annual meeting of
stockholders must be received by the Company no later than March 2, 2007 to be
included in the Company's proxy statement and form of proxy related to that
meeting.
SOLICITATION OF PROXIES
The proxy accompanying this Proxy Statement is solicited by the Board of
Directors of the Company. Proxies may be solicited by officers, directors, and
regular supervisory and executive employees of the Company, none of whom will
receive any additional compensation for their services. Such solicitations may
be made personally, or by mail, e-mail, facsimile, telephone, telegraph, or
messenger. The Company will pay persons holding shares of common stock in their
names or in the names of nominees, but not owning such shares beneficially, such
as brokerage houses, banks, and other fiduciaries, for the expense of forwarding
solicitation materials to their principals. All of the costs of solicitation of
proxies will be paid by the Company.
VOTING TABULATION
The election of the Company's directors requires a plurality of the votes
represented in person or by proxy at the meeting. The ratification of the Plans
and the selection of auditors requires the affirmative vote of a majority of the
votes represented in person or by proxy at the meeting. Votes cast by proxy or
in person at the meeting will be tabulated by the Company.
A stockholder who abstains from voting on any or all proposals will be included
in the number of shareholders present at the meeting for the purpose of
determining the presence of a quorum. Abstentions will not be counted either in
favor of or against the election of the nominees or other proposals. Under the
rules of the National Association of Securities Dealers, brokers holding stock
for the accounts of their clients who have not been given specific voting
instructions as to a matter by their clients may vote their clients' proxies in
their own discretion. Where a proposal requires a majority of the votes present
for its passage, an abstention or non-vote will have the same effect as a
negative vote.
OTHER MATTERS
The Board of Directors does not intend to bring any other business before the
meeting, and so far as is known to the Board, no matters are to be brought
before the meeting except as specified in the notice of the meeting. However, as
to any other business which may properly come before the meeting, it is intended
that proxies, in the form enclosed, will be voted in respect thereof in
accordance with the judgment of the persons voting such proxies.
DATED: Melville, New York, May 30, 2006
A COPY OF THE COMPANY'S FORM 10-K REPORT FOR FISCAL YEAR 2005, CONTAINING
INFORMATION ON OPERATIONS, FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, IS
AVAILABLE UPON REQUEST. PLEASE WRITE TO:
INVESTOR RELATIONS DEPARTMENT
FONAR CORPORATION
110 MARCUS DRIVE
MELVILLE, NEW YORK 11747
EXHIBIT A
2005 SUPPLEMENTAL STOCK BONUS PLAN
1. PURPOSES OF THE PLAN.
The purpose of this Stock Bonus Plan (the "Plan") is to assist FONAR
Corporation, a Delaware corporation (the "Corporation"), and its subsidiaries
(as hereinafter defined) in attracting and retaining the services of key
employees, non-employee directors, officers, advisors and consultants, and to
secure for the Corporation and its subsidiaries the benefits of the incentive
inherent in ownership of the Corporation's equity securities by parties who are
responsible for the continuing growth and success of the Corporation and its
subsidiaries.
For the purposes of this plan, the term "subsidiary" and/or "subsidiaries"
shall mean any corporation of which the majority of the outstanding voting stock
is owned directly or indirectly by the Corporation.
2. SHARES SUBJECT TO THE PLAN.
Subject to the provisions of Section 7 of the Plan, an aggregate of
3,000,000 shares of Common Stock, par value $.0001 per share, of the Corporation
("Common Stock"), are available for the issuance under the Plan as compensation
for services to the Corporation ("Bonus Stock").
The shares to be issued as Bonus Stock under the Plan may be authorized but
unissued shares of Common Stock or issued shares of Common Stock which are held
in the treasury of the Corporation.
3. TERM OF THE PLAN.
Subject to the provisions of Section 8 and 10, the Plan shall commence
effective as of July 14, 2005, and Bonus Stock awarded under the Plan must be
issued no later than July 13, 2015.
4. ADMINISTRATION OF THE PLAN.
The Plan shall be administered by a committee which shall consist of two or
such greater or lesser number of members, as determined by the Board of
Directors from time to time, who shall be appointed by the Board of Directors of
the Corporation (the "Committee") or, in the absence of such a Committee, by the
Board of Directors of the Corporation. Directors of the Corporation who are
either eligible to receive Bonus Stock, or to whom Bonus Stock has been granted,
may vote on any matters affecting the administration of the plan or the granting
of Bonus Stock under the Plan. Any action of the Committee may be taken by a
written instrument signed by a majority of the members of the Committee then in
office. Members of the Committee need not be members of the Board of Directors.
Subject to the express provisions of the Plan, the Committee or the Board
or Directors, as the case may be, shall have the authority, in its discretion:
(i) to determine the parties to receive Bonus Stock, the times when they shall
receive such awards, the number of shares to be issued, and the time, terms and
conditions of the issuance of any such shares; (ii) to construe and interpret
the terms of the Plan; (iii) to establish, amend and rescind rules and
regulations for the administration of the Plan; and (iv) to make all other
determinations necessary or advisable for administering the Plan. The
determinations of the Committee or the Board of Directors, as the case may be,
on the matters referred to in this Section 4 shall be final and conclusive.
5. ELIGIBILITY AND SELECTION.
The Committee or the Board of Directors, as the case may be, shall have
sole and absolute discretion to issue Bonus Stock under the Plan to reward
employees, non-employee directors, advisors and consultants for services
rendered or to be rendered to or for the benefit of the Corporation, or any of
its subsidiaries (the grant of Bonus Stock under this Plan shall be referred to
as a "Bonus Stock Award"). In determining the parties to whom Bonus Stock Awards
shall be granted under the Plan and the number of shares of Common Stock which
may be granted to such persons, the Committee or the Board of Directors, as the
case may be, shall consider the duties of the parties, their present and
potential contributions to the success of the Corporation, and such other
factors as the Committee or the Board of Directors deems relevant in furthering
the purposes of the granting of such Bonus Stock and the interests of the
Corporation. A party may receive more than one Bonus Stock Award under the Plan.
6. BONUS STOCK AWARDS.
(a) The Committee or the Board of Directors, as the case may be, shall
determine for each party chosen to participate in the Plan ("Participant") the
number of shares of Common Stock to be covered by each Bonus Stock Award and the
installments, if any, in which the Bonus Stock will be granted.
(b) The Committee or the Board of Directors shall determine the terms,
conditions and restrictions, if any, to which such Bonus Stock or its issuance
will be subject. Any restrictions imposed shall be evidenced by a written
agreement executed by the Participant. Such agreement shall also include any
terms and conditions required by applicable securities laws.
(c) The Corporation shall deliver to the Participant on the date specified,
or as soon thereafter as is practicable, the number of shares of Common Stock
specified in such Participant's Bonus Stock Award, subject to and in accordance
with the Bonus Stock Award.
(d) Bonus Stock Awards shall not be transferable other than by the last
will and testament of the holder of the Bonus Stock Award or the applicable laws
of descent and distribution. Bonus Stock Awards may not be assigned, sold,
transferred, pledged, hypothecated or disposed of in any way (whether by
operation of law or otherwise) except to the extent expressly provided for in
the Plan and shall not be subject to execution, attachment or similar process.
7. DILUTION AND OTHER ADJUSTMENTS.
In the event of any change in the outstanding Common Shares by reason of
any stock dividend or split, recapitalization, merger, consolidation,
reorganization, combination or exchange of shares of Common Stock, or other
similar corporate change, the Committee or the Board of Directors, as the case
may be, shall make such adjustments as it, in its absolute discretion, deems
equitable in the number of kind of shares of Common Stock authorized by the Plan
and, with respect to outstanding shares of Common Stock covered by Stock Bonus
Awards but not yet issued, in the number of kind of stock covered by Stock Bonus
Awards made under the Plan.
8. TERMINATION AND AMENDMENT OF THE PLAN.
Unless sooner terminated, as hereinafter provided, this Plan shall
terminate at 11:59 p.m. on July 13, 2015, and no Bonus Stock shall be granted
hereunder after that date. The Board of Directors may terminate or amend this
Plan at any time without notice, or make such modifications of this Plan as it
shall deem advisable. No termination, amendment or modification of the Plan may
adversely affect the rights of any party to whom a Bonus Stock Award has been
made without such party's consent.
9. INDEMNIFICATION.
In addition to such other rights of indemnification as they may have as
directors or as members of the Committee, the members of the Committee and the
Board of Directors shall be indemnified by the Corporation against the
reasonable expenses, including attorney's fees actually and necessarily incurred
in connection with the defense of any action, suit or proceeding, or in
connection with any appeal therein, to which they or any of them may be a party
by reason of any action taken or failure to act under or in connection with the
Plan or any Bonus Stock Award granted thereunder, and against all amounts paid
by them in settlement thereof (provided that such settlement is approved by the
Corporation) or paid by them in satisfaction of a judgment in any such action,
suit or proceeding, except in relation to matters as to which it shall be
adjudicated in such action, suit or proceeding that such Committee member or
director, as the case may be, is liable for negligence or misconduct in the
performance of his duties; provided that within 10 days after institution of any
such action, suit, or proceeding a Committee member or director, as the case may
be, shall offer the Corporation in writing the opportunity, at its own expense,
to handle and defend the same.
10. EFFECTIVENESS OF THE PLAN.
The Plan shall become effective on July 14, 2005.
ANNUAL REPORT TO SECURITY HOLDERS
FONAR PRESIDENT'S MESSAGE TO SHAREHOLDERS
MAY 2006
DEAR SHAREHOLDERS:
For over a quarter century, FONAR has been at the forefront of magnetic
resonance imaging (MRI) research and development. In recent years, we developed
and commercialized the FONAR Upright(TM) MRI, which we believe has the potential
to revolutionize the industry's standards and practices.
This revolution was clearly evident in fiscal year 2005. Our company achieved
many milestones in its most recently completed fiscal year.
FISCAL YEAR 2005 FINANCIAL RESULTS HIGHLIGHTS
Demand for the MRI industry's most important development in years, the
Upright(TM) MRI, resulted in an 80% increase in unit deliveries for fiscal
2005 as compared to the prior year.
Total revenues increased 46% to a record $104.9 million.
MRI product sales increased 70% to $73.1 million in fiscal 2005.
Service and repair revenues rose 81% to $5.8 million.
Net income was $1.0 million compared to a net loss of $9.5 million for
fiscal 2004.
International expansion gains traction.
Fiscal year 2005 was remarkable for FONAR in that our revenues exceeded $100
million for the first time in our Company's 27-year history. In light of our
record revenues of approximately $105 million, which is an increase of 46% from
the prior year, and nearly double that from two years earlier, we believe that
the FONAR Upright(TM) MRI is proving to be a technology that is revolutionizing
the industry.
Since the introduction of the FONAR Upright(TM) MRI in 2000, we are gratified to
report that a total of 129 FONAR Upright(TM) MRI scanners have been sold, with a
record 45 installations in fiscal 2005. We did not at that time have solid proof
that the regional advertising campaign that had commenced in January 2002 and
ended in November 2004 was contributing to our record MRI scanner sales and
revenues. With the intent of achieving profitability for the first time since
1997, we ended the use of what had been an expensive advertising campaign. By
the end of 2005, we realized that advertising was a key ingredient of our past
success and should be reintroduced under more economically prudent terms.
FISCAL YEAR 2006 - THE FIRST NINE MONTHS
For the first nine months of fiscal 2006 ended March 31, 2006, we reported a net
loss of $21.0 million on revenues of $27.8 million, as compared to net income of
$1.4 million on revenues of $79.9 million for the first nine months of fiscal
2005.
Notwithstanding the disappointing revenue recognition we have experienced so far
in fiscal 2006, we have thus far received orders for 13 machines, have Accounts
Receivable in the amount of approximately $11 million, and a backlog of
approximately $16 million. In other words, we expect to receive $27 million in
cash payments over the course of the next 18 months, in addition to new orders
for the Upright(TM) MRI and the FONAR 360(TM).
Health Management Corporation of America (HMCA) is showing steady growth, and
FONAR Field Service revenues are rising as Upright(TM) MRI centers complete
their free, one-year service warranty periods and begin making regular payments
according to their service contracts.
THE SIX-POINT MARKETING STRATEGY
As we previously announced, FONAR has developed a six-point marketing strategy
to target five spheres of industry influence in an effort to significantly
accelerate growth in revenue streams for MRI scanner equipment sales and
services and related revenues that are recurring in nature. The six-point
marketing strategy includes initiatives in the following areas: Advertising
Campaigns; Trade Show and Industry Event Participation; Third Party Endorsements
in the Form of Medical Research and Professional Testimonials; Direct Sales
Efforts for U.S. Market Penetration; Distribution Channel Partnerships; and
Strategic Marketing Relationships.
The Company's marketing initiatives are listed below, along with progress made
to date or plans for continued activity in the respective areas.
1) ADVERTISING - The Company previously announced its national direct-to-
consumer (DTC) advertising campaign with 30-second television spots to run
during prime time and daytime programming. Commenced in February, this is
the first national advertising campaign since the revolutionary MRI was
introduced. The ads also provide consumers with FONAR's 1-888-NEED-MRI
toll-free number onscreen so that they may find the nearest
Upright(TM) MRI scanning center.
The advertising campaign is proving to be helpful, judging from large
numbers of referrals to many Upright(TM) MRI centers, new scanner sales
leads, and the outcry of patients who have experienced failed spine
surgery. We have been receiving phone calls to the toll-free number from
all over the country.
2) TRADE SHOW PARTICIPATION - Given its recognition as an MRI industry
innovator, the developer of the first commercial MRI, and the only company
to offer Position(TM) Imaging (pMRI(TM)) with the FONAR Upright(TM) MRI,
FONAR exhibits at the annual meetings of the most important major surgery
and radiology societies: The American Academy of Orthopaedic Surgeons
(AAOS); North American Spine Society (NASS), American Association of
Neurosurgery (AANS), The Congress of Neurosurgery (CNS), and the
Radiological Society of North America (RSNA).
3) THIRD PARTY ENDORSEMENTS IN THE FORM OF MEDICAL RESEARCH AND PROFESSIONAL
TESTIMONIALS - In an effort to educate and inform all parties associated
with the MRI industry as well as patients, FONAR has initiated a direct
mail campaign providing specific case reports to approximately 10,000
physicians. These case reports show MRI images of spine pathologies seen by
the FONAR Upright(TM) MRI but not visible in the recumbent MRI.
Accompanying the images are testimonials from distinguished spine surgeons
explaining how the FONAR Upright(TM) MRI's images changed the surgery that
was planned and improved their patients' outcomes.
Distinguished spine surgeon Jean Pierre J. Elsig of Zurich, Switzerland
presented "How Upright(TM) MRI Changed My Life as a Surgeon" at the AAOS
meeting in Chicago and the AANS meeting in San Francisco. Dr. Elsig spoke
of the frustration he has endured with pre-operative, recumbent-only MRI
scans that fail to show any spinal instabilities, only to find just the
opposite in the surgical suite. The Upright(TM) MRI's ability to scan
patients in weight-bearing positions and in flexion and extension has
eliminated this frustration, enabling him, for the first time, to correlate
patient complaints, clinical findings and imaging, all of which are
necessary to achieve surgical success.
Another testimonial came from Professor J. Randy Jinkins (Department of
Radiology, Downstate Medical Center, State University of New York), a
pioneer of Position(TM) Imaging. He spoke on "Positional MRI of the Spine:
What is Being Missed on Recumbent MRI." Dr. Jinkins gave numerous examples
of the diagnostic superiority of the FONAR Upright(TM) MRI, making the
point that the conventional recumbent-only MRI misses or underestimates the
dynamic nature of the spine.
4) DIRECT SALES EFFORTS FOR U.S. MARKET PENETRATION - FONAR has a direct sales
force for U.S. distribution. The team consists of industry veterans who are
intimately familiar with the benefits of Upright(TM) Imaging. In the U.S.,
FONAR employs 20 regional sales representatives. In addition, there are
highly experienced sales support and management personnel stationed at the
Company's corporate headquarters in Melville, New York.
5) DISTRIBUTION CHANNEL PARTNERSHIPS -- In the most recent example of the
impact FONAR's Upright(TM) MRI is having on the MRI industry, the Company
announced a few months ago the selection of a distribution partner for
Europe. Tecserena GmbH of Germany is now marketing FONAR products in
Europe. The sales force of Tecserena formerly represented Hitachi in
Europe. We are pleased that Tecserena has elected to represent FONAR
instead of Hitachi, because of the unique appeal of FONAR's MRI products.
We are exploring the prospect of adding distribution partners to our own
sales force to assist in gaining further traction with the aid of
additional salespeople in the U.S. market, which FONAR has traditionally
addressed solely with its own direct sales force.
6) STRATEGIC MARKETING RELATIONSHIPS - FONAR will rely on strategic
relationships intended to broaden revenue opportunities and facilitate the
collaboration of sales activities. The Company has already signed its first
group purchasing agreement for the Upright(TM) MRI with MAGNET Inc., one of
the largest GPOs (Group Purchasing Organizations) in the country, with
significant coverage of the Northeast and Upper Midwest. The long-term
agreement calls for collaborative marketing efforts to MAGNET's member
organizations, including 775 acute care hospitals, 5,400 physician
practices/clinics, and over 100 free-standing imaging centers. An agreement
was signed with Sony Electronics to expand FONAR's product portfolio.
FONAR has also entered into an agreement with Managed Health Care
Associates, Inc. (MHA) whereby New Jersey-based MHA will market the
Upright(TM) MRI through its privately-owned GPO, one of the largest in the
United States.
FIVE SPHERES OF INFLUENCE
The focus of the sales and marketing efforts is to stimulate demand and
awareness of FONAR products from what we call the five spheres of influence:
Patients, Surgeons and Referring Physicians, Radiologists, Independent MRI
Practice Owners, and Hospitals. FONAR's intent is to reinforce the superiority
of its imaging technology for improved patient care and surgical outcomes by
interacting with these groups.
Very important among these constituencies is the U.S. hospital market. This
segment has traditionally been dominated by FONAR's competitors. Therefore,
successful sales to hospital customers will significantly enhance the perceived
value and uniqueness of FONAR MRI technology.
We are pleased to have recently announced a milestone for FONAR in its
penetration of the U.S. hospital market. In recent weeks, we announced two sales
of the FONAR Upright(TM) MRI to hospitals, one to a substantial hospital chain
and a second to a prestigious hospital in eastern Tennessee. We believe
continued success in the hospital segment, as well as in our traditional
scanning center market, is being achieved because FONAR's Upright(TM) MRI is
providing valuable medical benefits that cannot be achieved by the
recumbent-only MRI products available outside of FONAR.
Creating demand for Upright(TM) MRI scanning centers assists in FONAR's
endeavors to generate equipment sales, as well as HMCA revenues. Those centers
managed by HMCA deliver revenue to FONAR through HMCA management fees.
THE "FAILED BACK SURGERY SYNDROME" OPPORTUNITY
FONAR's Upright(TM) MRI is addressing a serious medical need * namely a proper
medical evaluation of the approximately 800,000 patients each year in the U.S.
who undergo back surgery. The failure rate of this surgery is such that the
medical profession has been forced to set aside a specific acronym, FBSS (Failed
Back Surgery Syndrome), to identify the high failure rate associated with back
surgery.
Only FONAR's Upright(TM) MRI meets the need of addressing the high surgery
failure rate of back surgery by making available to surgeons the ability to
visualize the patient's fully weight-loaded spine. No other MRI product on the
market, all of which are recumbent-only devices, provides this crucial feature.
CONCLUSION
The FONAR Upright(TM) MRI is in the process of reshaping the way patients and
doctors are perceiving MRI. As we fulfill our mission to improve patient care
through innovative products like the FONAR Upright(TM) and the FONAR 360(TM), we
expect FONAR shareholder value to reflect their benefit to patient care through
increased product sales and HMCA management fees.
In conclusion, I would like to acknowledge the support of our faithful
shareholders who share our vision, the FONAR team for its unwavering dedication,
and our customers for their loyalty. The opportunities and challenges we face as
a united force are certain to strengthen our resolve to achieve the goal of
medical excellence and thus the financial success that is coupled to that goal.
Sincerely,
Raymond V. Damadian
President and Chairman
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
---------------------------------------------------------
FORM 10-K/A
-------------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended June 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from ------------- to -------------
Commission File No. 0-10248
---------------------------
FONAR CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 11-2464137
------------------------ -----------------------------------
(State of incorporation) (IRS Employer Identification Number)
110 Marcus Drive, Melville, New York 11747
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(631) 694-2929
----------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.0001 per share (Title of Class)
--------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes ___X___ No _______
Indicate by check mark if disclosure of delinquent filers, pursuant to Item 405
of Regulation S-K, {section}229.405 of this Chapter, is not contained, and will
not be contained, to the best of the registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this 10-K or
any amendment to the Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer, as
defined in Rule 12b-2 of the Act.
Yes [X} No {}
As of September 1, 2005, 107,286,210 shares of Common Stock, 3,953 shares of
Class B Common Stock, 9,562,824 shares of Class C Common Stock and 7,836,287
shares of Class A Non-voting Preferred Stock of the registrant were outstanding.
The aggregate market value of the approximately 104.7 million shares of Common
Stock held by non-affiliates as of such date based on the closing price per
share on September 1, 2005 as reported on the NASDAQ System, was approximately
$115.2 million. The other outstanding classes do not have a readily
determinable market value.
DOCUMENTS INCORPORATED BY REFERENCE
None
REASON FOR ADMENDMENT
We are ammending our Form 10-K for the fiscal year ended June 30, 2005 to
include tables of unaudited quarterly financial data for each of the years
ended June 30, 2005 and 2004 in Note 21 of the footnotes to the consolidated
financial statements which were inadvertently excluded from the original filing
on September 28, 2005.
PART I
ITEM 1. BUSINESS
GENERAL
Fonar Corporation, sometimes referred to as the "Company" or "Fonar", is a
Delaware corporation which was incorporated on July 17, 1978. Our address is
110 Marcus Drive, Melville, New York 11747 and our telephone number is 631-694-
2929. Fonar also maintains a WEB site at www.Fonar.com.
FONAR is engaged in the business of designing, manufacturing, selling and
servicing magnetic resonance imaging, also referred to as "MRI" or "MR",
scanners which utilize MRI technology for the detection and diagnosis of human
disease. Fonar's founders built the first scanner in 1977 and FONAR introduced
the first commercial MRI scanner in 1980. FONAR is the originator of the iron-
core non-superconductive and permanent magnet technology.
Fonar's iron frame technology made FONAR the originator of "open" MRI scanners.
We introduced the first "open" MRI in 1980. Since that time we have concentrated
on further application of our "open" MRI, introducing most recently the Stand-
Up(TM) (also referred to as "Upright(TM)" Brand MRI scanner) and the Fonar
360(TM) MRI scanner.
The product we are now most vigorously promoting is our Stand-Up(TM)/Upright(TM)
MRI. The Stand-Up(TM)/Upright(TM) MRI is unique in the industry in that it
allows patients to be scanned in a fully weight-bearing condition, such as
standing, sitting or bending in any position that causes symptoms. This means
that an abnormality or injury, such as a slipped disk can be visualized where it
may not be visualized with the patient lying down. We are introducing the name
"Upright(TM)" as an alternative to "Stand-UP(TM)" because of the multiplicity of
positions in which the patient may be scanned where the patient is not standing.
Health Management Corporation of America, formerly U.S. Health Management
Corporation, which we sometimes refer to as "HMCA", was formed by Fonar in March
1997 as a wholly-owned subsidiary in order to enable us to expand into the
business of providing comprehensive management services to medical providers.
HMCA provides management services, administrative services, office space,
equipment, repair, maintenance service and clerical and other non-medical
personnel to physicians and other medical providers, including diagnostic
imaging centers. Since July 28, 2005, following the end of fiscal 2005, HMCA
has been providing its services solely to diagnostic imaging centers.
See Note 20 to the Consolidated Financial Statements for separate financial
information respecting our medical equipment and physician and diagnostic
management services segments.
FORWARD LOOKING STATEMENTS.
Certain statements made in this Annual Report on Form 10-K are "forward-looking
statements", within the meaning of the Private Securities Litigation Reform Act
of 1995, regarding the plans and objectives of Management for future operations.
Such statements involve known and unknown risks, uncertainties and other
factors that may cause our actual results, performance or achievements to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. These forward-looking
statements are based on current expectations that involve numerous risks and
uncertainties. Our plans and objectives are based, in part, on assumptions
involving the expansion of business. These assumptions involve judgments with
respect to, among other things, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond our control.
Although we believe that our assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could prove inaccurate and,
therefore, there can be no assurance that the forward-looking statements
included in this Annual Report will prove to be accurate. In light of the
significant uncertainties inherent in our forward-looking statements, the
inclusion of such information should not be regarded as a representation by us
or any other person that our objectives and plans will be achieved.
RECENT DEVELOPMENTS AND OVERVIEW.
Our products and works-in-progress are intended to significantly improve our
competitive position. Our current products are the Stand-Up(TM)/Upright(TM) MRI
and the Fonar 360(TM).
The Stand-Up(TM)/Upright(TM) MRI permits, for the first time, MRI diagnoses to
be made in the weight-bearing state. The Stand-Up(TM) MRI is the only MRI
scanner which allows patients to be scanned while standing, sitting or
reclining, either horizontally or at an angle. This means that an abnormality
or injury, such as a slipped disk, will be able to be scanned under full weight-
bearing conditions and, more often than not, in the position in which the
patient experiences pain. An elevator built into the
floor brings the patients to the desired height in the scanner. An adjustable
bed allows the patients to stand, sit or lie on their backs, sides or stomachs
at any angle. The Stand-Up(TM) MRI may also be useful for MRI guided
interventional procedures.
We are vigorously promoting sales of the Stand-Up(TM) MRI which we regard as our
most promising product. The market for the Stand-Up(TM) shows strong progress.
During the fiscal year ended June 30, 2005, we received orders for 30 Stand-
Up(TM) MRI scanners as compared to 39 for the fiscal year ended June 30, 2004.
Revenues recognized from the sale of Stand-Up(TM) MRI scanners increased in
fiscal 2005 by 68% over fiscal 2004 from approximately $42.7 million in fiscal
2004 to approximately $71.7 million in fiscal 2005, following a 76% increase
from fiscal 2003 to fiscal 2004, when revenues from the sale of Stand-Up(TM) MRI
scanners increased from $24.3 million to $42.7 million in fiscal 2004. The
following chart shows the revenues attributable to our different model scanners
for the fiscal years ended June 30, 2004 and June 30, 2005. Note that we
recognize revenue on a percentage of completion basis. Accordingly, revenue is
recognized as each sub-assembly of a scanner is manufactured. Consequently the
revenues for a fiscal period do not necessarily relate to orders placed in that
period.
Model Revenues Recognized
-----------------------------------
Fiscal 2004 Fiscal 2005
----------- -----------
Stand-Up(TM)(Upright(TM)) $42,668,377 $71,666,053
Fonar 360(TM) 0 764,031
QUAD(TM) 0 0
Echo(TM) 0 0
Beta(TM) (used) $ 0 $ 0
The Fonar 360(TM) includes the Open Sky(TM) MRI. We received our first order
for a Fonar 360(TM) scanner in August 2004, which is in the first quarter of
fiscal 2005. The magnet frame is incorporated into the floor, ceiling and
sidewalls of the scan room and is open. Consequently, physicians and family
members can walk inside the magnet to approach the patient. The Open Sky(TM)
version of the Fonar 360(TM) is decoratively designed so that it is incorporated
into the panoramic landscape that decorates the walls of the scan room. The
ability of the Fonar 360(TM) to give physicians direct 360 degree access to
patients and the availability of MRI compatible interventional instruments such
as needles, catheters, probes, scalpels and forceps, will also enable the Fonar
360(TM) to be used for image guided interventions.
Our earlier primary product, the QUAD(TM) MR scanner, utilized a electromagnet
and was accessible from four sides. The QUAD(TM) was the first "open" MRI
scanner at high field.
FONAR has an internal sales force of approximately 20 persons, concentrating on
domestic sales. We continue to use manufacturer's representatives and
distributors for our foreign sales efforts. We have also expanded our website
to a full-scale interactive product information desk for reaching new customers
and assisting existing customers.
In March 1997, FONAR formed Health Management Corporation of America, formerly
U.S. Health Management Corporation, as a wholly-owned subsidiary for the purpose
of engaging in the business of providing comprehensive management and
administrative services, office space, equipment, repair and maintenance service
for equipment and clerical and other personnel (other than physicians) to
physicians' practices and other medical providers, including diagnostic centers.
HMCA currently is managing 11 diagnostic imaging centers located principally in
New York and Florida. During 2005 HMCA also managed six physical therapy and
rehabilitation practices located in New York. HMCA sold the portion of its
business engaged in the management of physical therapy and rehabilitation
practices in July of 2005.
PRODUCTS
Fonar's principal products are the Stand-Up(TM)/Upright(TM) MRI and the Fonar
360(TM).
The Stand-Up(TM) MRI/Upright(TM) MRI is a whole-body open MRI system that
enables positional MRI (pMRI(TM)) applications, such as weight-bearing MRI
studies. Operating at a magnetic field strength of 0.6 Tesla, the scanner is a
powerful, diagnostically versatile and cost-effective open MRI that provides a
broad range of clinical capabilities and a complete set of imaging protocols.
Patients can be scanned standing, bending, sitting, upright at an intermediate
angle or in any of the conventional recumbent positions. This multi-positional
MRI system accommodates an unrestricted range of motion for flexion, extension,
lateral bending, and rotation studies of the cervical (upper) and lumbar
(lower) spine. Previously difficult patient scanning positions can be
achieved using the system's MRI-compatible, three-dimensional, motorized
patient handling system. Patients, lying horizontally, are placed into the
magnet in the conventional manner. The system's lift and tilt functions
then deliver the targeted anatomical region to the center of the magnet.
The ceiling and floor are recessed to accommodate the full vertical
travel of the table. True image orientation is assured, regardless of the
rotation angle, via computer read-back of the table's position. Spines and
extremities can be scanned in weight-bearing states; brains can be scanned
with patients either standing or sitting.
The Stand-Up(TM) MRI/Upright(TM) is exceptionally open, making it the most non-
claustrophobic whole-body MRI scanner. Patients can walk into the magnet, stand
or sit for their scans and then walk out. From the patient's point of view, the
magnet's front-open and top-open design provides an unprecedented degree of
comfort because the scanner allows the patient an unobstructed view of the
scanner room from inside the magnet, and there is nothing in front of one's face
or over one's head. The only thing in front of the patient's face during the
scan is a very large (42") panoramic TV (included with the scanner) mounted on
the wall. The bed is tilted back five degrees to stabilize a standing patient.
Special coil fixtures, a patient seat, Velcro straps, and transpolar stabilizing
bars are available to keep the patient comfortable and motionless throughout the
scanning process.
Full-range-of-motion studies of the joints in virtually any direction will be
possible, an especially promising feature for sports injuries. Full range of
motion cines, or movies, of the lumbar spine will be achieved under full body
weight.
The Stand-Up(TM) MRI will also be useful for MRI guided interventional
procedures as the physician would have unhindered access to the patient with no
restrictions in the vertical direction.
This easy-entry, mid-field-strength scanner should be ideal for trauma centers
where a quick MRI screening within the first critical hour of treatment will
greatly improve patients' chances for survival and optimize the extent of
recovery.
The Fonar 360(TM) is an enlarged room sized magnet in which the floor, ceiling
and walls of the scan room are part of the magnet frame. This is made
possible by Fonar's patented Iron-Frame(TM) technology which allows our
engineers to control, contour and direct the magnet's lines of flux in the
patient gap where wanted and almost none outside of the steel of the magnet
where not wanted. Consequently, this scanner allows 360 degree access to the
patient, and physicians and family members are able to enter the scanner and
approach the patient.
The Fonar 360(TM) is presently marketed as a diagnostic scanner and is sometimes
referred to as the Open Sky(TM) MRI. In its Open Sky(TM) capacity, the Fonar
360(TM) serves as an open patient-friendly scanner which allows 360 access to
the patient on the scanner bed.
To optimize the patient-friendly character of the Open Sky(TM) MRI, the walls,
floor, ceiling and magnet poles are decorated with landscape murals. The
patient gap is twenty inches and the magnetic field strength, like that of
Fonar's earlier QUAD(TM) MRI scanner, is 0.6 Tesla.
We also expect to enable the Fonar 360(TM) to function as an MRI guided
interventional scanner, for the purpose of performing intra-operative,
interventional and therapeutic procedures with MR compatible instrumentation.
In this capacity, the enlarged room sized magnet and 360 degree access to the
patient afforded by the Fonar 360(TM) would permit full-fledged support teams to
walk into the magnet and perform MRI guided interventions on the patient inside
the magnet. Most importantly, the exceptional quality of the MRI image and its
exceptional capacity to exhibit tissue detail on the image, by virtue of the
nuclear resonance signal's extraordinary capacity to create image contrast, can
then be obtained real time to guide the physician during the MRI guided
intervention. Thus MRI compatible instruments, needles, catheters, endoscopes
and the like can be introduced directly into the human body and guided to the
malignant lesion or other pathology by means of the MRI image. Surgically
inoperable lesions could be accessed through MRI guided catheters and needles
making it possible to deliver the treatment agent directly to the targeted
tissue.
It should be noted that these procedures have not yet been performed in the
scanner, although the work necessary to enable the Fonar 360(TM) to function in
this capacity is almost completed.
With current treatment methods, therapy must always be restricted in the doses
that can be applied to the malignant tissue because of the adverse effects on
the healthy tissues.
Thus chemotherapies must be limited at the first sign of toxic side effects.
The same is the case with radiation therapy. Fonar expects that with the Fonar
360(TM) treatment agents may be administrated directly to the malignant tissue
through small catheters or needles, thereby allowing much larger doses of
chemotherapy, x-rays, laser ablation, microwave and other anti-neoplastic agents
to be applied directly and exclusively to the malignant tissue with more
effective results. Since the interventional procedure of introducing a
treatment needle or catheter under image guidance will be minimally invasive,
the procedure can be readily repeated should metastases occur elsewhere, with
minimum impact on the patient beyond a straightforward needle injection.
The presence of the MRI image during treatment will would enable the operator to
make assessments during treatment whether the treatment is being effective.
In addition to the patient comfort and new applications, such as MRI directed
interventions, made possible by our scanners' open design, the Stand-Up(TM) and
Fonar 360(TM) scanners are designed to maximize image quality through an optimal
combination of signal-to-noise (S/N) and contrast-to-noise (C/N) ratios. The
technical improvements realized in these scanners' design over their
predecessors also include increased image-processing speed and diagnostic
flexibility.
MRI directed interventions are made possible by the scanners' ability to supply
images to a monitor positioned next to the patient, enabling the operator to
view in process an interventional procedure from an unlimited number of angles.
The openness of Fonar's scanners would enable a physician to perform a wide
range of interventional procedures inside the magnet.
In the case of breast imaging the access by a physician permits an image guided
biopsy to be performed easily which is essential once suspicious lesions are
spotted by any diagnostic modality. In addition to being far superior to x-ray
in detecting breast lesions because of the MRI's ability to create the soft
tissue contrast needed to see them, where x-ray is deficient in its ability to
generate the needed contrast between cancer and normal tissue, there is not the
painful compression of the breast characteristic of X-ray mammography.
The Stand-Up(TM) MRI and Fonar 360(TM) scanners share much of the same
fundamental technology and offer the same speed, precision and image quality.
Fonar's scanners initiated the new market segment of high-field open MRI in
which the Fonar Stand-Up(TM) MRI is one of the market leaders. High-field
open MRIs operate at significantly higher magnetic field strengths and,
therefore, produce more of the MRI image-producing signal needed to make high-
quality MRI images (measured by signal-to-noise ratios, S/N).
Like Fonar's previous principal product, the QUAD(TM) scanner, the Stand-Up(TM)
MRI and Fonar 360(TM) scanners utilize a 6000 gauss (0.6 Tesla field strength)
iron core electromagnet. The QUAD(TM) was the first open MRI scanner at high
field. The greater field strength of the 6000 gauss magnet, as compared to
lower field open MRI scanners that operate at 3,000 gauss (0.3 Tesla) when
enhanced by the electronics already utilized by Fonar's scanners, produces
images of higher quality and clarity. Fonar's 0.6 Tesla open scanner magnets
are among the highest field "open MRI" magnets in the industry.
The Stand-Up(TM) MRI and Fonar 360(TM) scanners are designed to maximize image
quality through an optimal combination of signal-to-noise (S/N) and contrast-to-
noise (C/N) ratios. The technical improvements realized in the scanners' design
over their lower field predecessors also include increased image-processing
speed and diagnostic flexibility.
Several technological advances have been engineered into the Stand-Up(TM) MRI
and Fonar 360(TM) scanners for extra improvements in S/N, including: new high-
S/N Organ Specific(TM) receiver coils; new advanced front-end electronics
featuring high-speed, wide-dynamic-range analog-to-digital conversion and a
miniaturized ultra-low-noise pre-amplifier; high-speed automatic tuning,
bandwidth-optimized pulse sequences, multi-bandwidth sequences, and off-center
FOV imaging capability.
In addition to the signal-to-noise ratio, however, the factor that must be
considered when it comes to image quality is contrast, the quality that enables
reading physicians to clearly distinguish adjacent, and sometimes minute,
anatomical structures from their surroundings. This quality is measured by
contrast-to-noise ratios (C/N). Unlike S/N, which increases with increasing
field strength, relaxometry studies have shown that C/N peaks in the mid-field
range and actually falls off precipitously at higher field strengths. The
Stand-Up(TM) MRI and Fonar 360(TM) scanners operate squarely in the optimum C/N
range.
The Stand-Up(TM) MRI and Fonar 360(TM) provide various features allowing for
versatile diagnostic capability. For example, SMART(TM) scanning allows for
same-scan customization of up to 63 slices, each slice with its own thickness,
resolution, angle and position. This is an important feature for scanning parts
of the body that include small-structure sub-regions requiring finer slice
parameters. There is also Multi-Angle Oblique(TM) (MAO) imaging, and oblique
imaging.
The console for these scanners includes a mouse-driven, multi-window interface
for easy operation and a 19-inch, 1280 x 1024-pixel, 20-up, high-resolution
image monitor with features such as electronic magnifying glass and real-time,
continuous zoom and pan.
Prior to the introduction of the Stand-Up(TM) MRI, Fonar 360(TM) and QUAD(TM)
scanners, the Ultimate(TM) 7000 scanner, introduced in 1990, was the Company's
principal product. The Ultimate(TM) scanner replaced the Company's traditional
principal products, the Beta(TM) 3000 scanner (which utilized a permanent
magnet) and the Beta(TM) 3000M scanner (which utilized an iron core
electromagnet). All of the Company's current and earlier model scanners create
cross-sectional images of the human body.
During fiscal 2005, sales of our Stand-Up(TM) MRI scanners accounted for
approximately 68.3% of our total revenues and 88.2% of our medical equipment
revenues, as compared to 59.6% of total revenues and 87.7% of medical equipment
revenues in fiscal 2004 and 45.9% of total revenues and 81.1% of medical
equipment revenues in fiscal 2003. This dramatic increase shows the market
penetration being achieved by the Stand-Up(TM) MRI scanner and our successful
reemphasis on new product development and scanner sales.
During fiscal 2005 and 2004, no medical equipment sales revenues were derived
from sales of Beta(TM) scanners. During fiscal 2003, less than 1% of both total
revenues and medical equipment revenues were derived from the sale of a
refurbished Beta(TM) scanner. The Beta(TM) is an older model scanner which we do
not manufacture any longer. Nevertheless, we can refurbish and sell used
Beta(TM) scanners where there is a demand for it.
During fiscal 2005, sales of our Fonar 360(TM) scanner accounted for 0.7% of
total revenues and 0.9% of medical equipment revenues. During fiscal 2004 sales
of our Fonar 360(TM) scanner accounted for none of our revenues. In the first
quarter of fiscal 2005 we sold the first Fonar 360(TM), to a hospital in
England. Our principal selling, marketing and advertising efforts have in the
past two years focused on the Stand-Up(TM) MRI, which we believe is a
particularly unique product, being the only MRI scanner which is both open and
allows for weight bearing imaging. Since we perceive that the Stand-Up(TM) MRI
is successfully penetrating the market and has enabled us to achieve
profitability in fiscal 2005, we expect to continue our focus on the Stand-
Up(TM) MRI in the immediate future. Following completion of the installation of
the first 360(TM) MRI, we are optimistic that Fonar 360(TM) and our other
products and works in progress will also contribute materially to increased
product sales.
The materials and components used in the manufacture of our products (circuit
boards, computer hardware components, electrical components, steel and plastic)
are generally available at competitive prices. We have not had difficulty
acquiring such materials.
WORKS-IN-PROGRESS
All of our products and works-in-progress seek to bring to the public MRI
products that are expected to provide important advances against serious
disease.
MRI takes advantage of the nuclear resonance signal elicited from the body's
tissues and the exceptional sensitivity of this signal for detecting disease.
Much of the serious disease of the body occurs in the soft tissue of vital
organs. The principal diagnostic modality currently in use for detecting
disease, as in the case of x-ray mammography, are diagnostic x-rays. X-rays
discriminate soft tissues, such as healthy breast tissue and cancerous tissue
poorly, because the x-ray particle traverses the various soft tissues almost
equally thereby causing target films to be nearly equally exposed by x-rays
passing through adjacent soft tissues and creating healthy and cancerous shadows
on the film that differ little in brightness. The image contrast between
cancerous and healthy breast tissue is poor, making the detection of breast
cancers by the x-ray mammogram less than optimal and forcing the mammogram to
rely on the presence or absence of microscopic stones called
"microcalcifications" instead of being able to "see" the breast cancer itself.
If microcalcifications are not present to provide the missing contrast, then the
breast cancer goes undetected. They frequently are not present. The maximum
contrast available by x-ray with which to discriminate disease is 4%. Brain
cancers differ from surrounding healthy brain by only 1.6% while the contrast in
the brain by MRI is 25 times greater at 40%. X-ray contrasts among the body's
soft tissues are maximally 4%. Their contrast by MRI is 32.5 times greater
(130%).
On the other hand the soft tissue contrasts with which to distinguish cancers on
images by MRI are up to 180%. In the case of cancer these contrasts can be even
more marked making cancers readily visible and detectable anywhere in the body.
This is because the nuclear resonance signals from the body's tissues differ so
dramatically. Liver cancer and healthy liver signals differ by 180% for
example. Thus there is some urgency to bring to market an MRI based breast
scanner that can overcome the x-ray limitation and assure that mammograms do not
miss serious lesions. The added benefit of MRI mammography relative to x-ray
mammography is the elimination of the need for the patient to disrobe and the
painful compression of the breast typical of the x-ray mammogram. The patient
is scanned in her street clothes in MRI mammography. Moreover MRI mammogram
scans the entire chest wall including the axilla for the presence of nodes which
the x-ray mammogram cannot reach.
We view our Stand-Up(TM) MRI as having the potential for being an ideal breast
examination machine as it permits the patient to be seated for the examination,
which would allow easy access for an MRI guided breast biopsy when needed. The
Fonar 360(TM) MRI scanner would also be ideal for breast examinations.
PRODUCT MARKETING
The principal markets for the Company's scanners are private scanning centers
and hospitals.
Fonar's internal sales force is approximately 20 persons. Our internal sales
force handles the domestic market while we continue to use independent
manufacturer's representatives and distributors for foreign markets. In
addition to its internal domestic sales force, Fonar and General Electric
Medical Systems, a division of General Electric Company, have entered into an
arrangement pursuant to which General Electric Medical Systems acts as
independent manufacturer's representative for Fonar's Stand-Up(TM) MRI scanner
in the domestic market as well.
In addition, Fonar's website includes an interactive product information desk
for reaching customers. We plan to commence a program for providing
demonstrations of our products to potential customers on an international basis.
FONAR has exhibited its new products at the annual meeting of the Radiological
Society of North America ("RSNA") in Chicago since November 1995 and plans to
attend the RSNA meeting in November 2005 and future years. The RSNA meeting is
attended by radiologists from all over the world. Most manufacturers of MRI
scanners regularly exhibit at this meeting.
FONAR has targeted orthopedic surgeons and neurosurgeons, particularly spine
surgeons, as important markets for the Stand-Up(TM)/Upright MRI(TM).
Accordingly, FONAR has regularly exhibited at the annual meetings of The
American Academy of Orthopaedic Surgeons (AAOS) since 2003; the North American
Spine Society (NASS) since 2004; the American Association of Neurological
Surgeons (AANS) since 2004; and the Congress of Neurological Surgeons (CNS)
since 2004.
We are directing our MRI marketing efforts to meet the demand for high field
open MRI scanners. Fonar plans to devote its principal efforts to marketing the
Stand-Up(TM) MRI, which is the only scanner in the industry that has the unique
capability of scanning patients under weight-bearing conditions and in various
positions of pain or other symptoms. In addition we will continue to market our
Fonar 360(TM) MRI scanners. In August 2004, FONAR sold its first Fonar 360(TM)
scanner, to a hospital in England. Utilizing a 6000 gauss (0.6 Tesla field
strength) iron core electromagnet, the Stand-Up(TM) MRI and Fonar 360(TM)
scanner magnets are among the highest field "open MRI" scanners in the industry.
We also will seek to introduce new MRI applications for our scanners such as
MRI-directed interventions.
Our areas of operations are principally in the United States. During the fiscal
year ended June 30, 2005, 7.1% of the Company's revenues were generated by
foreign sales, as compared to 1.2% and 3.0% for fiscal 2004 and 2003,
respectively.
We are seeking to promote foreign sales and have sold scanners in various
foreign countries. Foreign sales, however, have not yet proved to be a
significant source of revenue.
SERVICE AND UPGRADES FOR MRI SCANNERS
Our customer base of installed scanners has been and will continue to be an
additional source of income, independent of direct sales.
Income is generated from the installed base in two principal areas namely,
service and upgrades. Service and maintenance revenues from our external
installed base were approximately $2.5 million in fiscal 2003, $3.2 million in
fiscal 2004 and $5.8 million in fiscal 2005.
We anticipate that our new scanners will result in upgrades income in future
fiscal years. The potential for upgrades income, particularly in the form of
new patient supporting upright imaging fixtures and receiver coils, originates
in the versatility and productivity of the new Upright Imaging(TM) technology.
New medical uses for MRI technology are constantly being discovered and are
anticipated for the Upright Imaging(TM) technology as well. New features can
often be added to the scanner by the implementation of little more than
versatile new software packages. For example, software can be added to existing
MRI angiography applications to synchronize angiograms with the cardiac cycle.
By doing so the dynamics of blood vessel filling and emptying can be visualized
with movies. Such enhancements are attractive to end users because they extend
the useful life of the equipment and enable the user to avoid obsolescence and
the expense of having to purchase new equipment. At the present time, however,
upgrade revenue is not significant. We had upgrade revenues of approximately
$206,000 in fiscal 2003, and no upgrade revenue in fiscal 2004. We had upgrade
revenues of approximately $40,000 in fiscal 2005.
Service and upgrade revenues are expected to increase as sales of scanners and
the size of the customer base increases.
RESEARCH AND DEVELOPMENT
During the fiscal year ended June 30, 2005, we incurred expenditures of
$6,752,755, $745,994 of which was capitalized, on research and development, as
compared to $6,079,797, $588,735 of which was capitalized and $5,955,667,
$791,216 of which was capitalized, during the fiscal years ended June 30, 2004
and June 30, 2003, respectively.
Research and development activities have focused principally, on the development
and enhancement of the new Stand-Up(TM) and Fonar 360(TM) MRI scanners. The
Stand-Up(TM) MRI and Fonar 360(TM) involve significant software and hardware
development as the new products represent entirely new hardware designs and
architecture requiring a new operating software. Our research activity includes
developing a multitude of new features for upright scanning made possible by the
high speed processing power of its scanners. In addition, the Company's
research and development efforts include the development of new software, such
as its Sympulse(TM) software and hardware upgrade and the designing and
continuing introduction of new receiver surface coils for the Stand-Up(TM) MRI.
BACKLOG
Our backlog of unfilled orders at July 1, 2005 was approximately $13.1 million,
as compared to $40.7 million at July 1, 2004. Of these amounts, approximately
$1.7 million and $7.8 million had been paid to FONAR as customer advances as at
July 1, 2005 and July 1, 2004, respectively. Of the backlog amounts at July 1,
2005 and July 1, 2004, $103,000 and $234,000, respectively, represented orders
from related parties. It is expected that the existing backlog of orders will
be filled within the current fiscal year. Our 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
We currently have numerous patents in effect which relate to the technology and
components of the MRI scanners.
We believe that these patents, and the know-how it has developed, are material
to its business.
Dr. Damadian granted FONAR an exclusive world-wide license, to make, use and
sell apparatus covered by certain domestic and foreign patents in his name
relating to MRI technology. No patents covered by this license are in effect
any longer.
One of the patents, issued in the name of Dr. Damadian and covered by said
license, was United States patent No. 3,789,832, Apparatus and Method for
Detecting Cancer in Tissue, also referred to as the "1974 Patent". The
development of the Beta(TM) 3000 was based upon the 1974 Patent, and we believe
that the 1974 Patent was the first of its kind to utilize MR to scan the human
body and to detect cancer. The 1974 Patent was extended beyond its original 17-
year term and expired in February, 1992. None of the recoveries with respect to
the enforcement of this patent were received by Dr. Damadian.
Historically, the patent for multiple angle oblique imaging generated
significant revenues in connection with the enforcement and settlement of our
patent litigations. As a result of these litigations and settlements, our
competitors are now entitled to use this technology as well. This patent will
expire in 2006.
We have significantly enhanced our patent position within the industry and now
possesses a substantial patent portfolio which provides us, under the aegis of
United States patent law, "the exclusive right to make, use and sell" many of
the scanner features which FONAR pioneered and which are now incorporated in
most MRI scanners sold by the industry. The Company has 107 patents issued and
approximately 60 patents pending. A number of Fonar's existing patents
specifically relate to protecting Fonar's position in the high-field iron frame
open MRI market. The patents further enhance Dr. Damadian's pioneer patent, the
1974 Patent, that initiated the MRI industry and provided the original invention
of MRI scanning. The 107 issued patents extend to various times up to 2022.
We have a license agreement granting us a license to utilize the MRI technology
covered by the existing patent portfolio of a patent holding company. We also
have patent cross-licensing agreements with other MRI manufacturers.
PRODUCT COMPETITION
MRI SCANNERS
A majority of the MRI scanners in use in hospitals and outpatient facilities and
at mobile sites in the United States are based on high field air core magnet
technology while the balance are based on open iron frame magnet technology. In
2001, the size of the MRI market in the United States was approximately $1.202
billion. In 2002, the size of the MRI market in the United States was
approximately $1.46 billion. Fonar's open iron frame MRI scanners are competing
principally with high-field air core scanners. Fonar's open MRI scanners,
however, utilizing a 6,000 gauss or 0.6 Tesla field strength, iron core
electromagnet, were the first "open" MR scanners at high field strength.
FONAR believes that its MRI scanners have significant advantages as compared to
the high-field air core scanners of its competitors. These advantages include:
1. There is no expansive fringe magnetic field. High field air core scanners
require a more expensive shielded room than is required for the iron frame
scanners. The shielded room required for the iron frame scanners is intended to
prevent interference from external radio frequencies.
2. They are more open and quiet.
3. They can scan the trauma victim, the cardiac arrest patient, the respirator-
supported patient, and premature and newborn babies. This is not possible with
high- field air core scanners because their magnetic field interferes with
conventional life-support equipment.
The principal competitive disadvantage of our products is that they are not
"high field strength", 1.0 Tesla +, magnets. As a general principle, the higher
field strength can produce a faster scan. In some parts of the body a faster
scan can be traded for a clearer picture. Although we believe that the benefits
of "openness" provided by our scanners compensate for the lower field strength,
certain customers will still prefer the higher field strength.
FONAR faces competition within the MRI industry from such firms as General
Electric Company, Philips N.V., Toshiba Corporation, Hitachi Corporation and
Siemens A.G. Most competitors have marketing and financial resources more
substantial than those available to us. They have in the past, and may in the
future, heavily discount the sales price of their scanners. Such competitors
sell both high field air core and iron frame products. Fonar's current market
share of the United States market for MRI scanners is approaching to 3.0%. In
the mid-field segment of the 2002 market in the United States, Fonar had a 4.2%
market share, based on the Frost and Sullivan data contained in their U.S. MRI
Scanners and Coils Market publication. FONAR introduced the first "Open MRI" in
1980. "Open MRI" was made possible by Fonar's introduction of an MRI magnet
built on an iron frame. Thus the magnetic flux generating apparatus of the
magnet, magnet coils or permanent magnet bricks, was built into a frame of
steel. The steel frame provided a return path for the magnetic lines of force
and thereby kept the magnetic lines of force contained within the magnet. This
enabled FONAR, from 1980 on, to show that the FONAR magnet was the only magnet
that allowed the patients to stretch out their arms, the only "open" MRI.
The iron frame, because it could control the magnetic lines of force and place
them where wanted and remove them from where not wanted, such as in the Fonar
360(TM) where physicians and staff are standing, provide a much more versatile
magnet design than is possible with air core magnets. Air core magnets contain
no iron but consist entirely of turns of current carrying wire.
For an 11 year period from 1983-1994, Fonar's large competitors, with one
exception, generally rejected Fonar's "open" design but by now all have added
the iron frame "open" magnet to their MRI product lines. One principal reason
for this market shift, in addition to patient claustrophobia, is the awareness
that the open magnet designs permit access to the patient to perform MRI guided
procedures, a field which is now growing rapidly and is called "interventional
MRI."
The Fonar 360(TM) scanner explicitly addresses this growing market reception of
MRI guided interventions, and the first of these scanners was recently sold to a
hospital in England. Fonar's Stand-Up(TM) magnet also addresses the growing
market reception of MRI guided interventions. Although not enabling a full
interventional theater as the Fonar 360(TM) does, the iron frame Stand-Up(TM)
MRI design permits ready access to the patient and enables a wide range of
interventional procedures such as biopsies and needle or catheter delivered
therapies to be performed under MRI image guidance. The "tunnel" air core
superconductive scanners do not permit access to the patient while the patient
is inside the scanner.
While Fonar's current market share of the total domestic MRI market is almost
3.0%, FONAR expects to be a leader in domestic open MRI market for several
reasons. In MRI, scanning speed and image quality is controlled by the strength
of the magnetic field. Fonar's Stand-Up(TM) and Fonar 360(TM) scanners operate
at 0.6 Tesla, which make them among the highest field strength open MRI
scanners. Furthermore, the Stand-Up(TM) MRI is the only MRI which allows
patients to be scanned under weight-bearing conditions. High field MRI
manufacturers convinced the marketplace for FONAR, and the marketplace accepts,
that higher field strength translates directly into superior image quality and
faster scanning speeds. No companies possess the Stand-Up(TM) MRI or Fonar
360(TM) scanners, and FONAR possesses the pioneer patents on "open MRI"
technology.
OTHER IMAGING MODALITIES
Fonar's MRI scanners also compete with other diagnostic imaging systems, all of
which are based upon the ability of energy waves to penetrate human tissue and
to be detected by either photographic film or electronic devices for
presentation of an image on a television monitor. Three different kinds of
energy waves - X-ray, gamma and sound - are used in medical imaging techniques
which compete with MRI medical scanning, the first two of which involve exposing
the patient to potentially harmful radiation. These other imaging modalities
compete with MRI products on the basis of specific applications.
X-rays are the most common energy source used in imaging the body and are
employed in three imaging modalities:
1. Conventional X-ray systems, the oldest method of imaging, are typically used
to image bones and teeth. The image resolution of adjacent structures that have
high contrast, such as bone adjacent to soft tissue, is excellent, while the
discrimination between soft tissue organs is poor because of the nearly
equivalent penetration of x-rays.
2. Computerized Tomography, also referred to as "CT", systems couple computers
to x-ray instruments to produce cross-sectional images of particular large
organs or areas of the body. The CT scanner addresses the need for images, not
available by conventional radiography, that display anatomic relationships
spatially. However, CT images are generally limited to the transverse plane and
cannot readily be obtained in the two other planes, sagittal and coronal.
Improved picture resolution is available at the expense of increased exposure to
x-rays from multiple projections. Furthermore, the pictures obtained by this
method are computer reconstructions of a series of projections and, once
diseased tissue has been detected, CT scanning cannot be focused for more
detailed pictorial analysis or obtain a chemical analysis.
3. Digital radiography systems add computer image processing capability to
conventional x-ray systems. Digital radiography can be used in a number of
diagnostic procedures which provide continuous imaging of a particular area with
enhanced image quality and reduced patient exposure to radiation.
Nuclear medicine systems, which are based upon the detection of gamma radiation
generated by radioactive pharmaceuticals introduced into the body, are used to
provide information concerning soft tissue and internal body organs and
particularly to examine organ function over time.
Ultrasound systems emit, detect and process high frequency sound waves reflected
from organ boundaries and tissue interfaces to generate images of soft tissue
and internal body organs. Although the images are substantially less detailed
than those obtainable with x-ray methods, ultrasound is generally considered
harmless and therefore has found particular use in imaging the pregnant uterus.
X-ray machines, ultrasound machines, digital radiography systems and nuclear
medicine compete with the MRI scanners by offering significantly lower price
and space requirements. However, FONAR believes that the quality of the images
produced by its MRI scanners is generally superior to the quality of the images
produced by those other methodologies.
GOVERNMENT REGULATION
FDA Regulation
The Food and Drug Administration in accordance with Title 21 of the Code of
Federal Regulations regulates the manufacturing and marketing of Fonar's MRI
scanners. The regulations can be classified as either pre-market or post-
market. The pre-market requirements include obtaining marketing clearance,
proper device labeling, establishment registration and device listing. Once the
products are on the market, FONAR must comply with post-market surveillance
controls. These requirements include the Quality Systems Regulation, or "QSR",
also known as Good Manufacturing Practices or GMPs, and Medical Device
Reporting, also referred to as MDR regulations. The QSR is a quality assurance
requirement that covers the design, packaging, labeling and manufacturing of a
medical device. The MDR regulation is an adverse event-reporting program.
Classes of Products
Under the Medical Device Amendments of 1976 to the Federal Food, Drug and
Cosmetic Act, all medical devices are classified by the FDA into one of three
classes. A Class I device is subject only to general controls, such as labeling
requirements and manufacturing practices; a Class II device must comply with
certain performance standards established by the FDA; and a Class III device
must obtain pre-market approval from the FDA prior to commercial marketing.
Fonar's products are Class II devices. Class I devices are subject to the least
regulatory control. They present minimal potential for harm to the user and are
often simpler in design than Class II or Class III devices. Class I devices are
subject to "General Controls" as are Class II and Class III devices. General
Controls include:
1. Establishment registration of companies which are required to register under
21 CFR Part 807.20, such as manufacturers, distributors, re-packagers and re-
labelers.
2. Medical device listing with FDA of devices to be marketed.
3. Manufacturing devices in accordance with the Good Manufacturing Practices
Quality System Regulation in 21 CFR Part 820.
4. Labeling devices in accordance with labeling regulations in 21 CFR Part 801
or 809.
5. Submission of a Premarket Notification, pursuant to 510(k), before marketing
a device.
Class II devices are those for which general controls alone are insufficient to
assure safety and effectiveness, and existing methods are available to
provide such assurances. In addition to complying with general controls,
Class II devices are also subject to special controls. Special controls
may include special labeling requirements, guidance documents, mandatory
performance standards and post-market surveillance.
We received approval to market our Beta(TM) 3000 and Beta(TM) 3000M scanners as
Class III devices on September 26, 1984 and November 12, 1985. On July 28,
1988, the Magnetic Resonance Diagnostic Device which includes MR Imaging and MR
Spectroscopy was reclassified by the FDA to Class II status. Consequently,
Fonar's products are now classified as Class II products. On June 25, 1992,
Fonar received FDA clearance to market the Ultimate(TM) Magnetic Resonance
Imaging Scanner as a Class II device. Fonar received FDA clearance to market
the QUAD(TM) 7000 in April 1995 and the QUAD(TM) 12000 in November 1995. On
March 16, 2000, Fonar received FDA clearance to market the Fonar 360(TM) for
diagnostic imaging, the Open Sky(TM) version, and on October 3, 2000 received
FDA clearance for the Stand-Up(TM) MRI.
Premarketing Submission
Each person who wants to market Class I, II and some III devices intended for
human use in the U.S. must submit a 510(k) to FDA at least 90 days before
marketing unless the device is exempt from 510(k) requirements. A 510(k) is a
pre-marketing submission made to FDA to demonstrate that the device to be
marketed is as safe and effective, that is, substantially equivalent, SE, to a
legally marketed device that is not subject to pre-market approval, PMA.
Applicants must compare their 510(k) device to one or more similar devices
currently on the U.S. market and make and support their substantial equivalency
claims.
The FDA is committed to a 90-day clearance after submission of a 510(k),
provided the 510(k) is complete and there is no need to submit additional
information or data.
The 510(k) is essentially a brief statement and description of the product. As
Fonar's scanner products are Class II products, there are no pre-market data
requirements and the process is neither lengthy nor expensive.
An investigational device exemption, also referred to as IDE, allows the
investigational device to be used in a clinical study pending FDA clearance in
order to collect safety and effectiveness data required to support the Premarket
Approval, also referred to as PMA, application or a Premarket Notification
pursuant to 510(k), submission to the FDA. Clinical studies are most often
conducted to support a PMA.
For the most part, however, we have not found it necessary to utilize IDE's.
The standard 90 day clearance for our new MRI scanner products classified as
Class II products makes the IDE unnecessary, particularly in view of the time
and effort involved in compiling the information necessary to support an IDE.
Quality System Regulation
The Quality Management System is applicable to the design, manufacture,
administration of installation and servicing of magnetic resonance imaging
scanner systems. The FDA has authority to conduct detailed inspections of
manufacturing plants, to establish Good Manufacturing Practices which must be
followed in the manufacture of medical devices, to require periodic reporting of
product defects and to prohibit the exportation of medical devices that do not
comply with the law.
Medical Device Reporting Regulation
Manufacturers must report all MDR reportable events to the FDA. Each
manufacturer must review and evaluate all complaints to determine whether the
complaint represents an event which is required to be reported to FDA. Section
820.3(b) of the Quality Systems regulation defines a complaint as, "any written,
electronic or oral communication that alleges deficiencies related to the
identity, quality, durability, reliability, safety, effectiveness, or
performance of a device after it is released for distribution."
A report is required when a manufacturer becomes aware of information that
reasonably suggests that one of their marketed devices has or may have caused or
contributed to a death, serious injury, or has malfunctioned and that the device
or a similar device marketed by the manufacturer would be likely to cause or
contribute to a death or serious injury if the malfunction were to recur.
Malfunctions are not reportable if they are not likely to result in a death,
serious injury or other significant adverse event experience.
A malfunction which is or can be corrected during routine service or device
maintenance still must be reported if the recurrence of the malfunction is
likely to cause or contribute to a death or serious injury if it were to recur.
We have established and maintained written procedures for implementation of the
MDR regulation. These procedures include internal systems that:
provide for timely and effective identification,
communication and evaluation of adverse events;
provide a standardized review process and procedures for
determining whether or not an event is reportable; and
provide procedures to insure the timely transmission of
complete reports.
These procedures also include documentation and record keeping requirements for:
information that was evaluated to determine if an event
was reportable;
all medical device reports and information submitted to
the FDA;
any information that was evaluated during preparation of
annual certification reports; and
systems that ensure access to information that facilitates
timely follow up and inspection by FDA.
FDA Enforcement
FDA may take the following actions to enforce the MDR regulation:
FDA-Initiated or Voluntary Recalls
Recalls are regulatory actions that remove a hazardous, potentially hazardous,
or a misbranded product from the marketplace. Recalls are also used to convey
additional information to the user concerning the safe use of the product.
Either FDA or the manufacturer can initiate recalls.
There are three classifications, i.e., I, II, or III, assigned by the Food and
Drug Administration to a particular product recall to indicate the relative
degree of health hazard presented by the product being recalled.
Class I
Is a situation in which there is a reasonable probability that the use of, or
exposure to, a violative product will cause serious adverse health consequences
or death.
Class II
Is a situation in which use of, or exposure to, a violative product may cause
temporary or medically reversible adverse health consequences or where the
probability of serious adverse health consequences is remote.
Class III
Is a situation in which use of, or exposure to, a violative product is not
likely to cause adverse health consequences.
FONAR has initiated four Class II recalls. The recalls involved making minor
corrections to the product in the field. Frequently, corrections which are made
at the site of the device are called field corrections as opposed to recalls.
Civil Money Penalties
The FDA, after an appropriate hearing, may impose civil money penalties for
violations of the FD&C Act that relate to medical devices. In determining the
amount of a civil penalty, FDA will take into account the nature, circumstances,
extent, and gravity of the violations, the violator's ability to pay, the effect
on the violator's ability to continue to do business, and any history of
prior violations. The civil money penalty may not exceed $15,000 for each
violation and may not exceed $1,000,000 for all violations adjudicated
in a single proceeding, per person.
Warning Letters
FDA issues written communications to a firm, indicating that the firm may incur
more severe sanctions if the violations described in the letter are not
corrected. Warning letters are issued to cause prompt correction of violations
that pose a hazard to health or that involve economic deception. The FDA
generally issues the letters before pursuing more severe sanctions.
Seizure
A seizure is a civil court action against a specific quantity of goods which
enables the FDA to remove these goods from commercial channels. After seizure,
no one may tamper with the goods except by permission of the court. The court
usually gives the owner or claimant of the seized merchandise approximately 30
days to decide a course of action. If they take no action, the court will
recommend disposal of the goods. If the owner decides to contest the
government's charges, the court will schedule the case for trial. A third option
allows the owner of the goods to request permission of the court to bring the
goods into compliance with the law. The owner of the goods is required to
provide a bond or, security deposit, to assure that they will perform the orders
of the court, and the owner must pay for FDA supervision of any activities by
the company to bring the goods into compliance.
Citation
A citation is a formal warning to a firm of intent to prosecute the firm if
violations of the FD&C Act are not corrected. It provides the firm an
opportunity to convince FDA not to prosecute.
Injunction
An injunction is a civil action filed by FDA against an individual or company.
Usually, FDA files an injunction to stop a company from continuing to
manufacture, package or distribute products that are in violation of the law.
Prosecution
Prosecution is a criminal action filed by FDA against a company or individual
charging violation of the law for past practices.
Foreign and Export Regulation
We obtain approvals as necessary in connection with the sales of our products in
foreign countries. In some cases, FDA approval has been sufficient for foreign
sales as well. Our standard practice has been to require either the distributor
or the customer to obtain any such foreign approvals or licenses which may be
required.
Legally marketed devices that comply with the requirements of the Food Drug &
Cosmetic Act require a Certificate to Foreign Government issued by the FDA for
export. Other devices that do not meet the requirements of the FD&C Act but
comply with the laws of a foreign government require a Certificate of
Exportability issued by the FDA. All products which we sell have FDA clearance
and would fall into the first category.
Foreign governments have differing requirements concerning the import of medical
devices into their respective jurisdictions. The European Union, also referred
to as EU, made up of 25 individual countries, has some essential requirements
described in the EU's Medical Device Directive, also referred to as MDD. In
order to export to one of these countries, we must meet the essential
requirements of the MDD and any additional requirements of the importing
country. The essential requirements are similar to some of the requirements
mandated by the FDA. In addition the MDD requires that we enlist a Notified
Body to examine and assess our documentation, a Technical Construction File, and
verify that the product has been manufactured in conformity with the
documentation. The notified body must carry out or arrange for the inspections
and tests necessary to verify that the product complies with the essential
requirements of the MDD, including safety performance and Electromagnetic
Compatibility, also referred to as EMC. Also required is a Quality System, ISO-
9001, assessment by the Notified Body. We were approved for ISO 9001
certification for its Quality Management System in April, 1999.
We received clearance to sell the QUAD(TM) scanners in the EU in May, 1999.
Clearances for the Fonar 360(TM) and Stand-Up(TM) MRI scanners were obtained in
May, 2002.
Other countries such as China and Russia require that their own testing
laboratories perform an evaluation of our devices. This requires that we must
bring the foreign agency's personnel to the USA to perform the evaluation at our
expense before exporting.
Some countries, including many in Latin America and Africa, have very few
regulatory requirements.
Because our export sales are not material at this point, foreign regulation does
not have a material effect on us. In any case, we do not believe that foreign
regulation will deter its efforts to penetrate foreign markets.
Reimbursement to Medical Providers for MRI Scans
Effective November 22, 1985, the Department of Health and Human Services
authorized reimbursement of MRI scans under the Federal Medicare program. In
addition, most private insurance companies have authorized reimbursement for MRI
scans.
Anti-Kickback and Self-Referral Legislation
Proposed and enacted legislation at the State and Federal levels has restricted
referrals by physicians to medical and diagnostic centers in which they or their
family members have an interest. In addition, regulations have been adopted by
the Secretary of Health and Human Services which provide limited "safe harbors"
under the Medicare Anti-Kickback Statute. These safe harbors describe payments
and transactions which are permitted between an entity receiving reimbursement
under the Medicare program and those having an interest in or dealings with the
entity. Although the Company cannot predict the overall effect of the adoption
of these regulations on the medical equipment industry, the use and continuation
of limited partnerships, where investors may be referring physicians, to own and
operate MRI scanners could be greatly diminished.
HEALTH MANAGEMENT CORPORATION OF AMERICA
PHYSICIAN AND DIAGNOSTIC SERVICES MANAGEMENT BUSINESS
Health Management Corporation of America, formerly known as U.S. Health
Management Corporation and referred to as "HMCA", was organized by us in March
1997. HMCA is a wholly-owned subsidiary which engages in the business of
providing comprehensive management services to imaging facilities. The services
we provide include development, administration, leasing of office space,
facilities and medical equipment, provision of supplies, staffing and
supervision of non-medical personnel, legal services, accounting, billing and
collection and the development and implementation of practice growth and
marketing strategies.
HMCA currently manages 11 MRI facilities. In April 2003, HMCA sold the portion
of its business which managed primary care medical practices, and in July 2005,
HMCA sold the portion of its business engaged in the management of physical
therapy and rehabilitation practices. This was the result of HMCA's decision to
focus on management of MRI facilities, the business in which HMCA is most
experienced. For the 2005 fiscal year, the revenues HMCA recognized from the
MRI facilities were $14.0 million and the revenues recognized from the physical
therapy and rehabilitation practices were $9.7 million. For the 2004 fiscal
year, the revenues HMCA recognized from the MRI facilities were $13.3 million
and the revenues recognized from the physical therapy and rehabilitation
practices were $9.7 million.
HMCA GROWTH STRATEGY
HMCA's growth strategy focuses on upgrading and expanding the existing
facilities it manages and expanding the number of facilities it manages for its
clients. Our most important effort in this regard is to promote and facilitate
the replacement of existing MRI scanners with new Fonar Upright(TM)/Stand-Up(TM)
MRI scanners at the most promising locations. To date, we have Stand-Up(TM) MRI
scanners at the MRI facilities we manage in Islandia, New York, Staten Island,
New York, Bensonhurst, New York, Melville, New York, East Elmhurst, New York,
East Setauket, New York, Boca Raton, Florida, and Ormond Beach, Florida, which
new site replaced our prior site in Daytona Beach, Florida. We also plan to
install a Stand-Up(TM) MRI scanner at the Tallahassee, Florida site we manage
before the end of calendar year 2005.
In connection with its focus on managing MRI facilities, HMCA decided to sell
its business of managing physical therapy and rehabilitation practices. The
sale was completed on July 28, 2005, following the end of the 2005 fiscal year.
The sale was made pursuant to an asset purchase agreement. The assets sold
consisted principally of the management agreements with the physical therapy and
rehabilitation facilities, the assignment of other agreements and rights
utilized in our physical therapy and rehabilitation facility management
business, the physical therapy equipment, a portion of the accounts
receivable and office furnishings and equipment we provided to the physical
therapy and rehabilitation facilities.
The sale was made to Health Plus Management Services, L.L.C. There is no
material relationship between Health Plus and Fonar, HMCA, or any of their
respective subsidiaries, directors or officers or associates of any such person.
The two principals of Health Plus were employed by HMCA up to the time of the
closing of the transaction. In consideration for the termination of their
employment agreements, these two individuals each became entitled to receive
$800,000. In addition, each became entitled to receive $200,000 for billing and
collection services to be provided on behalf of HMCA with respect to a portion
of the accounts receivable of certain physical therapy and rehabilitation
facilities which arose during the period when we were engaged in the management
of those facilities. The $1,000,000 payable to each of these individuals may be
paid at our option in shares of Fonar common stock.
The purchase price under the asset purchase agreement was $6.6 million, payable
pursuant to a promissory note in 120 monthly installments commencing on August
28, 2005. The first twelve installments are interest only and the remaining 108
payments will consist of equal installments of principal and interest in the
amount of $76,014 each. The note is subject to prepayment provisions to the
extent Health Plus resells all or part of the assets and business or utilizes
the assets sold as collateral in any debt financing.
PHYSICIAN AND DIAGNOSTIC MANAGEMENT SERVICES
HMCA's services to the facilities it manages encompass substantially all of
their business operations. Each facility is controlled, however, by the
physician owner, not HMCA, and all medical services are performed by the
physicians and other medical personnel under the physician owner's supervision.
HMCA is the management company and performs services of a non-professional
nature. These services include:
1. Offices and Equipment. HMCA identifies, negotiates leases for and/or
provides office space and equipment to its clients. This includes
technologically sophisticated medical equipment. HMCA also provides improvements
to leaseholds, assistance in site selection and advice on improving, updating,
expanding and adapting to new technology.
2. Personnel. HMCA staffs all the non-medical positions of its clients with its
own employees, eliminating the client's need to interview, train and manage non-
medical employees. HMCA processes the necessary tax, insurance and other
documentation relating to employees.
3. Administrative. HMCA assists in the scheduling of patient appointments,
purchasing of medical supplies and equipment and handling of reporting,
accounting, processing and filing systems. It prepares and files the physician
portions of complex forms to enable its clients to participate in managed care
programs and to qualify for insurance reimbursement. We assist the clients to
implement programs and procedures to ensure full and timely regulatory
compliance and appropriate cost reimbursement under no-fault insurance and
workers' compensation guidelines, as well as compliance with other applicable
governmental requirements and regulations, including HIPAA and other privacy
requirements.
4. Billing and Collections. HMCA is responsible for the billing and collection
of revenues from third-party payors including those governed by no-fault and
workers' compensation statutes.
5. Cost Saving Programs. Based on available volume discounts, HMCA seeks to
obtain favorable pricing for medical supplies, equipment, contrast agents, such
as gadolinuim, and other inventory for its clients.
6. Diagnostic Imaging and Ancillary Services. HMCA can offer access to
diagnostic imaging equipment through diagnostic imaging facilities it manages.
The Company is expanding the ancillary services offered in its network to
include CT-scans, x-rays, ultrasound, and other ancillary services useful to its
clients.
7. Marketing Strategies. HMCA is responsible for developing marketing plans for
its clients.
8. Expansion Plans. HMCA assists the clients in developing expansion plans
including the opening of new or replacement facilities where appropriate.
HMCA advises clients on all aspects of their businesses, including expansion
where it is a reasonable objective, on a continuous basis. HMCA's objective is
to free physicians from as many non-medical duties as is practicable. Practices
can treat patients more efficiently if the physicians can spend less time on
business and administrative matters and more time practicing medicine.
HMCA provides its services pursuant to negotiated contracts with its clients.
While HMCA believes it can provide the greatest value to its clients by
furnishing the full range of services appropriate to that client, HMCA would
also be willing to enter into contracts providing for a more limited spectrum of
management services.
In the case of contracts with the MRI facilities, fees are charged by HMCA based
on the number of procedures performed. In the case of the physical therapy and
rehabilitation practices we previously managed, flat fees were charged on a
monthly basis. Fees are subject to adjustment on an annual basis, but must be
based on mutual agreement. The per procedure charges to the MRI facilities
range from $250 to $500 per MRI scan. No MRI facilities or physical therapy and
rehabilitation facilities are or were owned by HMCA.
The facilities enter into contracts with third party payors, including managed
care companies. Neither HMCA's clients nor HMCA participate in any capitated
plans or other risk sharing arrangements. Capitated plans are those HMO
programs where the provider is paid a flat monthly fee per patient.
HMCA MARKETING
HMCA's marketing strategy is to expand the business and improve the facilities
which it manages. HMCA will also seek to increase the number of locations of
those facilities where market conditions are promising. HMCA will seek to
promote growth of its clients' patient volume and revenue through installing new
Stand-Up(TM) MRI scanners at MRI facilities.
DIAGNOSTIC IMAGING FACILITIES AND OTHER ANCILLIARY SERVICES
Diagnostic imaging facilities managed by HMCA provide diagnostic imaging
services to patients referred by physicians who are either in private practice
or affiliated with managed care providers or other payor groups. The facilities
are operated in a manner which eliminates the admission and other administrative
inconveniences of in-hospital diagnostic imaging services. Imaging services are
performed in an outpatient setting by trained medical technologists under the
direction of physicians. Following diagnostic procedures, the images are
reviewed by the interpreting physicians who prepare a report of these tests and
their findings. These reports are transcribed by HMCA personnel and then
delivered to the referring physician.
HMCA develops marketing programs in an effort to establish and maintain
profitable referring physician relationships and to maximize reimbursement
yields. These marketing approaches identify and target selected market segments
consisting of area physicians with certain desirable medical specialties and
reimbursement yields. Corporate and facility managers determine these market
segments based upon an analysis of competition, imaging demand, medical
specialty and payor mix of each referral from the local market. HMCA also
directs marketing efforts at managed care providers.
Managed care providers have become an important factor in the diagnostic imaging
industry. To further its position, HMCA will seek to expand the imaging
modalities offered at its managed diagnostic imaging facilities.
HMCA COMPETITION
The physician and diagnostic management services field is highly competitive. A
number of large hospitals have acquired medical practices and this trend may
continue. HMCA expects that more competition will develop. Many competitors
have greater financial and other resources than HMCA.
With respect to the diagnostic imaging facilities managed by HMCA, the
outpatient diagnostic imaging industry is highly competitive. Competition
focuses primarily on attracting physician referrals at the local market level
and increasing referrals through relationships with managed care organizations.
HMCA believes that principal competitors for the diagnostic imaging centers are
hospitals and independent or management company-owned imaging centers.
Competitive factors include quality and timeliness of test results, ability to
develop and maintain relationships with managed care organizations and referring
physicians, type and quality of equipment, facility location, convenience of
scheduling and availability of patient appointment times. HMCA believes that it
will be able to effectively meet the competition in the outpatient diagnostic
imaging industry by installing the new Fonar Stand-Up(TM) MRI scanners at its
most promising facilities.
GOVERNMENT REGULATION APPLICABLE TO HMCA
FEDERAL REGULATION
Stark Law
Under the federal Self-Referral Law, also referred to as the "Stark Law", which
is applicable to Medicare and Medicaid patients, and the self-referral laws of
various States, certain health practitioners, including physicians,
chiropractors and podiatrists, are prohibited from referring their patients for
the provision of designated health services, including diagnostic imaging and
physical therapy services, to any entity with which they or their immediate
family members have a financial relationship, unless the referral fits within
one of the specific exceptions in the statutes or regulations. Statutory
exceptions under the Stark Law include, among others, direct physician services,
in-office ancillary services rendered within a group practice, space and
equipment rental and services rendered to enrollees of certain prepaid health
plans. Some of these exceptions are also available under the State self-
referral laws. HMCA believes that it and its clients are in compliance with
these laws.
Anti-kickback Regulation
Under the federal Anti-kickback statute, which is applicable to Medicare and
Medicaid, it is illegal, among other things, for a provider of MRI services to
pay or offer money or other consideration to induce the referral of MRI scans.
Neither HMCA nor its clients engage in this practice.
In fiscal 2005, approximately 9.9% of the revenues of HMCA's clients were
attributable to Medicare and 0.5% were attributable to Medicaid. In fiscal
2004, approximately 8.5% of the revenues of HMCA's clients were attributable to
Medicare and 1.0% were attributable to Medicaid.
State Regulation
In addition to the federal self-referral law and federal Anti-kickback statute,
many States, including those in which HMCA and its clients operate, have their
own versions of self-referral and anti-kickback laws. These laws are not
limited in their applicability, as are the federal laws, to specific programs.
HMCA believes that it and its clients are in compliance with these laws.
Various States prohibit business corporations from practicing medicine. Various
States also prohibit the sharing of professional fees or fee splitting.
Consequently, HMCA leases space and equipment to clients and provides clients
with a range of non-medical administrative and managerial services for agreed
upon fees. HMCA does not engage in the practice of medicine or establish
standards of medical practice or policies for its clients in any State even
where permitted.
HMCA's clients generate revenue from patients covered by no-fault insurance and
workers' compensation programs. For the fiscal year ended June 30, 2005
approximately 59.3% of our clients' receipts were from patients covered by no-
fault insurance and approximately 6.2% of our client's receipts were from
patients covered by worker's compensation programs. For the fiscal year ended
June 30, 2004, approximately 57.9% of HMCA's clients' receipts were from
patients covered by no-fault insurance and approximately 6.7% of HMCA's clients'
receipts were from patients covered by workers compensation programs. In the
event that changes in these laws alter the fee structures or methods of
providing service, or impose additional or different requirements, HMCA could be
required to modify its business practices and services in ways that could be
more costly to HMCA or in ways that decrease the revenues which HMCA receives
from its clients.
HMCA believes that it and its clients are in compliance with applicable Federal,
State and local laws. HMCA does not believe that such laws will have any
material effect on its business.
EMPLOYEES
As of July 1, 2005, we employed 494 persons on a full-time and part-time basis.
Of such employees, 43 were engaged in marketing and sales, 53 in research and
development, 82 in production, 50 in customer support services, 266 in
administration, including 168 on site at facilities and offices managed by HMCA
and 62 performing billing, collection and transcription services for those
facilities.
ITEM 2. PROPERTIES
Fonar leases approximately 135,240 square feet of office and plant space at its
principal offices in Melville, New York and at two other locations in Melville
and Farmingdale, New York at a current aggregate annual rental rate of
$1,033,618, excluding utilities, taxes and other related expenses. The term of
one of the leases includes options to renew up through 2008 and the terms of the
other leases extend to the beginning of 2009. Management believes that these
premises are adequate for its current needs. HMCA leases approximately 16,850
square feet for its headquarters in Melville, New York at a current annual
rental rate of $482,545. The term of the lease extends through September, 2009.
In addition, HMCA maintains leased office premises for its clients having an
aggregate annual rental rate of approximately $1.9 million under leases having
various terms.
ITEM 3. LEGAL PROCEEDINGS
There is no material litigation pending, or to its knowledge, threatened against
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 6, 2005, we held our annual meeting of stockholders. The matters before
the meeting were 1. the election of directors, 2. the ratification of stock
option and stock bonus plans and 3. the ratification of the selection of
auditors for fiscal 2005. All nominees for directors were elected and all other
proposals were approved, including the selection of Marcum & Kliegman LLP as the
Company's auditors for fiscal 2005. All of the directors elected, Raymond V.
Damadian, Claudette J.V. Chan, Robert Janoff, Charles N. O'Data and Robert
Djerejian, were sitting directors. The plans ratified by the stockholders were
the 2005 Stock Option Plan and the 2005 Stock Bonus Plan. The table below lists
the votes cast for, against or withheld, as well as abstentions and broker non-
votes.
(1) Election of Directors:
FOR WITHHELD
----------- ---------
Raymond V. Damadian 330,624,658 4,913,484
Claudette J.V. Chan 330,073,280 5,464,862
Robert J. Janoff 330,850,389 4,687,754
Charles N. O'Data 330,931,968 4,606,174
Robert Djerejian 331,058,091 4,480,057
(2) Ratification of Stock Bonus and Option Plans
FOR AGAINST ABSTAIN BROKER NON-VOTES
----------- --------- ------- ----------------
254,378,853 7,743,374 466,478 73,049,438
(3) Ratification of Auditors Marcum & Kliegman LLP
FOR AGAINST ABSTAIN BROKER NON-VOTES
----------- --------- ------- ----------------
333,473,976 1,857,772 206,394 1
Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is traded in the Nasdaq SmallCap market under the National
Association of Securities Dealers Automated Quotation System, also referred to
as "NASDAQ", symbol FONR. The following table sets forth the high and low
trades reported in NASDAQ System for the periods shown.
Fiscal Quarter High Low
------------------------------- ---- ----
July - September 2003 2.10 1.19
October - December 2003 1.60 1.10
January - March 2004 1.59 1.15
April - June 2004 1.52 1.13
July - September 2004 1.32 1.00
October - December 2004 1.88 1.02
January - March 2005 1.78 1.19
April - June 2005 1.42 1.14
July - August 2005 1.25 1.01
On September 1, 2005, we had approximately 4,544 stockholders of record of our
Common Stock, 10 stockholders of record of our Class B Common Stock, 4
stockholders of record of our Class C Common Stock and 3,938 stockholders of
record of our Class A Non-voting Preferred Stock.
At the present time, the only class of our securities for which there is a
market is the Common Stock.
We paid cash dividends in fiscal 1998 and the first three quarters of fiscal
1999 on monies we received from the enforcement of our patents. Except for
these dividends, we have not paid any cash dividends. We anticipate paying one
additional dividend on monies received from the enforcement of our patents.
Except for these dividends, however, we expect that we will retain earnings to
finance the development and expansion of our business.
Item 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data has been extracted from our
consolidated financial statements for the five years ended June 30, 2005. This
consolidated selected financial data should be read in conjunction with our
consolidated financial statements and the related notes included in Item 8 of
this form.
STATEMENT OF OPERATIONS
As of and For the Periods Ended June 30,
2005 2004 2003 2002 2001
------------ ----------- ------------ ------------ ------------
Revenues $104,899,000 $71,609,000 $ 52,892,000 $ 43,161,000 $ 40,274,000
Cost of revenues $ 66,720,000 $44,407,000 $ 32,477,000 $ 24,682,000 $ 25,959,000
Research and $ 6,007,000 $ 5,491,000 $ 5,164,000 $ 5,100,000 $ 5,866,000
Development
Expenses
Net Income $ 1,663,000 $(9,494,000) $(15,201,000) $(16,956,000) $(14,538,000)
(Loss) from
continuing
operations
Net Gain $ --- $ --- $ 194,000 $ (5,926,000) $ (646,000)
(Loss) from
discontinued
operations
Basic and Diluted $.01 $(.10) $ (.20) $ (.27) $ (.25)
Net Income (Loss)
per common share-
continuing operations
Basic and Diluted $ --- $ --- $ --- $ (.09) $ (.01)
Net Gain (Loss) per
common share
- discontinued operations
Basic Weighted 101,591,997 91,027,951 75,816,973 63,511,814 57,388,050
average number
of shares outstanding
Diluted Weighted 105,505,705 91,027,951 75,816,973 63,511,814 57,388,050
average number of
shares outstanding
BALANCE SHEET DATA
As of and For the Periods Ended June 30,
2005 2004 2003 2002 2001
------------ ----------- ------------ ------------ ------------
BALANCE SHEET DATA
Working capital (1) $36,224,000 $22,593,000 $13,517,000 $14,107,000 $17,206,000
Total assets $76,094,000 $77,201,000 $58,749,000 $73,129,000 $84,900,000
Long- (1) $ 1,392,000 $6,702,000 $ 1,930,000 $ 9,624,000 $17,760,000
term debt
and obligations
under capital
leases
Stock- $51,869,000 $43,154,000 $32,379,000 $35,695,000 $41,830,000
holder's
equity
(1) Amounts as of and for the years ended June 30, 2001 and June 30, 2002 have
been adjusted for the reclassification of discontinued operations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
INTRODUCTION.
Fonar was formed in 1978 to engage in the business of designing, manufacturing
and selling MRI scanners. In 1997, we formed a wholly-owned subsidiary, Health
Management Corporation of America, also referred to as "HMCA", formerly known as
U.S. Health Management Corporation, in order to expand into the physician and
diagnostic management services business.
Fonar's principal MRI products are its Stand-Up(TM)/Upright(TM) MRI and Fonar
360(TM) MRI scanners. The Stand-Up(TM) MRI allows patients to be scanned for
the first time under weight-bearing conditions. The Company has been
aggressively seeking new sales and during fiscal 2005 and 2004, respectively
received orders for 30 and 39 Stand-Up(TM) MRI scanners. The Stand-Up(TM) MRI
is the only MRI capable of producing images in the weight bearing state.
In fiscal 2005, we received our first order for a 360(TM) MRI scanner, bringing
the total number of orders for our MRI scanners to 31.
At 0.6 Tesla field strength, the Stand-Up(TM) MRI and Fonar 360(TM) magnets are
among the highest field open MRI scanners in the industry, offering non-
claustrophobic MRI together with high-field image quality. Fonar's open MRI
scanners were the first high field strength MRI scanners in the industry.
HMCA commenced operations in July, 1997 and generates revenues from providing
comprehensive management services, including development, administration,
accounting, billing and collection services, together with office space, medical
equipment, supplies and non-medical personnel to its clients. Revenues are in
the form of fees which are earned under contracts with MRI facilities and
physical rehabilitation practices. Since April 2003, HMCA no longer engages in
the management of primary care medical practices. On July 28, 2005, subsequent
to the end of fiscal 2005, HMCA sold the portion of its business engaged in the
management of physical therapy and rehabilitation practices.
For the fiscal years ended June 30, 2005, June 30, 2004, 96.2% and 100%,
respectively, of HMCA's revenues were derived from contracts with facilities and
practices owned by Dr. Raymond V. Damadian, the President of FONAR and HMCA and
principal stockholder of FONAR. The agreements with the MRI facilities are for
one-year terms which renew automatically on an annual basis, unless terminated.
The fees are based on the number of procedures performed and currently range
from $250 to $500 per MRI scan. The fees are reviewed and if appropriate,
adjusted on an annual basis by mutual agreement.
The agreements with the physical rehabilitation practices, which were executed
in 1998, provided for a term of 20 years. The fees were fixed monthly fees
adjusted annually. These agreements were terminated effective as of June 1,
2005, and new agreements were entered into with new practices with owners who
have no affiliation with Dr. Damadian, Fonar or HMCA. These new agreements were
assigned in connection with the sale of the portion of HMCA's business managing
physical therapy and rehabilitation practices. Historically, adjustments were
made on the basis of changes in HMCA's costs, plus a percentage of costs. The
monthly fees under these contracts with the physical rehabilitation practices
ranged from approximately $90,000 to $285,000.
Critical Accounting Policies
----------------------------
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States
of America. The preparation of these consolidated financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to investments, intangible assets, income taxes, contingencies and
litigation. We base our estimates on historical experience and on various
assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements. We recognize revenue and related costs of revenue from
sales contracts for our MRI scanners, under the percentage-of-completion method.
Under this method, we recognize revenue and related costs of revenue, as each
sub-assembly is completed. Amounts received in advance of our commencement of
production are recorded as customer advances.
We recognize revenue from license agreements for our intellectual property over
the shorter of the contractual life of the license or the estimated economic
life. For our current license agreement, we are recognizing revenue ratably
over 5 years.
We record a valuation allowance to reduce our deferred tax assets to the amount
that is more likely than not to be realized. As of June 30, 2005, we recorded a
valuation allowance which reduced our deferred tax assets to equal our deferred
tax liability.
We amortize our intangible assets, including patents, purchased management
agreements and capitalized software development costs, over the shorter of the
contractual/legal life or the estimated economic life. Our amortization life
for patents, purchased management agreements and capitalized software
development costs is 15 to 17 years, 20 years and 5 years, respectively.
We periodically assess the recoverability of long-lived assets, including
property and equipment, intangibles and management agreements, when there are
indications of potential impairment, based on estimates of undiscounted future
cash flows. The amount of impairment is calculated by comparing anticipated
discounted future cash flows with the carrying value of the related asset. In
performing this analysis, management considers such factors as current results,
trends, and future prospects, in addition to other economic factors.
RESULTS OF OPERATIONS. FISCAL 2005 COMPARED TO FISCAL 2004
In fiscal 2005, we experienced net income of $1.0 million on revenues of $104.9
million, as compared to a net loss of $9.5 million on revenues of $71.6 million
for fiscal 2004. This represents an increase in revenues of 46.5%. This was
due in part to the fact that while revenues increased by 46.5%, total costs and
expenses increased by only 28.9%. Our consolidated operating results improved
by $10.2 million to operating income of $1.7 million for fiscal 2005 as compared
to an operating loss of $8.5 million for fiscal 2004.
Discussion of Operating Results of Medical Equipment Segment
Fiscal 2005 Compared to Fiscal 2004
------------------------------------------------------------
Revenues attributable to our medical equipment segment increased by 67.1% to
$81.3 million in fiscal 2005 from $48.6 million in fiscal 2004, reflecting an
increase in product sales revenues of 70.2%, from $43.0 million in fiscal 2004
to $73.1 million in fiscal 2005 and an increase in service revenue of 80.6%,
from $3.2 million in fiscal 2004 to $5.8 million in fiscal 2005. This
improvement in revenues was attributable to our increase in sales of our Stand-
Up(TM) MRI, which is unique in that it permits MRI scans to be performed on
patients upright in the weight-bearing state and in multiple positions that
correlate with symptoms. The increase in service revenue is a result primarily
of our increase scanner base, as scanners sold in previous years become service
customers after the warranty period expires.
During the fiscal years ended June 30, 2005 and June 30, 2004, respectively, we
received orders for 30 and 39 Stand-Up(TM) MRI scanners. In addition to 30
Stand-Up(TM) MRI scanners, we received our first order for a Fonar 360(TM)
scanner.
Confirming our expectation of increased demand for our MRI scanners, product
sales to unrelated parties increased by 77.7% in fiscal 2005 from $37.7 million
in fiscal 2004 to $66.9 million in fiscal 2005. Product sales to related
parties increased by 16.8% in fiscal 2005 from $5.3 million in fiscal 2004 to
$6.2 million in fiscal 2005. We believe that one of our principal challenges in
achieving greater market penetration is attributable to the better name
recognition and larger sales forces of our larger competitors such as General
Electric, Siemens, Hitachi, Philips and Toshiba and the ability of some of our
competitors to offer attractive financing terms through affiliates, such as G.E.
Capital. Nevertheless, no other competitor offers a whole body weight bearing
MRI scanner such as the Stand-Up(TM) MRI, and the General Electric Medical
Systems division of General Electric acts as a manufacturer's representative for
the Stand-Up(TM) MRI.
We believe that our continuing increase in unrelated party product sales shows
that we are successfully meeting that challenge.
The operating results for the medical equipment segment improved by $9.5 million
from a loss of $8.8 million in fiscal 2004 to an income of $752,000 in fiscal
2005. This improvement is attributable to our continuing increase in
recognition of revenues on our scanner sales.
We recognized revenues of $71.7 million from the sale of our Stand-Up(TM) MRI
scanners and $764,031 from the sales of a FONAR 360(TM) MRI scanner in fiscal
2005. In fiscal 2004, we recognized revenues of $42.7 million from the sale of
Stand-Up(TM) MRI scanners.
Sales of MRI scanners to related parties, consisting of professional
corporations and other entities in which Dr. Damadian or members of his family
have an interest represented approximately 5.9%, or $6.2 million, of our
revenues in fiscal 2005, as compared to 7.4%, or $5.3 million, of our revenues
in fiscal 2004.
License and royalty revenue declined by 4.3% to approximately $2.3 million in
fiscal 2005 from approximately $2.4 million in fiscal 2004.
Gross profit margins on product sales decreased during fiscal 2005 from 38.1% in
fiscal 2004 to 35.9% in fiscal 2005. The decrease is principally attributable
to increased prices for steel and copper.
Research and development expenses, net of capitalized costs, increased by 9.4%
to $6.0 million in fiscal 2005 as compared to $5.5 million in fiscal 2004. Our
expenses for fiscal 2005 represented continued research and development of
Fonar's scanners, Fonar's new hardware and software product, Sympulse(TM) and
new surface coils to be used with the Stand-Up(TM) MRI scanner.
Discussion of Operating Results of Physician and Diagnostic Services Management
Segment.
--------------------------------------------------------------------------------
Fiscal 2005 Compared to Fiscal 2004
-----------------------------------
Revenues attributable to the Company's physician and diagnostic services
management segment, HMCA, increased by 2.8% to $23.6 million in fiscal 2005 from
$23.0 million in fiscal 2004. The increase in revenues reflected anticipated
increases provided by upgraded facilities. Presently, eight of the 11 MRI
facilities managed by HMCA have Stand-Up(TM) MRI scanners and additional
upgrades are planned.
Cost of revenues as a percentage of the related revenues for our physician and
diagnostic services management segment increased from $13.8 million or 60% of
related revenues for the year ended June 30, 2004 to $14.5 million, or 61.3% of
related revenue for the year ended June 30, 2005.
Operating results of this segment improved from an operating loss of $308,000 in
fiscal 2004 to operating income of $912,000 in fiscal 2005. We attribute the
improvement to HMCA's focus on upgrading the more promising sites it manages
such as the introduction of Stand-Up(TM) MRI scanners at MRI facilities.
Discussion of Certain Consolidated Results of Operations
--------------------------------------------------------
Fiscal 2005 Compared to Fiscal 2004
-----------------------------------
We recognized interest income of $546,648 in 2005 as compared to $448,571 in
fiscal 2004, representing an increase of 21.9%. The increase was attributable
primarily to an increase in interest rates on our investments in marketable
securities.
Interest expense of $232,227 was recognized in fiscal 2005 decreasing from
$268,128 in fiscal 2004 and representing a decrease of 13.4%. The decrease was
attributable primarily to the repayment of debt and capital lease obligations in
fiscal 2004.
Notwithstanding that revenue increased by 46.5%, selling, general and
administrative expenses, exclusive of compensatory element of stock issuances,
increased by only 6.2% to $26.6 million in fiscal 2005 from $25.1 million in
fiscal 2004,accounting in part for our increase in net income. This increase
was related to expenses incurred in our medical segment related to marketing and
customer relations programs, such as participating in a trade show, increased
commissions, and an in-house seminar for all owners of Stand-Up MRI(TM) scanners
and increased professional fees. A portion of the increased professional fees
was related to the engagement of outside consultants to assist us in preparation
of internal documentation in connection with our compliance with Section 404 of
the Sarbanes-Oxley Act. In addition we incurred expenses in connection with the
defense of non-material litigation.
The decrease in compensatory element of stock issuances from approximately $4.1
million in fiscal 2004 to $3.1 million in fiscal 2005 reflected the continued
but reduced use of Fonar's stock bonus plans to pay certain highly compensated
employees and others in stock rather than in cash.
The lower provision for bad debt of $164,000 in fiscal 2005 as compared to
$331,000 in fiscal 2004, reflected a decrease in reserves and write-offs of
certain indebtedness.
The amortization expense of $634,000 in fiscal 2005 and fiscal 2004, reflects
the amortization of management agreements attributable to HMCA's acquisitions.
We are enthusiastic about the future of our Stand-Up(TM) MRI and FONAR 360(TM)
scanners which bring a new plateau of openness to diagnostic MRI and are
expected to bring a new frontier in performing MRI guided intervention. We
believe our new products are beginning to successfully penetrate the market, as
reflected in the dramatic increase in product sales from approximately $3.4
million in fiscal 2000 to $6.1 million in fiscal 2001, to $11.6 million in
fiscal 2002, to $24.9 million in fiscal 2003, to $43.0 million in fiscal 2004
and 73.1 million in fiscal 2005. In addition to our success with our
Stand-Up(TM) MRI, we sold our first Fonar 360(TM) in the first quarter of fiscal
2005.
Service and repair fees also have steadily increased, as reflected by the
increase in service and repair fees from $1.7 million in fiscal 2000 to $2.0
million in fiscal 2001 to $2.2 million in fiscal 2002 to $2.5 million in fiscal
2003 to $3.2 million in fiscal 2004 and $5.8 million in fiscal 2005.
Continuing our tradition as the originator of MRI, we remain committed to
maintaining our position as a leading innovator of the industry through
aggressive investing in research and development. In fiscal 2005 we continued
our investment in the development of our new MRI scanners, together with
software and upgrades, with an investment of $6,752,755 in research and
development, $745,994 of which was capitalized, as compared to $6,079,797,
$588,735 of which was capitalized, in fiscal 2004. The research and development
expenditures were approximately 8.3% of revenues attributable to our medical
equipment segment, and 6.4% of total revenues, in 2005 and 12.5% of medical
equipment segment revenues, and 8.5% of total revenues in fiscal 2004. This
represented a 11.1% increase in research and development expenditures in fiscal
2005 as compared to fiscal 2004 and our significantly higher total revenues and
medical equipment revenues which have resulted from our greater emphasis on
marketing and selling.
In summary, Fonar continued the trend of steadily increasing MRI scanner sales,
most dramatically the increase in Stand-Up(TM) MRI scanner sales revenues from
fiscal 2001 through fiscal 2005. We anticipate that increased scanner sales
revenues will continue due to the unique capability of the Stand-Up(TM) MRI
scanner to scan patients in weight-bearing positions and future sales of the
Fonar 360(TM) for image guided interventional procedures and treatments. Service
revenues have also increased over the past five fiscal years.
The physician and diagnostic services management segment, HMCA, revenues also
continued to increase, from $22.9 million in fiscal 2003 to $23.0 in fiscal 2004
and $23.6 million in fiscal 2005.
We have increased HMCA revenues by closing unprofitable facilities and
continuing our program of replacing the MRI scanners at the MRI facilities we
manage with Stand-Up(TM) MRI scanners and opening new facilities equipped with
Stand-Up(TM).
Marketing expenditures are likely to increase, as the Company continues its
efforts to promote sales.
Following the end of fiscal 2005, HMCA sold the portion of its business engaged
in the management of physical therapy and rehabilitation facilities in July of
2005 to Health Plus Management Services, L.L.C. for a purchase price of $6.6
million, payable pursuant to a promissory note in 120 monthly installments.
The first twelve installments are interest only and the remaining 108 payments
will consist of equal installments of principal and interest in the amount of
$76,014 each. The note is secured by a first lien on all of the assets of
Health Plus, including its accounts receivable. The note is subject to
prepayment provisions to the extent Health Plus resells all or part of the
assets and business or utilizes the assets sold as collateral in any debt
financing.
HMCA had recognized revenue from the management of physical therapy and
rehabilitation facilities of approximately $9.7 million during both 2005 and
2004. In connection with this sale, HMCA expects to recognize a diminimus loss
during the quarter ended September 30, 2005. In addition, HMCA will record a
one time charge to earnings during the quarter ended September 30, 2005 of $1.6
million related to the termination of the employment contracts discussed above.
RESULTS OF OPERATIONS. FISCAL 2004 COMPARED TO FISCAL 2003
In fiscal 2004, we experienced a net loss of $9.5 million on revenues of $71.6
million as compared to a net loss of $15.0 million on revenues of $52.9 million
for fiscal 2003. This represented a decrease in the net loss of 36.7%, and an
increase in revenues of 35.4%.
Discussion of Operating Results of Medical Equipment Segment
------------------------------------------------------------
Fiscal 2004 Compared to Fiscal 2003
-------------------------------------
Revenues attributable to our medical equipment segment increased by 62.3% to
$48.6 million in fiscal 2004 from $30.0 million in fiscal 2003, reflecting an
increase in product sales of 72.4%, from $24.9 million in fiscal 2003 to $43.0
million in fiscal 2004 and an increase in service revenue of 29.4% from $2.5
million in fiscal 2003 to $3.2 million in fiscal 2004. We attributed the
increase in scanner sales to the growing market penetration of the Stand-Up(TM)
MRI. Product sales to unrelated parties increased by 113.3% in fiscal 2004 from
$17.7 million in fiscal 2003 to $37.7 million in fiscal 2004.
Product sales to related parties, consisting of professional corporations and
other entities in which Dr. Damadian or members of his family have an interest,
decreased, however, by approximately 26.9%, from $7.3 million in fiscal 2003 to
$5.3 million in fiscal 2004. Such related party scanner sales represented
approximately 7.4% of our revenues in fiscal 2004 as compared to 13.8% of our
revenues in fiscal 2003.
Sales to related parties in fiscal 2004 were adversely affected by the
bankruptcy during the year of their primary financing source, which had to be
replaced.
Licensee and royalty revenue declined by 4.1% to approximately $2.4 million in
fiscal 2004 from approximately $2.6 million in fiscal 2003.
Gross profit margins on product sales improved during fiscal 2004 from 35.7% in
fiscal 2003 to 38.1% in fiscal 2004. Such improvement was principally
attributable to the medical equipment segment operating at a higher level of
capacity resulting from increased sales volume.
Results of operations for the medical equipment segment improved by 22.1% from
an operating loss of $11.3 million in fiscal 2003 to an operating loss of $8.8
million in fiscal 2004. This improvement was attributable to our increase in
gross margins on our scanner sales.
We recognized revenues of $42.7 million from the sale of Stand-Up(TM) MRI
scanners in fiscal 2004. In fiscal 2003 we recognized revenues of $24.3 million
from the sale of Stand-Up(TM) MRI scanners and $100,000 from the sale of one
refurbished, used, Beta(TM) scanner.
Research and development expenses, net of capitalized costs, increased by 6.3%
to $5.5 million in fiscal 2004 as compared to $5.2 million in fiscal 2003. Our
expenses for fiscal 2004 represented continued research and development of
Fonar's scanners, its new hardware and software product, Sympulse(TM) and new
surface coils to be used within the Stand-Up(TM) MRI scanner.
Discussion of Operating Results of Physician Management Services Segment. Fiscal
2004 Compared to Fiscal 2003
--------------------------------------------------------------------------------
Revenues attributable to our physician and diagnostic services management
segment (HMCA) increased by 0.2% to $23.0 million in fiscal 2004 from $22.9
million in fiscal 2003. Our increase in revenues reflected our clients'
increased revenues from upgraded facilities offsetting the closing of
underperforming facilities.
Costs of revenues for our physician and diagnostic services management segment
increased from $13.3 million, or 57.9%, of related revenues for the year ended
June 30, 2003 to $13.8 million, or 60%, of related revenues for the year ended
June 30, 2004.
Operating results of this segment improved from an operating loss of $3.8
million in fiscal 2003 to operating income of $308,000 in fiscal 2004. In the
fourth quarter of fiscal 2003, HMCA recognized an impairment loss of $795,237,
on certain management agreements with a physical rehabilitation and therapy
facility which was closed in the beginning of the second quarter of fiscal 2003.
We attribute the improvement to HMCA's focus on upgrading the more promising
sites it manages with Stand-Up(TM) MRI facilities.
Discussion of Certain Consolidated Results of Operations.
Fiscal 2004 Compared to Fiscal 2003
--------------------------------------------------------
We recognized interest income of $448,571 in fiscal 2004 as compared to $670,678
in fiscal 2003, representing a decrease of 33.1%. The decrease was attributable
primarily to a decrease in interest on our investments in marketable securities.
Interest expense of $268,128 was recognized in fiscal 2004 decreasing from
$626,450 in fiscal 2003 and representing a decrease of 57.2%. The decrease was
attributable primarily to the repayment of long-term debt and capital lease
obligations in fiscal 2004.
Selling, general and administrative expenses, exclusive of the compensatory
element of stock issuances, increased by 7.3% to $25.1 million in fiscal 2004
from $23.4 million in fiscal 2003. The increase in selling, general and
administrative expenses was attributable primarily to the expansion of Fonar's
increased manufacturing, advertising, marketing and sales activity.
The decrease in compensatory element of stock issuances from approximately $4.8
million in fiscal 2003 to $4.1 million in fiscal 2004 reflected the continued
but reduced use of Fonar's stock bonus plan to pay certain highly compensated
employees and others in stock rather than in cash.
The lower provision for bad debt of $331,000 in fiscal 2004 as compared to
$702,000 in fiscal 2003, reflected a decrease in reserves and write-offs of
certain receivables.
The amortization expense of $634,000 in fiscal 2004 and $696,000 in fiscal 2003
reflects the amortization of management agreements attributable to HMCA's
acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and marketable securities decreased by 27.5% from $20.6
million at June 30, 2004 to $14.9 million at June 30, 2005.
Marketable securities approximated $9.4 million as of June 30, 2005, as compared
to $11.1 million as of June 30, 2004. At June 30, 2005, we decreased our
investments in U.S. Government obligations from approximately $5.2 million at
June 30, 2004 to approximately $3.8 million, increased our investments in
corporate and government agency bonds from approximately $3.4 million at June
30, 2004 to approximately $4.0 million and decreased our investments in
certificates of deposits, notes and equivalents from $2.5 million at June 30,
2004 to $1.6 million.
Cash used in operating activities for fiscal 2005 approximated $1.0 million.
Cash used in operating activities was attributable substantially to the increase
in costs and estimated earnings in excess of billings of $8.7 million, the
increase in accounts receivable of $1.6 million and the decrease in customer
advances of $6.1 million.
Cash used in investing activities for fiscal 2005 approximated $1.9 million.
The principal uses of cash from investing activities were purchases of
marketable securities of $13.4 million, purchases of property and equipment of
$2.2 million, costs of capitalized software development of $788,000 and costs of
patents and copyrights of $464,000. The principal source of cash provided by
investing activities was sales of approximately $15.0 in marketable securities.
Cash used in financing activities for fiscal 2005 approximated $1.1 million.
The principal sources of cash in financing activities were proceeds from the
exercise of stock options and warrants of $254,000, offset by the repayment of
borrowings and capital lease obligations of $400,000 and distributions to
holders of minority interests of $910,000.
Total liabilities decreased by 29.6% during fiscal 2005, from approximately
$33.7 million at June 30, 2004 to approximately $23.7 million at June 30, 2005.
The decrease in total liabilities reflected principally a decrease of 92.9% in
the current portion of long-term debt and capital leases, from $6.0 million at
June 30, 2004 to $425,000 at June 30, 2005, an increase in accounts payable of
57.7% from $5.4 million at June 30, 2004 to $8.5 million at June 30, 2005 and a
decrease in customer advances of 78.5% from $7.8 million at June 30, 2004 to
$1.6 million at June 30, 2005, resulting from our reduced backlog.
Our obligations and the periods in which they are scheduled to become due are
set forth in the following table:
Due in
Less Due Due Due
than 1 in 1-3 in 4-5 after 5
Obligation Total Year years years years
---------- ----- ----- ----- ----- -----
Long-term debt $ 505,496 $ 224,869 $ 280,627 $ --- $ ---
Capital lease
Obligation 886,018 200,274 353,032 319,212 13,500
Operating
leases 10,867,531 2,714,531 4,719,301 2,196,868 1,236,831
----------- --------- --------- --------- ---------
Total cash
Obligations $12,259,045 $3,139,674 $5,352,960 $2,516,080 $1,250,331
=========== =========== ========== ========== ==========
As at June 30, 2005, our obligations included approximately $2.4 million in
various state sales taxes.
Our working capital surplus as of June 30, 2005 approximates $36.2 million, as
compared to a working capital surplus of $22.6 million as of June 30, 2004.
In order to conserve its capital resources, we have issued common stock under
our stock bonus and stock option plans to compensate employees and non-employees
for services rendered. In fiscal 2005, the compensatory element of stock
issuances was $3.1 million as compared to $4.1 million for fiscal 2004.
Utilization of equity in lieu of cash compensation has improved our liquidity
since it increases cash available for other expenditures.
The foregoing trends in our capital resources are expected to improve as our MRI
scanner products gain wider market acceptance and produce greater sales
revenues.
Capital expenditures for fiscal 2005 approximated $3.5 million and substantially
consisted of office and research and development equipment, in the amount of
$2.2 million, capitalized software costs of $788,000, and capitalized patent
costs of $464,000.
Fonar has not committed to making capital expenditures in the 2006 fiscal year
other than its intention to continue research and development expenditures at
current levels. In addition, HMCA plans to incur expenditures of approximately
$350,000 for leasehold improvement costs for a new MRI facility in Tallahassee,
Florida.
Our business plan currently includes an aggressive program for manufacturing and
selling our new line of open MRI scanners. In addition, we are enhancing our
revenue by participating in the physician and diagnostic services management
business through our subsidiary, HMCA and are in the process of upgrading the
facilities which it manages, most significantly by the replacement of existing
MRI scanners with new Stand-Up(TM) MRI scanners.
Our business plan calls for a continuing emphasis on providing our 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 our installed base of
scanners were $3.2 million for the year ended June 30, 2004 and $5.8 million for
the year ended June 30, 2005.
We believe that the above mentioned financial resources, anticipated cash flows
from operations and potential financing sources, will provide the cash flows
needed to achieve the sales, service and production levels necessary to support
its operations.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET
RISK
Fonar's investments in fixed rate instruments. None of the fixed rate
instruments in which we invest extend beyond June 30, 2005. Below is a tabular
presentation of the maturity profile of the fixed rate instruments held by us at
June 30, 2005.
INTEREST RATE SENSITIVITY
PRINCIPAL AMOUNT BY EXPECTED MATURITY
WEIGHTED AVERAGE INTEREST RATE
Date Investments in Fixed Rate Weighted Average
Instruments Interest Rate
6/30/06 3,087,486 2.05%
6/30/07 1,800,000 3.57%
6/30/08 1,050,000 3.48%
6/30/09 1,398,500 3.58%
6/30/10 1,845,999 2.67%
6/30/11 200,000 3.90%
6/30/14 100,000 4.12%
---------
Total: 9,481,985
Fair Value
at 6/30/05 9,304,446
All of our revenue, expense and capital purchasing activities are transacted in
United States dollars.
See Note 12 to the consolidated Financial Statements for information on long-
term debt.
ITEM 8.
FINANCIAL STATEMENTS
FONAR CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No.
-------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
CONSOLIDATED BALANCE SHEETS
At June 30, 2005 and 2004
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Years Ended June 30, 2005, 2004 and 2003
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Three Years Ended June 30, 2005, 2004 and 2003
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Years Ended June 30, 2005, 2004 and 2003
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
To the Board of Directors and Stockholders
FONAR Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of FONAR
Corporation and Subsidiaries (the "Company") as of June 30, 2005 and 2004, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended June 30, 2005. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of FONAR
Corporation and Subsidiaries at June 30, 2005 and 2004, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended June 30, 2005, in conformity with accounting principles generally
accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of June 30, 2005, based on the
criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated, September 23, 2005, expressed an unqualified opinion on management's
assessment of the effectiveness of the Company's internal control over financial
reporting and an unqualified opinion on the effectiveness of the Company's
internal control over financial reporting.
During each of the three years in the period ended June 30, 2005, a significant
portion of the Company's revenues was from related parties.
New York, New York
September 23, 2005
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
To the Board of Directors and Stockholders of
FONAR Corporation and Subsidiaries
We have audited management's assessment, included in the accompanying
Management's Report on Internal Controls over Financial Reporting, that FONAR
Corporation and Subsidiaries (the "Company") maintained effective internal
control over financial reporting as of June 30, 2005 based on the criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Company's internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of America. A
company's internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the United States of
America, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company's assets that could
have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of June 30, 2005, is fairly stated,
in all material respects, based on the criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of
June 30, 2005, based on the criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet as of
June 30, 2005 and the related consolidated statements of operations,
stockholders' equity, and cash flows for the fiscal year ended June 30, 2005 of
the Company and our report dated September 23, 2005 expressed an unqualified
opinion on those financial statements.
/s/Marcum & Kliegman LLP
New York, New York
September 23, 2005
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
------
June 30,
----------------------------
2005 2004
------------ ------------
Current Assets:
Cash and cash equivalents $ 5,516,603 $ 9,473,989
Marketable securities 9,411,231 11,120,141
Restricted cash - 5,500,000
Accounts receivable - net of allowances for
doubtful accounts of $498,452 and $467,990
at June 30, 2005 and 2004, respectively 1,971,251 1,006,287
Accounts receivable - related parties - net of
allowances for doubtful accounts of $646,621
and $655,563 at June 30, 2005 and 2004,
respectively 470,388 296,909
Medical receivables 9,990,000 -
Management fee receivable 893,419 -
Management fee receivable - related medical
practices - net of allowances for doubtful
accounts of $2,017,163 and $1,874,390 at
June 30, 2005 and 2004, respectively 7,826,069 14,314,657
Costs and estimated earnings in excess of
billings on uncompleted contracts 10,538,163 1,711,306
Costs and estimated earnings in excess of billing
on uncompleted contracts - related party - 111,941
Inventories 9,837,790 9,585,346
Investment in sales-type lease 173,751 153,413
Current portion of advances and notes to related
medical practices 149,441 240,127
Prepaid expenses and other current assets 1,784,935 1,571,550
------------ ------------
Total Current Assets 58,563,041 55,085,666
Property and Equipment - Net 7,594,225 8,210,621
Advances and Notes to Related Medical Practices -
net of allowances for doubtful accounts of
$364,791 at June 30, 2005 and 2004 200,987 367,075
Investment in Sales-Type Lease 279,028 452,778
Notes Receivable 553,000 -
Management Agreements - Net 3,991,688 8,730,273
Other Intangible Assets - Net 4,503,247 3,957,687
Other Assets 409,266 396,746
------------ ------------
Total Assets $ 76,094,482 $ 77,200,846
============ ============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES
-----------
June 30,
---------------------------
2005 2004
------------ ------------
Current Liabilities:
Current portion of long-term debt and capital
leases $ 425,143 $ 5,982,991
Accounts payable 8,468,505 5,368,461
Other current liabilities 10,779,156 10,004,799
Unearned revenue on service contracts - related
parties 525,699 373,333
Customer advances 1,632,983 7,800,305
Customer advances - related party 41,566 -
Income taxes payable 11,234 25,831
Billings in excess of costs and estimated
earnings on uncompleted contracts 301,179 2,936,905
Billings in excess of costs and estimated
earnings on uncompleted contracts - related
party 153,461 -
------------ ------------
Total Current Liabilities 22,338,926 32,492,625
------------ ------------
Long-Term Liabilities:
Due to related medical practices 127,728 154,357
Long-term debt and capital leases, less
current portion 966,371 719,502
Other liabilities 270,372 298,916
------------ ------------
Total Long-Term Liabilities 1,364,471 1,172,775
------------ ------------
Total Liabilities 23,703,397 33,665,400
------------ ------------
Commitments, Contingencies and Other Matters
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
STOCKHOLDERS' EQUITY
--------------------
June 30,
---------------------------
2005 2004
------------ ------------
Minority Interest $ 522,564 $ 381,022
------------ ------------
Stockholders' Equity:
Class A non-voting preferred stock - $.0001
par value; authorized - 8,000,000 shares;
issued and outstanding - 7,836,287 shares
at June 30, 2005 and 2004 784 784
Preferred stock - $.001 par value;
authorized - 10,000,000 shares; issued
and outstanding - none - -
Common stock - $.0001 par value; authorized -
130,000,000 and 110,000,000 shares at
June 30, 2005 and 2004, respectively;
issued - 105,043,014 and 98,704,937 shares
at June 30, 2005 and 2004, respectively;
outstanding - 104,751,950 and 98,413,873
shares at June 30, 2005 and 2004, respectively 10,474 9,840
Class B common stock (10 votes per share) -
$.0001 par value; authorized - 4,000,000
shares; issued and outstanding - 3,953 and
4,153 shares at June 30, 2005 and 2004,
respectively - -
Class C common stock (25 votes per share) -
$.0001 par value; authorized - 10,000,000
shares; issued and outstanding - 9,562,824
shares at June 30, 2005 and 2004 956 956
Paid-in capital in excess of par value 159,928,871 152,090,431
Accumulated other comprehensive loss (182,250) (45,871)
Accumulated deficit (106,369,283) (107,383,692)
Notes receivable from employee stockholders (845,641) (842,634)
Treasury stock, at cost - 291,064 shares
of common stock at June 30, 2005 and 2004 (675,390) (675,390)
------------ ------------
Total Stockholders' Equity 51,868,521 43,154,424
------------ ------------
Total Liabilities and Stockholders' Equity $ 76,094,482 $ 77,200,846
============ ============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30,
------------------------------------------
2005 2004 2003
------------ ------------ ------------
Revenues
Product sales - net $ 66,918,535 $ 37,658,710 $ 17,652,799
Product sales - related parties - net 6,210,302 5,315,837 7,276,209
Service and repair fees - net 5,017,478 2,729,352 2,063,999
Service and repair fees - related
parties - net 780,634 480,556 415,691
Management and other fees 893,419 - -
Management and other fees - related
medical practices - net 22,738,176 22,979,902 22,932,837
License fees and royalties 2,340,000 2,445,000 2,550,000
------------ ------------ ------------
Total Revenues - Net 104,898,544 71,609,357 52,891,535
------------ ------------ ------------
Costs and Expenses
Costs related to product sales 43,124,019 23,160,484 11,681,213
Costs related to product sales - related
parties 3,752,493 3,447,944 4,351,860
Costs related to service and repair fees 4,634,486 3,323,862 2,539,563
Costs related to service and repair fees
- related parties 721,047 688,606 627,661
Costs related to management and other fees 547,717 - -
Costs related to management and other fees
- related medical practices 13,939,841 13,786,039 13,277,016
Research and development 6,006,761 5,491,062 5,164,451
Selling, general and administrative,
inclusive of compensatory element of stock
issuances of $3,073,134, $4,125,717 and
$4,842,748 for the years ended June 30,
2005, 2004 and 2003, respectively 29,711,008 29,217,080 28,203,960
Provision for bad debts 164,293 330,997 701,534
Loss on impairment of management agreement - - 795,237
Amortization of management agreements 633,577 633,577 696,285
------------ ------------ ------------
Total Costs and Expenses 103,235,242 80,079,651 68,038,780
------------ ------------ ------------
Income (Loss) from Operations 1,663,302 (8,470,294) (15,147,245)
Other Income and (Expenses):
Financing costs due to the change in terms of
warrants - (238,950) -
Interest expense (232,277) (263,803) (580,748)
Interest expense - related parties - (4,325) (45,702)
Investment income 522,870 403,398 470,271
Interest income - related parties 23,778 45,173 200,407
Other income (expense) - net 152,178 16,247 (25,499)
Minority interests in income of partnerships (1,051,401) (951,940) (776,222)
------------ ------------ ------------
Income (Loss) Before Provision for
(Benefit From) Income Taxes 1,078,450 (9,464,494) (15,904,738)
Provision for (Benefit from) Income Taxes 64,041 29,889 (703,871)
------------ ------------ ------------
Income (Loss) from Continuing
Operations $ 1,014,409 (9,494,383) $(15,200,867)
------------ ------------- ------------
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30,
------------------------------------------
2005 2004 2003
------------ ------------ ------------
Discontinued Operations:
Loss from discontinued operations $ - $ - $ (315,363)
Gain on sale of discontinued operations - - 509,814
------------ ------------ ------------
Net Gain from Discontinued Operations - - 194,451
------------ ------------ ------------
Net Income (Loss) $ 1,014,409 $ (9,494,383) $(15,006,416)
============ ============ ============
Net Income (Loss) Available to Common
Stockholders $ 943,768 $ (9,494,383) $(15,006,416)
============ ============ ============
Basic and Diluted Net Earnings (Loss) Per Share
- Continuing Operations $ 0.01 $(0.10) $(0.20)
Basic and Diluted Net Earnings Per Share -
Discontinued Operations - - -
------ ------ ------
Basic and Diluted Net Earnings (Loss) Per
Common Share $ 0.01 $(0.10) $(0.20)
====== ====== ======
Basic and Diluted Earnings (Loss) Per Share -
Common C $ - N/A N/A
====== ====== ======
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2005
Class A
Non-Voting Common Stock
Preferred ---------------------------
Stock Shares Amount
---------- ----------- ----------
Balance - June 30, 2004 $ 784 98,413,873 $ 9,840
Net income - - -
Other comprehensive loss, net of tax:
Unrealized losses on securities arising
during the year, net of tax - - -
Exercise of stock options - 49,484 5
Exercise of callable warrants - 253,250 25
Stock issued to employees under stock
bonus plans - 1,914,177 192
Issuance of stock for goods and services - 3,418,695 342
Issuance of stock for consulting services - 523,298 52
Net reduction in notes receivable
from employee stockholders - -
-
Issuance of stock for notes receivable -
employee stockholders - 178,973 18
Conversion of Class B common stock - 200 -
----------- ----------- ----------
Balance - June 30, 2005 $ 784 104,751,950 $ 10,474
=========== =========== ==========
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2005
Paid-in
Class B Class C Capital in
Common Common Excess of
Stock Stock Par Value
---------- --------- -------------
Shares
----------
Balance - June 30, 2004 4,153 $956 $152,090,431
Net income - - -
Other comprehensive loss, net of tax:
Unrealized losses on securities arising during
the year, net of tax - - -
Exercise of stock options - - 54,176
Exercise of callable warrants - - 200,042
Stock issued to employees under stock bonus plans - - 2,447,829
Issuance of stock for goods and services - - 4,288,115
Issuance of stock for consulting services - - 625,061
Net reduction in notes receivable from employee
stockholders - -
Issuance of stock for notes receivable - employee
stockholders - - 223,217
Conversion of Class B common stock (200) - -
---------- --------- ------------
Balance - June 30, 2005 3,953 $ 956 $159,928,871
========== ========== ============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2005
Notes
Receivable Accumulated
From Other
Treasury Employee Comprehensive
Stock Stockholders Loss
---------- ------------ -------------
Balance - June 30, 2004 $ (675,390) $ (842,634) $ (45,871)
Net income - - -
Other comprehensive loss, net of tax:
Unrealized losses on securities arising during
the year, net of tax - - (136,379)
Exercise of stock options - - -
Exercise of callable warrants - - -
Stock issued to employees under stock bonus plans - - -
Issuance of stock for goods and services - - -
Issuance of stock for consulting services - - -
Net reduction in notes receivable from employee
stockholders - 220,228 -
Issuance of stock for notes receivable - employee
stockholders - (223,235) -
Conversion of Class B common stock - - -
---------- ------------ ------------
Balance - June 30, 2005 $ (675,390) $ (845,641) $ (182,250)
========== ============ ============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2005
Accumulated Comprehensive
Deficit Total Income (Loss)
------------- ------------ -------------
Balance - June 30, 2004 $(107,383,692) $ 43,154,424 $ -
Net income 1,014,409 1,014,409 1,014,409
Other comprehensive loss, net of tax:
Unrealized losses on securities arising during
the year, net of tax - (136,379) (136,379)
Exercise of stock options - 54,181 -
Exercise of callable warrants - 200,067 -
Stock issued to employees under stock bonus plans - 2,448,021 -
Issuance of stock for goods and services - 4,288,457 -
Issuance of stock for consulting services - 625,113 -
Net reduction in notes receivable from employee
stockholders - 220,228 -
Issuance of stock for notes receivable - employee
stockholders - - -
Conversion of Class B common stock - - -
------------- ------------ ------------
Balance - June 30, 2005 $(106,369,283) $ 51,868,521 $ 878,030
============= ============ ============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2004
Class A
Non-Voting Common Stock
Preferred ---------------------
Stock Shares Amount
---------- ---------- ---------
Balance - June 30, 2003 $ 784 82,452,958 $ 8,246
Net loss - - -
Other comprehensive loss, net of tax:
Unrealized losses on securities arising
during the year, net of tax - - -
Exercise of stock options - 201,421 20
Exercise of callable warrants - 3,551,625 355
Stock issued to employees under stock
bonus plans - 1,792,648 179
Issuance of stock for goods and services - 8,927,183 892
Issuance of stock for consulting services - 1,223,198 122
Net reduction in notes receivable
from employee stockholders - - -
Issuance of stock for notes receivable -
employee stockholders - 264,840 26
Financing costs due to change in terms of
warrants - - -
---------- ---------- ---------
Balance - June 30, 2004 $ 784 98,413,873 $ 9,840
========== ========== =========
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2004
Paid-in
Class C Capital in
Common Excess of Treasury
Stock Par Value Stock
---------- ------------ ----------
Balance - June 30, 2003 $ 956 $131,519,579 $ (675,390)
Net loss - - -
Other comprehensive loss income, net of tax:
Unrealized losses on securities arising during
the year, net of tax - - -
Exercise of stock options - 219,428 -
Exercise of callable warrants - 3,636,789 -
Stock issued to employees under stock bonus plans - 2,520,464 -
Issuance of stock for goods and services - 12,001,820 -
Issuance of stock for consulting services - 1,676,542 -
Net reduction in notes receivable from employee
stockholders - - -
Issuance of stock for notes receivable - employee
stockholders - 276,859 -
Financing costs due to change in terms of warrants - 238,950 -
---------- ------------ ----------
Balance - June 30, 2004 $ 956 $152,090,431 $ (675,390)
========== ============ ==========
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2004
Notes
Receivable Accumulated
From Other
Employee Comprehensive Accumulated
Stockholders (Loss) Income Deficit
------------ ------------- --------------
Balance - June 30, 2003 $ (654,246) $ 68,672 $ (97,889,309)
Net loss - - (9,494,383)
Other comprehensive loss, net of tax:
Unrealized losses on securities arising during
the year, net of tax - (114,543) -
Exercise of stock options - - -
Exercise of callable warrants - - -
Stock issued to employees under stock bonus plans - - -
Issuance of stock for goods and services - - -
Issuance of stock for consulting services - - -
Net reduction in notes receivable from employee
stockholders 88,497 - -
Issuance of stock for notes receivable - employee
stockholders (276,885) - -
Financing costs due to change in terms of warrants - - -
------------ ------------- --------------
Balance - June 30, 2004 $ (842,634) $ (45,871) $(107,383,692)
============ ============= ==============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2004
Comprehensive
Total Loss
------------ -------------
Balance - June 30, 2003 $ 32,379,292 $ -
Net loss (9,494,383) (9,494,383)
Other comprehensive loss, net of tax:
Unrealized losses on securities arising during
the year, net of tax (114,543) (114,543)
Exercise of stock options 219,448 -
Exercise of callable warrants 3,637,144 -
Stock issued to employees under stock bonus plans 2,520,643 -
Issuance of stock for goods and services 12,002,712 -
Issuance of stock for consulting services 1,676,664 -
Net reduction in notes receivable from employee stockholders 88,497 -
Issuance of stock for notes receivable - employee stockholders - -
Financing costs due to change in terms of warrants 238,950 -
------------ ------------
Balance - June 30, 2004 $ 43,154,424 $ (9,608,926)
============ ============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2003
Class A
Non-Voting Common Stock
Preferred ------------------------
Stock Shares Amount
---------- ---------- ----------
Balance - June 30, 2002 $ 784 71,582,243 $ 7,158
Net loss - - -
Other comprehensive loss, net of tax:
Unrealized losses on securities arising
during the year, net of tax - - -
Exercise of stock options - 27,571 3
Exercise of callable warrants - 1,000,000 100
Stock issued to employees under stock
bonus plans - 2,400,117 240
Issuance of stock for goods and services - 5,433,077 543
Issuance of stock for consulting services - 772,042 78
Issuance of stock for options held by
related party - 1,125,000 113
Issuance of stock for note payable - 15,000 1
Issuance of stock for minority interest - 97,850 10
Net reduction in notes receivable
from stockholders - - -
Conversion of Class B common stock to
common stock - 58 -
---------- ---------- ----------
Balance - June 30, 2003 $ 784 82,452,958 $ 8,246
========== ========== ==========
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2003
Paid-in
Class B Class C Capital in
Common Common Excess of
Stock Stock Par Value
---------- ---------- ------------
Shares
----------
Balance - June 30, 2002 4,211 $ 956 $120,156,196
Net loss - - -
Other comprehensive loss, net of tax:
Unrealized losses on securities arising
during the year, net of tax - - -
Exercise of stock options - - 31,200
Exercise of callable warrants - - 1,072,972
Stock issued to employees under stock
bonus plans - - 2,653,942
Issuance of stock for goods and services - - 5,473,406
Issuance of stock for consulting services - - 784,806
Issuance of stock for options held by
related party - - 1,226,138
Issuance of stock for note payable - - 21,749
Issuance of stock for minority interest - - 99,170
Net reduction in notes receivable
from stockholders - - -
Conversion of Class B common stock to
common stock (58) - -
---------- ---------- ------------
Balance - June 30, 2003 4,153 $ 956 $131,519,579
========== ========== ============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2003
Notes
Receivable Accumulated
From Other
Treasury Employee Comprehensive
Stock Stockholders Income
---------- ------------ -------------
Balance - June 30, 2002 $(675,390) $ (997,132) $ 85,569
Net loss - - -
Other comprehensive loss, net of tax:
Unrealized losses on securities arising
during the year, net of tax - - (16,897)
Exercise of stock options - - -
Exercise of callable warrants - - -
Stock issued to employees under stock
bonus plans - - -
Issuance of stock for goods and services - - -
Issuance of stock for consulting services - - -
Issuance of stock for options held by
related party - - -
Issuance of stock for note payable - - -
Issuance of stock for minority interest - - -
Net reduction in notes receivable
from stockholders - 342,886 -
Conversion of Class B common stock to -
common stock - - -
---------- ----------- ------------
Balance - June 30, 2003 $ (675,390) $(654,246) $ 68,672
========== =========== ============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2003
Accumulated Comprehensive
Deficit Total Loss
------------- ------------ -------------
Balance - June 30, 2002 $(82,882,893) $ 35,695,248 $ -
Net loss (15,006,416) (15,006,416) (15,006,416)
Other comprehensive loss, net of tax:
Unrealized losses on securities arising
during the year, net of tax - (16,897) (16,897)
Exercise of stock options - 31,203 -
Exercise of callable warrants - 1,073,072 -
Stock issued to employees under stock
bonus plans - 2,654,182 -
Issuance of stock for goods and services - 5,473,949 -
Issuance of stock for consulting services - 784,884 -
Issuance of stock for options held by
related party - 1,226,251 -
Issuance of stock for note payable - 21,750 -
Issuance of stock for minority interest - 99,180 -
Net reduction in notes receivable
from stockholders - 342,886 -
Conversion of Class B common stock to
common stock - - -
------------- ------------ -------------
Balance - June 30, 2003 $(97,889,309) $ 32,379,292 $(15,023,313)
============= ============ =============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30,
-------------------------------------------------
2005 2004 2003
------------ ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 1,014,409 $ (9,494,383) $(15,006,416)
Income from discontinued operations - - (194,451)
------------ ------------- -------------
Income (loss) from continuing operations 1,014,409 (9,494,383) (15,200,867)
Adjustments to reconcile net income
(loss) to net cash (used in) provided
by operating activities:
Minority interest in income of
partnerships 1,051,401 951,940 776,222
Depreciation and amortization 3,991,752 3,880,898 4,433,490
Amortization of unearned license fee (2,340,000) (2,340,000) (2,340,000)
Loss on impairment of management
agreement - - 795,237
Financing costs due to change in
terms of warrants - 238,950 -
Gain on sale of equipment (28,105) (21,500) (1,608)
Provision for bad debts 164,293 330,997 701,534
Compensatory element of stock
issuances 3,073,134 4,125,717 4,842,748
Stock issued for costs and expenses 4,288,457 12,002,712 5,473,949
Reduction in notes receivable from
employee stockholders 125,909 - -
(Increase) decrease in operating
assets, net:
Accounts and management fee
receivable (1,592,559) (2,938,367) (73,152)
Notes receivable (548,000) - 170,000
Costs and estimated earnings
in excess of billings on
uncompleted contracts (8,714,916) (1,463,374) 792,733
Inventories 547,586 (4,528,085) (393,494)
Principal payments received on
sales-type lease - related
parties - 14,285 2,597,331
Principal payments received on
sales-type lease 153,412 135,456 119,601
Prepaid expenses and other
current assets (213,385) (285,689) (333,959)
Other assets (17,520) (37,722) 80,124
Advances and notes to related
parties medical practices 256,774 519,181 492,594
Increase (decrease) in operating
liabilities, net:
Accounts payable 3,100,044 1,664,772 (295,413)
Other current liabilities 3,328,598 2,674,269 472,617
Customer advances (6,125,756) 2,867,540 (2,774,867)
Billings in excess of costs and
estimated earnings on uncompleted
contracts (2,482,265) (1,814,534) 3,636,527
Other liabilities (28,544) (2,768) (57,850)
Due to related medical practices (26,629) - -
Income taxes payable (14,597) 15,430 (734,104)
------------- ------------- -------------
NET CASH (USED IN) PROVIDED BY
CONTINUING OPERATIONS (1,036,507) 6,495,725 3,179,393
NET CASH PROVIDED BY
DISCONTINUED OPERATIONS - - 232,939
------------- ------------- -------------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (1,036,507) 6,495,725 3,412,332
------------- ------------- -------------
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30,
------------------------------------------------
2005 2004 2003
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of marketable securities $(13,388,404) $(26,046,021) $(20,920,431)
Sales of marketable securities 14,960,935 20,648,354 20,640,000
Purchases of property and equipment (2,204,290) (1,935,186) (1,273,557)
Repayment of note receivable from buyers
of A&A Services - 150,000 -
Costs of capitalized software development (788,321) (630,263) (791,216)
Proceeds from sale of discontinued
operations, net - - 2,821,564
Proceeds from sale of equipment 31,126 21,500 133,898
Cost of patents and copyrights (464,104) (572,709) (424,761)
------------ ------------ ------------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES (1,853,058) (8,364,325) 185,497
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
(Repayment of) proceeds from long-term
debt (5,500,000) 5,500,000 950,000
Decrease (increase) in restricted cash 5,500,000 (5,500,000) 5,500,000
Repayment of borrowings and capital lease
obligations (444,653) (1,003,935) (8,674,362)
Net proceeds from exercise of stock
options and warrants 254,248 3,928,182 1,104,275
Distributions to holders of minority
interests (909,859) (916,036) (604,230)
Repayment of notes receivable from
employee stockholders 32,443 - -
------------ ------------ ------------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (1,067,821) 2,008,211 (1,724,317)
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (3,957,386) 139,611 1,873,512
CASH AND CASH EQUIVALENTS - BEGINNING OF
YEAR 9,473,989 9,334,378 7,460,866
------------ ------------ ------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 5,516,603 $ 9,473,989 $ 9,334,378
============ ============ ============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 1 - DESCRIPTION OF BUSINESS
FONAR Corporation (the "Company" or "FONAR") is a Delaware corporation, which
was incorporated on July 17, 1978. FONAR is engaged in the research,
development, production and marketing of medical scanning equipment, which uses
principles of Magnetic Resonance Imaging ("MRI") for the detection and diagnosis
of human diseases. In addition to deriving revenues from the direct sale of MRI
equipment, revenue is also generated from its installed-base of customers
through its service and upgrade programs.
Health Management Corporation of America ("HMCA") was organized by the Company
in March 1997, as a wholly-owned subsidiary, in order to enable the Company to
expand into the business of providing comprehensive management services to
physicians' practices and other medical providers, including diagnostic imaging
centers and ancillary services. The services provided by the Company include
development, administration, leasing of office space, facilities and medical
equipment, provision of supplies, staffing and supervision of non-medical
personnel, legal services, accounting, billing and collection and the
development and implementation of practice growth and marketing strategies.
HMCA entered the physician and diagnostic management services business through
the consummation of two acquisitions in fiscal 1997, two acquisitions in fiscal
1998, and one acquisition consummated in fiscal 1999. The acquired companies in
all cases were actively engaged in the business of managing medical providers.
The medical providers are diagnostic imaging centers, principally MRI scanning
centers, multi-specialty practices and primary care practices. On April 8, 2003,
HMCA sold all of its issued and outstanding stock of A&A Services, Inc., a
physician practice management services organization engaged in the business of
managing four primary care practices (see Note 22). On July 28, 2005, HMCA sold
the assets consisting principally of the management agreements with the physical
therapy and rehabilitation facilities, the assignment of other agreements and
rights utilized in the physical therapy and rehabilitation facility management
business, the physical therapy equipment, a portion of the accounts receivable
and furniture and fixtures we provided to the physical therapy and
rehabilitation facilities (see Note 24). As a result of the sale on July 28,
2005, HMCA is only managing diagnostic imaging centers.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of FONAR Corporation,
its majority and wholly-owned subsidiaries and partnerships. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
----------------
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities in
the consolidated financial statements and accompanying notes. The most
significant estimates relate to allowances, intangible assets, income taxes,
useful lives of property and equipment, contingencies, revenue recognition and
litigation. In addition, healthcare industry reforms and reimbursement
practices will continue to impact the Company's operations and the determination
of contractual and other allowance estimates. Actual results could differ from
those estimates.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investment in Marketable Securities
-----------------------------------
The Company accounts for its investments using Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS No. 115"). This standard requires that certain debt
and equity securities be adjusted to market value at the end of each accounting
period. Unrealized market value gains and losses are charged to earnings if the
securities are traded for short-term profit. Otherwise, such unrealized gains
and losses are charged or credited to comprehensive income (loss).
Management determines the proper classifications of investments in obligations
with fixed maturities and marketable equity securities at the time of purchase
and re-evaluates such designations as of each balance sheet date. At June 30,
2005 and 2004, all securities covered by SFAS No. 115 were designated as
available for sale. Accordingly, these securities are stated at fair market
value, with unrealized gains and losses reported in comprehensive income (loss).
Realized gains and losses on sales of investments, as determined on a specific
identification basis, are included in investment income in the accompanying
Consolidated Statements of Operations.
Inventories
-----------
Inventories consist of purchased parts, components and supplies, as well as
work-in-process, and are stated at the lower of cost determined on the first-in,
first-out method or market.
Property and Equipment
----------------------
Property and equipment procured in the normal course of business is stated at
cost. Property and equipment purchased in connection with an acquisition is
stated at its estimated fair value, generally based on an appraisal. Property
and equipment is being depreciated for financial accounting purposes using the
straight-line method over the shorter of their estimated useful lives, generally
five to seven years, or the term of a capital lease, if applicable. Leasehold
improvements are being amortized over the shorter of the useful life or the
remaining lease term. Upon retirement or other disposition of these assets, the
cost and related accumulated depreciation of these assets are removed from the
accounts and the resulting gains or losses are reflected in the results of
operations. Expenditures for maintenance and repairs are charged to operations.
Renewals and betterments are capitalized. Maintenance and repair expenses
totaled approximately $738,000, $598,000 and $625,000 for the years ended June
30, 2005, 2004 and 2003.
Management Agreements
---------------------
Amounts allocated to management agreements, in connection with two acquisitions
completed during the period from June 1997 through August 1998, are being
amortized using the straight-line method over the 20-year term of the
agreements. These management agreements were sold on July 28, 2005 (see Notes 3
and 24).
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Other Intangible Assets
-----------------------
1) Capitalized Software Development Costs
Capitalization of software development costs begins upon the establishment of
technological feasibility. Technological feasibility for the Company's computer
software is generally based upon achievement of a detail program design free of
high risk development issues and the completion of research and development on
the product hardware in which it is to be used. The establishment of
technological feasibility and the ongoing assessment of recoverability of
capitalized computer software development costs require considerable judgment by
management with respect to certain external factors, including, but not limited
to, technological feasibility, anticipated future gross revenue, estimated
economic life and changes in software and hardware technology.
Amortization of capitalized software development costs commences when the
related products become available for general release to customers. Amortization
is provided on a product by product basis. The annual amortization is the
greater of the amount computed using (a) the ratio that current gross revenue
for a product bear to the total of current and anticipated future gross revenue
for that product, or (b) the straight-line method over the remaining estimated
economic life of the product.
The Company periodically performs reviews of the recoverability of such
capitalized software development costs. At the time a determination is made
that capitalized amounts are not recoverable based on the estimated cash flows
to be generated from the applicable software, any remaining capitalized amounts
are written off.
2) Patents and Copyrights
Amortization is calculated on the straight-line basis over a period ranging from
15 to 17 years.
Long-Lived Assets
-----------------
The Company periodically assesses the recoverability of long-lived assets,
including property and equipment and intangibles, when there are indications of
potential impairment, based on estimates of undiscounted future cash flows. The
amount of impairment is calculated by comparing anticipated discounted future
cash flows with the carrying value of the related asset. In performing this
analysis, management considers such factors as current results, trends, and
future prospects, in addition to other economic factors (see Notes 9 and 10).
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition
-------------------
Revenue on sales contracts for scanners is recognized under the percentage-of-
completion method. The Company manufactures its scanners under specific
contracts that provide for progress payments. Production and installation take
approximately three to six months. The percentage of completion is determined
by the ratio of costs incurred to date on completed sub-assemblies to the total
estimated cost for each scanner. Contract costs include purchased parts and
components, direct labor and overhead. Revisions in cost estimates and
provisions for estimated losses on uncompleted contracts, if any, are made in
the period in which such losses are determined. The asset, "Costs and Estimated
Earnings in Excess of Billings on Uncompleted Contracts", represents revenues
recognized in excess of amounts billed. The liability, "Billings in Excess of
Costs and Estimated Earnings on Uncompleted Contracts", represents amounts
billed in excess of revenues recognized.
Revenue on scanner service contracts is recognized on the straight-line method
over the related contract period, usually one year.
Revenue from sales of other items is recognized upon shipment.
Revenue from sales-type leases are recognized when collectibility of the minimum
lease payments is reasonably predictable and no important uncertainties surround
the amount of unreimbursable costs yet to be incurred by the Company as lessor
under the lease. The minimum lease payments, plus the unguaranteed residual
value accruing to the benefit of the Company as lessor, are recorded as the
gross investment in the lease. The difference between the gross investment in
the lease and the sum of the present value of the minimum lease payments and
unguaranteed residual value, accruing to the Company's benefit as lessor, are
recorded as unearned income.
Revenue under management and lease contracts is recognized based upon
contractual agreements for management services rendered by the Company and
leases of medical equipment primarily under various long-term agreements with
related medical providers (the "PCs"). The PCs are primarily owned by Raymond
V. Damadian, M.D., President and Chairman of the Board of FONAR. The Company's
agreements with the PCs stipulate fees for services rendered and equipment
leased, are primarily calculated on activity based efforts at pre-determined
rates per unit of activity. All fees are re-negotiable at the anniversary of
the agreements and each year thereafter.
Research and Development Costs
------------------------------
Research and development costs are charged to expense as incurred. The costs of
materials and equipment that are acquired or constructed for research and
development activities, and have alternative future uses (either in research and
development, marketing or production), are classified as property and equipment
and depreciated over their estimated useful lives.
Advertising Costs
-----------------
Advertising costs are expensed as incurred. Advertising expense approximated
$1,604,000, $2,576,000 and $3,558,000 for the years ended June 30, 2005, 2004
and 2003, respectively.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Shipping Costs
--------------
The Company's shipping and handling costs are included under costs related to
product sales.
Income Taxes
------------
Deferred tax assets and liabilities are determined based on the difference
between the financial statement carrying amounts and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse.
Customer Advances
-----------------
Cash advances and progress payments received on sales orders are reflected as
customer advances until such time as revenue recognition begins.
Minority Interest
-----------------
The Company records adjustments to minority interest for the allocable portion
of income or loss that the minority interest holders are entitled based upon
their portion of certain of the subsidiaries that they own. Distributions to
holders of minority interests are adjusted to the respective minority interest
holders' balance.
The Company suspends allocation of losses to minority interest holders when the
minority interest balance for a particular minority interest holder is reduced
to zero. Any excess loss above the minority interest holders' balance is not
charged to minority interest as the minority interest holders have no obligation
to fund such losses.
Stock Options and Warrants and Similar Equity Instruments and Earnings (Loss)
Per Share
--------------------------------------------------------------------------------
The Company has various stock-based employee compensation plans, which are more
fully described in Note 12. As permitted under SFAS No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure", which amended SFAS No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation", the Company has elected
to continue to follow the intrinsic value method in accounting for its stock-
based employee compensation arrangements as defined by Accounting Principles
Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees", and
related interpretations including Financial Accounting Standards Board
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation", an interpretation of APB No. 25. No stock-based employee
compensation cost is reflected in net income (loss), as all options granted
under those plans had an exercise price equal to the market value of the
underlying common stock on the date of grant.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock Options and Warrants and Similar Equity Instruments and Earnings (Loss)
Per Share
--------------------------------------------------------------------------------
Basic earnings (loss) per share ("EPS") is computed based on weighted average
shares outstanding and excludes any potential dilution. In accordance with EITF
03-6, "Participating Securities and the Two-Class Method under FASB Statement
No. 128" ("EITF 03-6"), which nullifies EITF Topic D-95, "Effect of
Participating Convertible Securities on the Computation of Basic Earnings Per
Share," in periods when there is net income, the Company uses the two-class
method to calculate the effect of the Company's participating convertible
securities, which include the Class A Non-voting Preferred stock, Class B common
stock and Class C common stock, and the if-converted method is used to calculate
the effect of participating convertible securities on diluted EPS. In addition,
these participating convertible securities were not included in the computation
of basic EPS for the years ended June 30, 2004 and 2003 because the
participating securities did not have a contractual obligation to share in the
losses of the Company. The provisions of EITF 03-6 became effective for the
Company beginning April 1, 2004. The adoption of this new pronouncement did not
have any impact on the Company's consolidated financial statements.
Diluted EPS reflects the potential dilution from the exercise or conversion of
all dilutive securities into common stock based on the average market price of
common shares outstanding during the period. The number of common shares
potentially issuable upon the exercise of certain options and warrants of
approximately 660,000 as of June 30, 2005 has not been included in the
computation of diluted EPS since the effect would be anti-dilutive. The number
of common shares potentially issuable upon the exercise of options and warrants
or conversion of the participating convertible securities that were excluded
from the diluted EPS calculation, because they are antidilutive as a result of
the net losses, was as follows: 7,690,392 and 9,841,956 as of June 30, 2004 and
2003, respectively.
Earnings (Loss) Per Share
-------------------------
June 30, 2005 June 30
-------------------------------------- ------------------------
Class C
Common Common
Total Stock Stock 2004 2003
------------ ------------ ------------ ----------- ------------
Basic
-----
Numerator:
Net income (loss) available
to common stockholders $ 943,768 $ 921,214 $ 22,554 $(9,494,383) $(15,006,416)
============ ============ ============ =========== ============
Denominator:
Weighted average shares
outstanding 101,591,997 9,562,824 91,027,951 75,816,973
============ ============ =========== ============
Basic earnings (loss) per
common share $0.01 $0.01 $ - $(0.10) $(0.20)
===== ===== ===== ===== ======
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings (Loss) Per Share
-------------------------
Diluted
-------
Weighted average shares
outstanding 101,591,997 101,591,997 91,027,951 75,816,973
Stock options 257,961 257,961 - -
Warrants 468,139 468,139 - -
Conversion of Class C
Common stock 3,187,608 3,187,608 - -
------------ ------------ ----------- ------------
Denominator for Diluted
Earnings Per Share:
Weighted average shares
outstanding of common
stock and equivalents 105,505,705 105,505,705 91,027,951 75,816,973
============ ============ =========== ============
Diluted earnings (loss)
per common share $0.01 $0.01 $(0.10) $(0.20)
===== ===== ====== ======
The following table illustrates the effect on net income (loss) and income
(loss) per share if the Company had applied the fair value recognition
provisions of SFAS 123 to stock-based employee compensation:
For the Years Ended
June 30,
------------------------------------------
2005 2004 2003
------------ ------------ ------------
Net Income (Loss) Available to Common
Stockholders, as Reported $ 943,768 $ (9,494,383) $(15,006,416)
Deduct:
Total stock-based employee
compensation expense determined
under fair value based method for
all awards 216,362 438,751 559,416
------------ ------------ ------------
Proforma Net Income (Loss) $ 727,406 $ (9,933,134) $(15,565,832)
============ ============ ============
Basic and Diluted Net Earnings (Loss)
Per Share, as Reported $ 0.01 $(0.10) $(0.20)
====== ====== ======
Basic and Diluted Proforma Net Earnings
(Loss) Per Share $ 0.01 $(0.11) $(0.21)
====== ====== ======
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings (Loss) Per Share
-------------------------
The fair value of options at date of grant was estimated using the Black-Scholes
fair value based method with the following weighted average assumptions:
For the Years Ended
June 30,
----------------------------------
2005 2004 2003
------ ------- -------
Expected life (years) 3 3 3
Interest rate 2.69% 2.69% 4.00%
Annual rate of dividends 0% 0% 0%
Volatility 40% 55% 55%
The weighted average fair value of the options at the date of grant, using the
fair value based method, for the years ended June 30, 2005, 2004 and 2003 was
estimated at $0.74, $0.75 and $0.60, respectively.
Cash and Cash Equivalents
-------------------------
The Company considers all short-term highly liquid investments with a maturity
of three months or less when purchased to be cash or cash equivalents.
Concentration of Credit Risk
----------------------------
Cash: The Company maintains its cash and cash equivalents with various
financial institutions, which exceed federally insured limits throughout the
year. At June 30, 2005, the Company had cash on deposit of approximately
$3,629,000 in excess of federally insured limits.
Related Parties: Net revenues from related parties accounted for approximately
29%, 40% and 58% of the consolidated net revenues for the years ended June 30,
2005, 2004 and 2003, respectively.
Fair Value of Financial Instruments
-----------------------------------
The financial statements include various estimated fair value information at
June 30, 2005, 2004 and 2003, as required by SFAS No. 107, "Disclosures about
Fair Value of Financial Instruments". Such information, which pertains to the
Company's financial instruments, is based on the requirements set forth in that
Statement and does not purport to represent the aggregate net fair value to the
Company.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and cash equivalents: The carrying amount approximates fair value because
of the short-term maturity of those instruments.
Accounts receivable and accounts payable: The carrying amounts approximate fair
value because of the short maturity of those instruments.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Value of Financial Instruments (Continued)
-----------------------------------
Investment in sales-type leases and investments, advances and notes to related
medical practices: The carrying amount approximates fair value because the
discounted present value of the cash flow generated by the related parties
approximates the carrying value of the amounts due to the Company.
Long-term debt and notes payable: The carrying amounts of debt and notes
payable approximate fair value due to the length of the maturities, the interest
rates being tied to market indices and/or due to the interest rates not being
significantly different from the current market rates available to the Company.
All of the Company's financial instruments are held for purposes other than
trading.
Comprehensive Income (Loss)
---------------------------
Comprehensive income (loss) generally includes all changes in equity during a
period, except those resulting from investments by stockholders and
distributions to stockholders.
Recent Accounting Pronouncements
--------------------------------
In June 2005, the EITF reached consensus on Issue No. 05-6, Determining the
Amortization Period for Leasehold Improvements ("EITF 05-6.") EITF 05-6 provides
guidance on determining the amortization period for leasehold improvements
acquired in a business combination or acquired subsequent to lease inception.
The guidance in EITF 05-6 will be applied prospectively and is effective for
periods beginning after June 29, 2005. EITF 05-6 is not expected to have a
material effect on its consolidated financial position or results of operations.
In December 2004, the Financial Accounting Standards Board ("FASB") issued its
final standard on accounting for share-based payments ("SBP"), FASB Statement
No. 123R (revised 2004), Share-Based Payment. The statement requires companies
to expense the value of employee stock options and similar awards. Under FAS
123R, SBP awards result in a cost that will be measured at fair value on the
awards' grant date, based on the estimated number of awards that are expected to
vest. Compensation cost for awards that vest would not be reversed if the awards
expire without being exercised. The effective date for public companies is
annual periods beginning after June 15, 2005, and applied to all outstanding and
unvested SBP awards at a company's adoption. Management does not anticipate that
this statement will have a significant impact on the Company's consolidated
financial statements.
In May 2005, FASB issued SFAS No. 154, "Accounting Changes and Error Corrections
- a Replacement of APB Opinion No. 20 and FASB No. 3." This statement requires
retrospective application of prior periods' financial statements of changes in
accounting principles, unless it is impracticable to determine the period
specific effects, or the cumulative effect of the change. This pronouncement
will be effective December 15, 2005. Currently, the Company does not have
changes in accounting principle, the adoption of SFAS No. 154 will not have an
impact on the Company's financial position or results of operations.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investment At Cost
------------------
The Company has a 20% equity interest in an unconsolidated entity. The income on
this investment is included under other income (expense) (see Note 17).
Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform to the current year
presentation. The reclassifications did not have any effect on reported net
losses for any periods presented.
NOTE 3 - MANAGEMENT AGREEMENTS
In connection with two acquisitions completed in June of 1997 and August of
1998, a portion of the purchase price was allocated to various long-term
management agreements. The cost, accumulated amortization and net carrying
value at June 30, 2005 and 2004 is as follows:
As of June 30, 2005
-------------------
Acquisition Accumulated Net Carrying
Date Cost Amortization Value
----------- ----------- ------------ ------------
Affordable Diagnostics, Inc. June 1997 $ 1,441,684 $ 1,441,684 $ -
Dynamic Health Care
Management, Inc. ("Dynamic") August 1998 7,124,855 3,133,167 3,991,688
----------- ----------- -----------
$ 8,566,539 $ 4,574,851 $ 3,991,688
=========== =========== ===========
Acquisition Accumulated Net Carrying
Date Cost Amortization Value
----------- ----------- ------------ ------------
Affordable Diagnostics, Inc. June 1997 $ 3,719,640 $ 1,255,702 $ 2,463,938
Dynamic Health Care
Management, Inc. ("Dynamic") August 1998 8,951,907 2,685,572 6,266,335
----------- ----------- -----------
$12,671,547 $ 3,941,274 $ 8,730,273
=========== =========== ===========
Amortization of management agreements for the years ended June 30, 2005, 2004
and 2003 was $633,577, $633,577 and $696,285, respectively.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 3 - MANAGEMENT AGREEMENTS (Continued)
On May 23, 2005, HMCA and Dynamic terminated their management agreements with
three related physical medicine practices, under which HMCA and Dynamic were
managing six physical medicine facilities. Commensurate with this termination,
HMCA and Dynamic entered into new management agreements with four unrelated
medical practices to manage five of the same physical medicine facilities.
Pursuant to the Termination and Replacement Agreements, the related medical
practices assigned to HMCA and Dynamic medical receivables valued at $11,775,000
in consideration of management fees outstanding of $7,669,993 and termination
fees of $4,105,007. The $4,105,007 was accounted for as a recovery of the
capitalized management agreements, with $2,277,956 allocated to the Affordable
Diagnostics, Inc. capitalized management agreements and $1,827,052 allocated to
the Dynamic Healthcare Management, Inc. capitalized management agreements.
The Termination and Replacement Agreements required the related physical
medicine practices to replace five of the six management agreements, which HMCA
and Dynamic were managing. In the event that the related medical practices did
not replace the management agreements, the related medical practices would be
obligated to continue to pay the monthly management fees under the cancelled
agreements until a total of $4,000,000 was received. As noted above, the five
management agreements were replaced on May 23, 2005.
On July 28, 2005, the management agreements, along with certain related assets,
were sold (see Note 24).
Sale of Management Company - A&A Services, Inc.
-----------------------------------------------
On April 8, 2003, the Company's wholly-owned subsidiary, HMCA, sold all of its
issued and outstanding stock of A&A Services, Inc. (see Note 22).
Impairment Loss - Central Health Care Management Services, Inc.
---------------------------------------------------------------
During the year ended June 30, 2003, the primary care medical practices managed
by the Company's subsidiary, Central Health Care Management Services, Inc.,
closed because it experienced a significant overall decline in patient volume
and related operating cash flows, which led to the inability of the medical
practices to fully and timely pay the contractual management fees to the
Company. As a result, the Company recorded an impairment loss of $795,237
during the year ended June 30, 2003, related to the management agreement, which
reduced the carrying value of such agreement to $-0-.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 4 - MARKETABLE SECURITIES
The following is a summary of marketable securities at June 30, 2005 and 2004:
June 30, 2005
--------------------------------------------
Unrealized Fair Market
Cost Loss Value
----------- ----------- -----------
Certificate of deposits $ 1,600,000 $ (17,925) $ 1,582,075
U.S. Government Obligations 3,781,987 (12,787) 3,769,200
Corporate and government
agency bonds 4,100,000 (149,175) 3,950,825
Equities - other 111,494 (2,363) 109,131
----------- ----------- -----------
$ 9,593,481 $ (182,250) $ 9,411,231
=========== =========== ===========
June 30, 2004
--------------------------------------------
Unrealized Fair Market
Cost Loss Value
----------- ----------- -----------
Certificate of deposits $ 2,550,000 $ (24,243) $ 2,525,757
U.S. Government Obligations 5,181,010 (24,912) 5,156,098
Corporate and government
agency bonds 3,399,818 (1,696) 3,398,122
Equities - other 35,184 4,980 40,164
----------- ----------- -----------
$11,166,012 $ (45,871) $11,120,141
=========== =========== ===========
All debt securities are due within five years. At June 30, 2005, the amount of
cost due within one year was $3,087,486.
NOTE 5 - ACCOUNTS RECEIVABLE AND MANAGEMENT FEE RECEIVABLE
The Company's customers are concentrated in the healthcare industry.
The Company's receivable from the related and non-related PCs substantially
consists of fees outstanding under management agreements, service contracts and
lease agreements. Payment of the outstanding fees is dependent on collection by
the PCs of fees from third party medical reimbursement organizations,
principally insurance companies and health management organizations.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 5 - ACCOUNTS RECEIVABLE AND MANAGEMENT FEE RECEIVABLE (Continued)
Collection by the Company of its accounts receivable may be impaired by the
uncollectibility of PCs medical fees from third party payors, particularly
insurance carriers covering automobile no-fault and workers compensation claims
due to longer payment cycles and rigorous informational requirements.
Approximately 66%, 65% and 69%, respectively, of the PCs 2005, 2004 and 2003 net
revenues were derived from no-fault and personal injury protection claims. The
Company considers the aging of its accounts receivable in determining the amount
of allowance for doubtful accounts and contractual allowances. The Company
generally takes all legally available steps, including legally prescribed
arbitrations, to collect its receivables. Credit losses associated with the
receivables are provided for in the consolidated financial statements and have
historically been within management's expectations.
The Company was assigned medical receivables valued at $11,775,000, in
connection with the satisfaction of the management fees and termination fees
related to a Termination and Replacement Agreement dated May 23, 2005 (see Note
3). The balance of the medical receivables as of June 30, 2005 was $9,990,000.
Net revenues from management and other fees charged to the related PCs accounted
for approximately 22%, 32% and 43%, of the consolidated net revenues for the
years ended June 30, 2005, 2004 and 2003, respectively.
Unaudited Financial Information of Unconsolidated Managed Medical Practices
---------------------------------------------------------------------------
Audited financial information related to the 17 unconsolidated related PCs
managed by the Company is not available. Substantially all of these medical
practices' books and records are maintained on a cash basis, they depreciate
their equipment on an accelerated tax basis and have a December 31 year end.
Summarized unaudited income statement data for the years ended December 31,
2004, 2003 and 2002 related to the 17 unconsolidated medical practices managed
by the Company are as follows:
(000's omitted)
2004 2003 2002
-------- -------- --------
Patient Revenue - Net $ 33,584 $ 30,974 $ 31,316
======== ======== ========
Income (Loss) from
Operations (Income Tax
- Cash Basis) $ 74 $ (53) $ (160)
======== ======== ========
Net Loss (Income Tax -
Cash Basis) $ (247) $ (554) $ (608)
======== ======== ========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 5 - ACCOUNTS RECEIVABLE AND MANAGEMENT FEE RECEIVABLE (Continued)
Credit risk with respect to the Company's accounts receivable related to product
sales and service and repair fees is limited due to the customer advances
received prior to the commencement of work performed and the billing of amounts
to customers as sub-assemblies are completed. Service and repair fees are
billed on a monthly or quarterly basis and the Company does not continue
providing these services if accounts receivable become past due. The Company
controls credit risk with respect to accounts receivable from service and repair
fees through its credit evaluation process, credit limits, monitoring procedures
and reasonably short collection terms. The Company performs ongoing credit
authorizations before a product sales contract is entered into or service and
repair fees are provided. Bad debt expense has been within management's
expectations and, generally, the Company does not require collateral or other
security to support accounts receivable.
NOTE 6 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND CUSTOMER
ADVANCES
1) Information relating to uncompleted contracts as of June 30, 2005 and 2004
is as follows:
As of June 30,
--------------------------
2005 2004
----------- -----------
Costs incurred on uncompleted contracts $18,364,046 $11,961,900
Estimated earnings 8,704,477 8,298,538
----------- -----------
27,068,523 20,260,438
Less: Billings to date 16,985,000 21,374,096
----------- -----------
$10,083,523 $(1,113,658)
=========== ===========
Included in the accompanying consolidated balance sheets under the following
captions:
As of June 30,
--------------------------
2005 2004
----------- -----------
Costs and estimated earnings in excess
of billings on uncompleted contracts $10,538,163 $ 1,711,306
Costs and estimated earnings in excess
of billings on uncompleted contracts
- related party - 111,941
Less: Billings in excess of costs and
estimated earnings on uncompleted
contracts 301,179 2,936,905
Less: Billings in excess of costs and
estimated earnings on uncompleted
contracts - related party 153,461 -
----------- -----------
$10,083,523 $(1,113,658)
=========== ===========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 6 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND CUSTOMER
ADVANCES (Continued)
2) Customer advances consist of the following:
As of June 30, 2005
--------------------------------------
Related
Total Parties Other
----------- ------------ -----------
Total advances $18,659,549 $ 1,541,566 $17,117,983
Less: Advances on contracts
under construction 16,985,000 1,500,000 15,485,000
----------- ----------- -----------
$ 1,674,549 $ 41,566 $ 1,632,983
=========== =========== ===========
As of June 30, 2004
--------------------------------------
Related
Total Parties Other
----------- ------------ -----------
Total advances $29,174,401 $ 1,009,096 $28,165,305
Less: Advances on contracts
under construction 21,374,096 1,009,096 20,365,000
----------- ----------- -----------
$ 7,800,305 $ - $ 7,800,305
=========== =========== ===========
NOTE 7 - INVENTORIES
Inventories included in the accompanying consolidated balance sheets consist of:
As of June 30,
-----------------------
2005 2004
---------- ----------
Purchased parts, components and supplies $ 8,290,077 $ 7,016,218
Work-in-process 1,547,713 2,569,128
----------- -----------
$ 9,837,790 $ 9,585,346
=========== ===========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 8 - INVESTMENT IN SALES-TYPE LEASES
During the year ended June 30, 2001, the Company entered into two lease
agreements, totaling $1,895,000, with related parties for MRI scanners, which
are considered sales-type leases. The leases are payable in 120 monthly
installments of $12,356 and $11,903, respectively, including interest at 10% and
8.5% per annum. The lessees can also elect to pay lump sums of $581,544 and
$580,149, respectively, at the end of the first 60 months. If the lease term is
extended beyond 60 months, the lessee may elect to purchase the scanner at the
end of the second 60-month period for a purchase price of $1.
During the year ended June 30, 2003, three related entities that had lease
agreements with the Company obtained financing from a third party and utilized
the proceeds to repay amounts due to the Company. During the year ended June
30, 2003, the Company received a total of $2,600,000 from these related entities
as payment of a substantial portion of the amounts due to the Company under the
lease agreements.
During the year ended June 30, 2001, the Company entered into a $1,050,000 lease
agreement with a third party for an MRI scanner, which is considered a sales-
type lease. The lease is payable in 75 monthly installments of $18,389 each,
plus at the end of the 75-month lease, the lessee can elect to continue the
lease for an additional two years, at a monthly payment of $18,389, including
interest at 12.5% per annum, or pay a lump sum of $200,000.
The Company's investment in sales-type leases as at June 30, 2005 and 2004 is as
follows:
As of June 30,
-------------------------
2005 2004
---------- ----------
Net minimum lease payments receivable $ 512,613 $ 733,281
Less: Unearned income 59,834 127,090
---------- ----------
Net investment in sales-type leases $ 452,779 $ 606,191
========== ==========
Current portion $ 173,751 $ 153,413
Non-current portion 279,028 452,778
---------- ----------
$ 452,779 $ 606,191
========== ==========
Future minimum lease payments are as follows:
Years Ending June 30:
-------------------
2006 $ 173,751
2007 79,028
2008 200,000
----------
$ 452,779
==========
Interest income from sales-type leases with related parties for the years ended
June 30, 2005, 2004 and 2003 amounted to $-0-, $-0- and $172,363, respectively.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 9 - PROPERTY AND EQUIPMENT
Property and equipment, at cost, less accumulated depreciation and amortization,
at June 30, 2005 and 2004, is comprised of:
As of June 30,
--------------------------
2005 2004
----------- -----------
Diagnostic equipment under capital
leases $ 800,339 $ 621,411
Diagnostic equipment 4,053,198 3,519,060
Research, development and
demonstration equipment 8,819,089 9,506,134
Machinery and equipment 7,393,347 7,689,317
Furniture and fixtures 3,581,104 3,357,549
Equipment under capital leases 1,517,441 1,517,441
Leasehold improvements 6,095,373 5,127,950
----------- -----------
32,259,891 31,338,862
Less: Accumulated depreciation
and amortization 24,665,666 23,128,241
----------- -----------
$ 7,594,225 $ 8,210,621
=========== ===========
Depreciation and amortization of property and equipment for the years ended June
30, 2005, 2004 and 2003 was $2,651,310, $2,626,849 and $3,247,798, respectively.
Equipment under capital leases has a net book value of $995,303 and $785,130 at
June 30, 2005 and 2004, respectively.
NOTE 10 - OTHER INTANGIBLE ASSETS
Other intangible assets, net of accumulated amortization, at June 30, 2005 and
2004 are comprised of:
As of June 30,
-------------------------
2005 2004
---------- ----------
Capitalized software development
costs $4,159,882 $3,371,561
Patents and copyrights 3,135,672 2,671,568
---------- ----------
7,295,554 6,043,129
Less: Accumulated amortization 2,792,307 2,085,442
---------- ----------
$4,503,247 $3,957,687
========== ==========
Information related to other intangible assets for the years ended June 30,
2005, 2004 and 2003 is as follows:
2005 2004 2003
---------- ---------- ----------
Balance - Beginning of Year $3,957,687 $3,375,187 $2,648,618
Amounts capitalized 1,252,425 1,202,972 1,215,977
Amortization (706,865) (620,472) (489,408)
---------- ---------- ----------
Balance - End of Year $4,503,247 $3,957,687 $3,375,187
========== ========== ==========
Amortization of patents and copyrights for the years ended June 30, 2005, 2004
and 2003 amounted to $95,613, $82,429 and $72,382, respectively.
Amortization of capitalized software development costs for the years ended June
30, 2005, 2004 and 2003 was $611,252, $538,043 and $417,026, respectively.
The estimated amortization of patents and copyrights and capitalized software
development costs for the five years ending June 30, 2010 is as follows:
Capitalized
Software
For the Years Patents and Development
Ending June 30, Total Copyrights Costs
--------------- ---------- ----------- -----------
2006 $ 682,776 $ 121,114 $ 561,662
2007 610,029 123,517 486,512
2008 590,287 150,390 439,897
2009 560,811 152,479 408,332
2010 412,849 117,855 294,994
---------- ---------- ----------
$2,856,752 $ 665,355 $2,191,397
========== ========== ==========
The weighted average amortization period for other intangible assets is 8.6
years and has no residual value.
NOTE 11 - NOTES RECEIVABLE
Notes receivable represents $180,000 due from a customer for the purchase of a
system. The note is payable over two years.
Also included in notes receivable are promissory notes totaling $368,000. These
notes represent advances to unrelated PCs, in which HMCA has entered into
management agreements. These agreements, along with the promissory notes, were
sold on July 28, 2005 as part of the sale of the physical medicine management
business (see Note 24).
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 12 - CAPITAL STOCK
Common Stock
------------
Cash dividends payable on the common stock shall, in all cases, be on a per
share basis, one hundred twenty percent (120%) of the cash dividend payable on
shares of Class B common stock and three hundred sixty percent (360%) of the
cash dividend payable on a share of Class C common stock. In addition, as
revised, pursuant to a legal settlement agreement on April 29, 1997, a special
cash dividend was paid in an amount equal to 3-1/4% on first $10 million, 4-
1/2% on next $20 million, and 5-1/2% on amounts in excess of $30 million of the
amount of any cash awards or settlements received by the Company in connection
with the enforcement by the Company of United States Patent No. 3,789,832
(Apparatus and Method of Detecting Cancer in Tissue).
On June 26, 2003, the Company amended its certificate of incorporation
increasing the number of authorized shares from 85,000,000 to 110,000,000.
On February 15, 2005, the Company amended its certificate of incorporation
increasing the number of authorized shares from 110,000,000 to 130,000,000.
On October 6, 2003 and June 28, 2004, the Company filed Registration Statements
on Form S-3 to register 10,000,000 shares (5,000,000 shares on each date) of the
Company's common stock to be issued for various costs and expenses of the
Company. As of June 30, 2005, no shares of common stock of FONAR were available
for future grant under this plan.
Class B Common Stock
--------------------
Class B common stock is convertible into shares of common stock on a one-for-one
basis. Class B common stock has 10 votes per share. There were 3,953 and 4,153
of such shares outstanding at June 30, 2005 and 2004, respectively.
Class C Common Stock
--------------------
On April 3, 1995, the stockholders ratified a proposal creating a new Class C
common stock and authorized the exchange offering of three shares of Class C
common stock for each share of the Company's outstanding Class B common stock.
The Class C common stock has 25 votes per share, as compared to 10 votes per
share for the Class B common stock and one vote per share for the common stock.
The Class C common stock was offered on a three-for-one basis to the holders of
the Class B common stock. Although having greater voting power, each share of
Class C common stock has only one-third of the rights of a share of Class B
common stock to dividends and distributions. Class C common stock is
convertible into shares of common stock on a three-for-one basis. As of June
30, 2005, the Company does not have enough common stock available for the
conversion of the Class C common stock.
Class A Non-Voting Preferred Stock
----------------------------------
On April 3, 1995, the stockholders ratified a proposal consisting of the
creation of a new class of Class A non-voting preferred stock with special
dividend rights and the declaration of a stock dividend on the Company's common
stock consisting of one share of Class A non-voting preferred stock for every
five shares of common stock. The stock dividend was payable to holders of
common stock on October 20, 1995. Class A non-voting preferred stock issued
pursuant to such stock dividend approximates 7.8 million shares.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 12 - CAPITAL STOCK (Continued)
Class A Non-Voting Preferred Stock (Continued)
----------------------------------
The Class A non-voting preferred stock is entitled to a special dividend equal
to 3-1/4% of first $10 million, 4-1/2% of next $20 million and 5-1/2% on amounts
in excess of $30 million of the amount of any cash awards or settlements
received by the Company in connection with the enforcement of five of the
Company's patents in its patent lawsuits, less the revised special dividend
payable on the common stock with respect to one of the Company's patents.
The Class A non-voting preferred stock participates on an equal per share basis
with the common stock in any dividends declared and ranks equally with the
common stock on distribution rights, liquidation rights and other rights and
preferences (other than the voting rights).
Options
-------
The Company has stock option plans, which provide for the awarding of incentive
and non-qualified stock options to employees, directors and consultants who may
contribute to the success of the Company. The options granted vest either
immediately or ratably over a period of time from the date of grant, typically
three or four years, at a price determined by the Board of Directors or a
committee of the Board of Directors, generally the fair value of the Company's
common stock at the date of grant. The options must be exercised within ten
years from the date of grant.
FONAR's 1993 Incentive Stock Option Plan (the "FONAR 1993 Plan"), adopted on
March 26, 1993, was intended to qualify as an incentive stock option plan under
Section 422A of the Internal Revenue Code of 1954, as amended. The FONAR 1993
Plan permitted the issuance of stock options covering an aggregate of 1,500,000
shares of common stock of FONAR. The FONAR 1993 Plan terminated on March 25,
2003. No options to purchase shares of common stock remained available for
grant under the FONAR 1993 Plan at that time. There are 59,000 options that
were issued under the FONAR 1993 Plan that remain outstanding.
FONAR's 1997 Nonstatutory Stock Option Plan, adopted on May 9, 1997, permits the
issuance of stock options covering an aggregate of 5,000,000 shares of common
stock of FONAR. The options may be issued at such prices and upon such terms
and conditions as are determined by FONAR. The 1997 Plan will terminate on May
8, 2007. As of June 30, 2005, options to purchase 2,098,724 shares of common
stock of FONAR were available for future grant. Of the options granted under
this plan, 2,189,002 remain outstanding.
FONAR's 2002 Incentive Stock Option Plan (the "FONAR 2002 Plan"), adopted on
July 1, 2002, is intended to qualify as an incentive stock option plan under
Section 422A of the Internal Revenue Code of 1954, as amended. The FONAR 2002
Plan permits the issuance of stock options covering an aggregate of 2,500,000
shares of common stock of FONAR. The options have an exercise price equal to
the fair market value of the underlying stock on the date the option is granted,
are nontransferable, are exercisable for a period not exceeding ten years and
expire upon the voluntary termination of employment. The FONAR 2002 Plan will
terminate on June 30, 2012. As of June 30, 2005, options to purchase 1,323,572
shares of common stock of FONAR were available for future grant under this plan
and 587,646 shares remain outstanding.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 12 - CAPITAL STOCK (Continued)
Options (Continued)
-------
FONAR's 2005 Incentive Stock Option Plan (the "FONAR 2005 Plan"), adopted on
February 16, 2005, is intended to qualify as an incentive stock option plan
under Section 422A of the Internal Revenue Code of 1954, as amended. The FONAR
2005 Plan permits the issuance of stock options covering an aggregate of
2,000,000 shares of common stock of FONAR. The options have an exercise price
equal to the fair market value of the underlying stock on the date the option is
granted, are non-transferable, are exercisable for a period not exceeding ten
years, and expire upon the voluntary termination of employment. The FONAR 2005
Plan will terminate on February 14, 2015. As of June 30, 2005, 2,000,000 shares
of common stock of FONAR were available for future grant under this Plan.
Stock option activity and weighted average exercise prices under these plans and
grants for the years ended June 30, 2005, 2004 and 2003 were as follows:
Weighted
Average
Number of Exercise
Options Price
--------- ---------
Outstanding, June 30, 2002 3,000,191 $1.47
Granted 718,073 1.00
Exercised (27,571) 1.13
Forfeited - -
--------- -----
Outstanding, June 30, 2003 3,690,693 1.38
Granted 324,183 1.11
Exercised (471,788) 0.98
Forfeited (496,082) 2.57
--------- -----
Outstanding, June 30, 2004 3,047,006 1.22
Granted 150,973 1.28
Exercised (200,456) 1.23
Forfeited (161,875) 1.28
--------- -----
Outstanding, June 30, 2005 2,835,648 $1.22
========= =====
Exercisable at:
June 30, 2003 1,972,777 $1.62
June 30, 2004 2,425,311 $1.24
June 30, 2005 2,287,947 $1.24
The range of exercise prices for options outstanding as of June 30, 2005 was as
follows:
Weighted
Average
Number of Remaining
Options Contractual
Range of Exercise Price Outstanding Life in Years
----------------------- ----------- -------------
$. 75 - $1.125 2,039,891 5.9
$1.13 - $1.69 590,739 6.5
$1.70 - $1.875 205,018 6.1
----------
2,835,648
==========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 12 - CAPITAL STOCK (Continued)
Options (Continued)
-------
On March 10, 1997, HMCA adopted the 1997 Incentive Stock Option Plan, pursuant
to which HMCA authorized the issuance of up to 2,000,000 shares of the common
stock of HMCA. Options to purchase 1,600,000 shares at an option price of $0.10
per share were granted on March 10, 1997. As of June 30, 2005, options to
purchase 400,000 shares of HMCA common stock were available for future grant
under this plan.
On December 16, 1998, HMCA adopted the 1998 Non-Statutory Stock Option Plan,
pursuant to which HMCA authorized the issuance of up to 500,000 shares of the
common stock of HMCA. Options to purchase 400,000 shares at an option price of
$1.00 per share were granted on December 16, 1998. During the year ended June
30, 2003, the Company issued 1,125,000 shares of FONAR common stock at a value
of $1,226,251 to a related party in exchange for the options outstanding under
the HMCA 1997 Incentive and 1998 Non-Statutory Stock Option Plans. As of June
30, 2005, 100,000 shares of HMCA common stock were available for future grant
under this plan.
On December 16, 1998, HMCA adopted the 1998 Incentive Stock Option Plan,
pursuant to which HMCA authorized the issuance of up to 2,000,000 shares of the
common stock of HMCA. Options to purchase 670,000 shares at an option price of
$1.00 per share were granted on December 16, 1998. 470,000 of the options
granted will not become exercisable unless and until such time as HMCA
successfully completes a public offering of its securities, and 200,000 of the
options will not become exercisable until one year thereafter. The options will
expire on December 15, 2008. No options have vested as of June 30, 2005. As of
June 30, 2005, options to purchase 1,330,000 shares of HMCA common stock were
available for future grant under this plan.
Stock option share activity and weighted average exercise prices under the HMCA
plans and grants for the three years ended June 30, 2005, 2004 and 2003 were as
follows:
Weighted
Average
Number of Exercise
Options Price
---------- ---------
Outstanding, June 30, 2002 2,670,000 $0.46
Exchanged for common stock of FONAR (2000,000) $0.28
----------
Outstanding, June 30, 2003 670,000 $1.00
Forfeited (10,000) $1.00
---------- -----
Outstanding, June 30, 2004 and 2005 660,000 $1.00
========== =====
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 12 - CAPITAL STOCK (Continued)
Stock Bonus Plans
-----------------
FONAR's 2003 Stock Bonus Plan, adopted on November 1, 2002, permitted FONAR to
issue an aggregate of 5,000,000 shares of common stock of FONAR as bonus or
compensation. As of June 30, 2005, no shares of common stock of FONAR were
available for future grant under this plan.
FONAR's 2003 Supplemental Stock Bonus Plan, adopted May 1, 2003, permits FONAR
to issue an aggregate of 5,000,000 shares of common stock of FONAR as bonus or
compensation. FONAR selects the persons to whom bonus stock will be issued, the
number of shares to be awarded and such other terms and conditions as it deems
advisable. The 2003 Supplemental Stock Bonus Plan will terminate on April 30,
2013. As of June 30, 2005, no shares of common stock of FONAR were available
for future grant under this plan.
On February 6, 2004, the Company filed a Registration Statement on Form S-8 to
register 2,000,000 shares under the Company's 2004 Stock Bonus Plan that was
adopted on February 4, 2004. As of June 30, 2005, no shares of common stock of
FONAR were available for future grant under this plan.
On February 16, 2005, the Company filed a registration statement on Form S-8 to
register 3,000,000 shares under FONAR's 2005 Stock Bonus Plan. As of June 30,
2005, 2,261,424 shares of common stock of FONAR were available for future grant
under this plan.
Warrants
--------
In connection with the convertible debenture financing with The Tail Wind Fund,
Ltd. (the "investor") completed in May of 2001, the Company granted to the
investor and the placement agent warrants to purchase a total of 959,501 common
shares at an exercise price of $1.801 per share. The warrants were exercisable
over a five-year period. The fair value of the warrants was estimated at $1.14
on the date of grant using the Black-Scholes pricing model. Separately, the
Company issued to the investor callable warrants to purchase a total of
2,000,000 shares of common stock at fluctuating prices.
Under the terms of the callable warrant, the exercise price was variable and was
to be equal to the average closing bid price of the Company's common stock for
the full calendar month preceding the date of exercise subject to a maximum
exercise price of $6.00 per share and a minimum exercise price of $2.00 per
share, subject to adjustment.
Both the callable warrant and the purchase warrants contained anti-dilution
provisions, which provided for proportionate adjustments of the exercise price
and number of underlying shares in the event of stock splits, stock dividends or
reverse stock splits and sales of the Company's common stock below the warrant
exercise price.
During June 2002, the Company issued 1,000,000 shares of common stock and
received proceeds, net of fees, of $1,500,000 upon the exercise of certain of
the callable warrants.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 12 - CAPITAL STOCK (Continued)
Warrants (Continued)
--------
On September 30, 2002, the Company issued 1,000,000 shares of common stock and
received proceeds from the investor, net of fees, of $1,073,072 upon the
exercise of certain of the callable warrants.
During the quarter ended September 30, 2002, in accordance with the agreements
with the investor, the Company issued replacement callable warrants to purchase
2,000,000 shares on the same terms as the original warrants.
On August 27, 2003, warrants to purchase 200,000 shares of the Company's common
stock were exercised by the investor at an exercise price of $1.42 per share for
total proceeds received of $283,340.
On January 27, 2004, warrants to purchase 200,000 shares of the Company's common
stock were exercised by the investor at an exercise price of $1.17 per share for
total proceeds received of $233,980.
On April 28, 2004, the investor and the Company amended the terms of the
callable warrant and purchase warrants to resolve adjustments resulting from the
anti-dilution provisions. The number of shares of stock remaining under the
callable warrant was agreed to be 3,000,000, exercisable at a price of $1.00 per
share, provided the investor immediately exercised the callable warrant in full.
On April 28, 2004, the investor exercised the callable warrant in full,
purchasing 3,000,000 shares for $3,000,000.
The number of shares underlying the purchase warrants was agreed to be increased
to 1,454,875 shares of common stock at an exercise price of $0.79 per share.
Although the exercise price was reduced in accordance with the terms of the
purchase warrants, the holders of the warrants agreed to accept an adjustment
representing a lesser number of shares to which it would have been entitled if
the formula contained in the original terms of the purchase warrants were
strictly followed, in consideration, among other things, for the term of the
purchase warrants being extended three years, to May 24, 2009.
As a result of the extension of the term of the warrants discussed above, the
Company recorded a charge to financing costs of $238,950 during the year ended
June 30, 2004.
On June 17, 2004, warrants to purchase 151,625 shares of the Company's common
stock were exercised at an exercise price of $.79 per share resulting in
proceeds of $119,784.
On July 1, 2004, warrants to purchase 151,625 shares of the Company's common
stock were exercised at an exercise price of $.79 per share resulting in
proceeds of $119,784.
On November 4, 2004, warrants to purchase 101,625 shares of the Company's common
stock were exercised at an exercise price of $.79 per share resulting in
proceeds of $80,283.
As of June 30, 2005, 1,050,000 purchase warrants remain outstanding under the
terms indicated above.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 13 - LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASES
Long-term debt, notes payable and capital leases consist of the following:
June 30,
-------------------------
2005 2004
----------- -----------
Line of credit to a bank which expired on
March 31, 2005, collateralized by a $5.5
million restricted money market account,
requiring monthly payments of interest
only, at a rate of 1.75%. $ - $ 5,500,000
Capital lease requiring monthly payments
of $13,623, including interest at a
rate of 10.51% per annum through July 2010.
The loan was collateralized by the related
equipment. 625,602 -
Capital lease requiring monthly payments
of $8,468, including interest at a rate
of 8.63% through April 2005. The loan
was collateralized by the related equipment. - 73,544
Note payable requiring monthly payments of
$21,083, including interest at a rate of
8% per annum through August 31, 2007.
The note is collateralized by the related 500,834 703,822
equipment.
Capital lease requiring monthly payments
of $2,997, including interest at a rate of
8.36% per annum through October 2008. The
loan is collateralized by the related
equipment. 103,616 129,491
Other (including capital leases for property
and equipment). 161,462 295,636
----------- -----------
1,391,514 6,702,493
Less: Current portion 425,143 5,982,991
----------- -----------
$ 966,371 $ 719,502
=========== ===========
The maturities of long-term debt over the next five years are as follows:
Years Ending
June 30,
------------
2006 $ 425,143
2007 406,564
2008 227,094
2009 162,430
2010 156,781
Thereafter 13,502
----------
$1,391,514
==========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 14 - INCOME TAXES
Components of the current provision for (benefit from) income taxes are as
follows:
Years Ended June 30,
-------------------------------------
2005 2004 2003
---------- ---------- ----------
Current:
Federal $ - $ - $ (554,642)
State 64,041 29,889 (149,229)
---------- ---------- ----------
$ 64,041 $ 29,889 $ (703,871)
========== ========== ==========
During the year ended June 30, 2003, the Company recorded a benefit for federal
and state income taxes of $554,642 and $169,244, respectively, substantially due
to the reversal of an accrual for corporate income taxes related to the 1997 tax
year, for which the statute of limitations has expired.
A reconciliation of the federal statutory income tax rate to the Company's
effective tax rate as reported is as follows:
Years Ended June 30,
------------------------------------
2005 2004 2003
---------- ---------- ----------
Taxes at federal statutory
rate 34.0% (34.0)% (34.0)%
State and local income
taxes (benefit), net of
federal benefit 5.9 0.3 (0.9)
Permanent differences 2.5 1.8 (2.6)
Increase in the valuation
allowance against
deferred tax assets - 32.2 33.1
Utilization of net
operating loss that were
fully reserved (36.5) - -
------ ------ ------
Effective income tax rate 5.9% 0.3% (4.4)%
====== ====== ======
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 14 - INCOME TAXES (Continued)
As of June 30, 2005, the Company has net operating loss ("NOL") carryforwards of
approximately $105,268,000 that will be available to offset future taxable
income. The utilization of certain of the NOL's is limited by separate return
limitation year rules pursuant to Section 1502 of the Internal Revenue Code. The
expiration dates of NOL carryforwards are as follows:
June 30,
--------
2012 $ 5,136,000
2013 845,000
2019 15,852,000
2020 18,718,000
2021 19,619,000
2022 19,680,000
2023 16,228,000
2024 9,190,000
------------
$105,268,000
============
The Company has, for federal income tax purposes, research and development tax
credit carryforwards aggregating $3,358,993, which are accounted for under the
flow-through method. The tax credit carryforwards expire as follows:
June 30,
--------
2012 $ 70,145
2013 402,590
2018 432,195
2019 378,193
2020 448,221
2022 441,865
2023 440,499
2024 459,721
2025 285,564
----------
$3,358,993
==========
In addition, for New York State income tax purposes, the Company has tax credit
carryforwards aggregating approximately $1,178,000, which are accounted for
under the flow-through method. The tax credit carryforwards expire during the
years ending June 30, 2006 to June 30, 2024.
The Company has capital loss carryforwards that expire as of June 30, 2008.
The Company has charitable contributions of approximately $235,000, which expire
during the years ending June 30, 2006 to June 30, 2009.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 14 - INCOME TAXES (Continued)
Significant components of the Company's deferred tax assets and liabilities at
June 30, 2005 and 2004 are as follows:
June 30,
----------------------------
2005 2004
------------ -----------
Deferred tax assets:
Allowance for doubtful accounts $ 1,321,784 $ 1,186,827
Non-deductible accruals 551,952 726,668
Net operating carryforwards 42,107,182 42,668,436
Tax credits 4,536,499 4,440,506
Inventory capitalization for
tax purposes 94,461 128,616
Capital losses carryforwards 1,329,528 1,333,663
Charitable contributions 93,987 95,481
------------ ------------
50,035,393 50,580,197
Valuation allowance (48,610,326) (48,145,223)
------------ ------------
Net deferred tax assets 1,425,067 2,434,974
------------ ------------
Deferred tax liabilities:
Fixed and intangible assets (526,409) (1,409,355)
Capitalized software development
costs (898,658) (1,025,619)
------------ ------------
Gross deferred tax liabilities (1,425,067) (2,434,974)
------------ ------------
Net deferred tax liabilities $ - $ -
============ ============
The net change in the valuation allowance for deferred tax assets increased by
approximately $450,352 and $3,518,901, respectively, for the years ended June
30, 2005 and 2004.
NOTE 15 - OTHER CURRENT LIABILITIES
Included in other current liabilities are the following:
2005 2004
----------- -----------
Royalties $ 903,697 $ 510,550
Current portion of deferred revenue
- license fee - 2,340,000
Unearned revenue on service contracts 3,305,066 1,644,505
Accrued salaries, commissions and
payroll taxes 2,092,398 1,858,904
Accrued interest 535,209 502,609
Litigation judgements 213,672 430,207
Sales tax payable 2,443,049 1,667,088
Other 1,286,065 1,050,936
----------- -----------
$10,779,156 $10,004,799
=========== ===========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 16 - COMMITMENTS AND CONTINGENCIES
Leases
------
The Company rents its operating facilities and certain equipment, pursuant to
operating lease agreements expiring at various dates through February 2009. The
leases for certain facilities contain escalation clauses relating to increases
in real property taxes as well as certain maintenance costs.
In May 2002, HMCA entered into a sub-lease agreement (as amended in January
2003) with an entity owned by a relative of Raymond V. Damadian. The sub-lease
agreement expires on September 30, 2009. Rental income under the sub-lease
agreement for the years ended June 30, 2005, 2004 and 2003 amounted to $97,587,
$39,971 and $39,775, respectively. The amount due from the related party at June
30, 2005 was $37,474 and is included in current portion of advances and notes to
related medical practices (see Note 19).
During 2003, HMCA entered into a sub-lease agreement with a third party. The
sub-lease agreement expires on June 30, 2006. Rental income under the sub-lease
agreement for the years ended June 30, 2005, 2004 and 2003 amounted to
approximately $129,000, $130,000 and $18,000, respectively.
Future minimum operating lease commitments, along with sub-lease income
consisted of the following at June 30, 2005:
Facilities
And
Equipment
Year Ending (Operating Sub-Lease
June 30, Lease) (Income)
----------- ------------ ---------
2006 $ 2,714,531 $(214,346)
2007 2,510,401 (84,000)
2008 2,208,900 (84,000)
2009 1,577,121 (84,000)
2010 619,747 (21,000)
Thereafter 1,236,831 -
----------- ---------
Total minimum obligations $10,867,531 $(487,346)
=========== =========
Rent expense for operating leases approximated $3,316,000, $3,286,000, and
$3,166,000 for the years ended June 30, 2005, 2004 and 2003, respectively.
License Agreements and Self-Insurance
-------------------------------------
The Company has license agreements with two separate companies, which require
the Company to pay a royalty on the Company's future sales of certain MRI
imaging apparatus. Royalty expense charged to operations for the years ended
June 30, 2005, 2004 and 2003 approximated $868,000, $802,000 and $126,000,
respectively.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 16 - COMMITMENTS AND CONTINGENCIES (Continued)
License Agreements and Self-Insurance (Continued)
-------------------------------------
In July 2000, the Company entered into a license agreement, pursuant to which it
licensed certain of its intellectual assets on a non-exclusive basis.
Remuneration payable to the Company under this agreement was $11.7 million, of
which $9.0 million was received in September of 2000 and $2.7 million in January
of 2001. The license fee of $11.7 million was recognized as income ratably over
the five-year period ended June 30, 2005.
Employment Agreements
---------------------
On August 20, 1998, a wholly-owned subsidiary of HMCA entered into two
employment agreements with the former owners of Dynamic. Each agreement
provided for base compensation of $150,000 during the first year with annual
cost of living increases for the first five years. Each agreement also provided
for an increase in base compensation of $100,000 per annum commencing in the
sixth year. In addition, the agreements provided for bonus compensation
contingent upon pretax earnings of Dynamic. The employment agreements expire
ten years from August 20, 1998.
On July 28, 2005, these employment contracts were terminated and the two
individuals each became entitled to receive $800,000 as consideration in
connection with the sale of the Physical Medicine Management Business (see Note
24).
Employee Benefit Plans
----------------------
The Company has a non-contributory 401(k) Plan (the "401(k) Plan"). The 401(k)
Plan covers all non-union employees who are at least 21 years of age with no
minimum service requirements. There were no employer contributions to the Plan
for the years ended June 30, 2005, 2004 and 2003.
The stockholders of the Company approved the 2000 Employee Stock Purchase Plan
("ESPP") at the Company's annual stockholders' meeting in April 2000. The ESPP
provides for eligible employees to acquire common stock of the Company at a
discount, not to exceed 15%. This plan has not been put into effect as of June
30, 2005.
Litigation
----------
The Company is subject to legal proceedings and claims arising from the ordinary
course of its business, including personal injury, customer contract and
employment claims. In the opinion of management, the aggregate liability, if
any, with respect to such actions, will not have a material adverse effect on
the consolidated financial position or results of operations of the Company.
In March 2005, the Company settled a litigation for $550,000. At June 30, 2004,
the Company reserved $200,000 in anticipation of a settlement. For the year
ended June 30, 2005, the Company recorded an additional $350,000 shown in other
expenses in the accompanying consolidated statement of operations, to reflect
the balance of the settlement (see Note 17).
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 17 - OTHER INCOME (EXPENSE)
Other income (expense) consists of:
For the Years Ended June 30,
------------------------------------
2005 2004 2003
---------- ---------- ----------
Income from investment $ 180,000 $ 117,000 $ 53,000
Other income (expense) 322,178 131,356 (68,499)
Litigation settlements (350,000) (232,109) (10,000)
---------- ---------- ----------
$ 152,178 $ 16,247 $ (25,499)
========== ========== ==========
NOTE 18 - SUPPLEMENTAL CASH FLOW INFORMATION
During the years ended June 30, 2005, 2004 and 2003, the Company paid $225,177,
$264,819 and $1,142,741 for interest, respectively. During the years ended June
30, 2005, 2004 and 2003, the Company paid $78,638, $14,459 and $30,233 for
income taxes, respectively.
Non-Cash Transactions
---------------------
- During the Year Ended June 30, 2005:
a) The Company acquired equipment of $633,675 under a capital lease obligation.
b) The Company issued 179,973 shares of common stock valued at $223,234 in
connection with issuance of notes and loans receivable from employee
stockholders.
- During the Year Ended June 30, 2004:
a) The Company acquired equipment of $276,852 under capital lease obligations.
b) The Company issued 264,840 shares of its common stock, valued at $276,885,
to various employees in connection with the issuance of notes and loans
receivable pursuant to various exercises of stock options.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 18 - SUPPLEMENTAL CASH FLOW INFORMATION (Continued)
Non-Cash Transactions (Continued)
---------------------
- During the Year Ended June 30, 2003:
a) The Company issued 1,125,000 shares at a value of $1,226,251 as part of the
consideration issued in exchange for options held by a related party to acquire
approximately 20% of the stock of HMCA.
b) The Company acquired equipment of $207,254 under capital lease obligations.
c) The Company issued 15,000 shares of its common stock valued at $21,750 in
connection with the repayment of a note payable.
d) The Company issued 97,850 shares of its common stock valued at $99,180 in
connection with distributions made to its minority stockholders.
e) The Company transferred equipment in satisfaction of a note payable of
$10,123.
f) The Company offset notes payable of $145,386 in connection with the
acquisition of Central Health Care Management, Inc. against the impairment of
its management contracts.
NOTE 19 - ADVANCES AND NOTES TO RELATED PARTIES
During 1994, Melville MRI, P.C. ("Melville Center"), a New York professional
corporation, of which Raymond V. Damadian is the sole shareholder, director and
president, purchased an MRI scanner from the Company for a purchase price of
$1,011,431. Of the purchase price, $900,000 is to be paid by the assumption and
payment of the Company's indebtedness to the lender secured by the scanner,
pursuant to a note, bearing interest at 14% per annum, and providing for 60
monthly payments of $20,700 each. The remaining $111,431 of the purchase price
was to be paid concurrently with the payments to the lender. The payment terms
for the principal balance, plus accrued interest (in the aggregate amount of
$139,290), were restructured to provide for 60 equal monthly payments (including
interest at the rate of 10% per annum) of $2,959.50 each, commencing July 1998.
In fiscal 2001, the balance outstanding on the obligation was paid in full by
the Company as guarantor of the indebtedness due to the lender. This resulted in
a balance of $893,606 owing to the Company by the Melville Center.
The $2,959 monthly payment to the Company has been increased by an additional
principal payment of $10,000 per month to be applied toward the balance due. In
July 2003, the payment terms were restructured to be $16,314 per month,
inclusive of interest at the rate of 5% per annum, over a three-year period
commencing July 2003. In March 2004, the Company received a refund of accrued
interest from the original lender of $163,471, which was applied to the
outstanding principal balance. At this time, the note was restructured to
provide for 18 equal monthly payments (including interest at the rate of 5% per
annum) of $15,418. The balance due under this note as of June 30, 2005 was
$45,872. As of September 9, 2005, this note was paid in full. Interest income on
this note for the years ended June 30, 2005, 2004 and 2003 amounted to $7,148,
$19,649 and $3,993, respectively.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 19 - ADVANCES AND NOTES TO RELATED PARTIES (Continued)
Canarsie MRI Associates ("Canarsie"), a joint venture partnership, of which MRI
Specialties, Inc. ("Specialties") is an owner, is a party to a service agreement
for its scanner with the Company at an annual fee of $70,000. In addition,
during fiscal 2001, Canarsie entered into an agreement to purchase a QUAD MRI
scanner from the Company, recognizing on a percentage-of-completion basis
revenue of $636,121. The agreement provides for a purchase price of $850,000,
payable as follows: (1) $400,000 downpayment (received April 2001); (2)
$450,000 in 84 equal monthly installments, including interest at 6%, pursuant to
a promissory note to be executed upon acceptance of the scanner. Timothy
Damadian, the son of Raymond V. Damadian, is the sole stockholder, Director and
President of Specialties. The balance due under this note as of June 30, 2005
was $243,149. Interest income on this note for the years ended June 30, 2005,
2004 and 2003 amounted to $16,631, $20,247 and $23,654, respectively.
The maturities of advances and notes to related medical practices over the next
five years are as follows:
Years Ending
June 30,
---------
2006 $149,441
2007 94,105
2008 74,500
2009 32,382
--------
$350,428
========
NOTE 20 - SEGMENT AND RELATED INFORMATION
The Company provides segment data in accordance with the provisions of SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information".
The Company operates in two industry segments - manufacturing and the servicing
of medical equipment and management of physician practices, including diagnostic
imaging services.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. All intersegment sales are market-
based. The Company evaluates performance based on income or loss from
operations.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 20 - SEGMENT AND RELATED INFORMATION (Continued)
Summarized financial information concerning the Company's reportable segments is
shown in the following table:
Physician
FONAR Management and
Medical Diagnostic
Equipment Services Totals
------------ -------------- -----------
Fiscal 2005:
-----------
Net revenues from external
customers $ 81,266,949 $ 23,631,595 $104,898,544
Intersegment net revenues $ 506,955 $ - $ 506,955
Income from operations $ 751,570 $ 911,732 $ 1,663,302
Depreciation and amortization $ 2,343,146 $ 1,648,606 $ 3,991,752
Compensatory element of stock
issuances $ 1,290,346 $ 1,782,788 $ 3,073,134
Total identifiable assets $ 46,265,840 $ 29,828,642 $ 76,094,482
Capital expenditures $ 1,943,091 $ 1,513,624 $ 3,456,715
Fiscal 2004:
-----------
Net revenues from external
customers $ 48,629,455 $ 22,979,902 $ 71,609,357
Intersegment net revenues $ 474,584 $ - $ 474,584
(Loss) income from operations $ (8,777,961) $ 307,667 $ (8,470,294)
Depreciation and amortization $ 2,322,363 $ 1,558,535 $ 3,880,898
Compensatory element of stock
issuances $ 2,039,079 $ 2,086,638 $ 4,125,717
Total identifiable assets $ 48,891,815 $ 28,309,031 $ 77,200,846
Capital expenditures $ 2,642,212 $ 772,799 $ 3,415,011
Fiscal 2003:
-----------
Net revenues from external
customers $ 29,958,698 $ 22,932,837 $ 52,891,535
Intersegment net revenues $ 2,041,080 $ - $ 2,041,080
Loss from operations $(11,324,562) $ (3,822,683) $(15,147,245)
Depreciation and amortization $ 2,628,826 $ 1,804,664 $ 4,433,490
Compensatory element of stock
issuances $ 1,330,767 $ 3,511,981 $ 4,842,748
Total identifiable assets $ 30,378,270 $ 28,370,391 $ 58,748,661
Capital expenditures $ 583,190 $ 1,409,032 $ 1,992,222
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 20 - SEGMENT AND RELATED INFORMATION (Continued)
Export Product Sales
--------------------
The Company's areas of operations are principally in the United States. The
Company had export sales of medical equipment amounting to 9.4%, 1.0% and 6.2%
of product sales revenues to third parties for the years ended June 30, 2005,
2004 and 2003, respectively.
The foreign product sales, as a percentage of product sales to unrelated
parties, were made to customers in the following countries:
2005 2004 2003
------ ------ ------
Puerto Rico 3.8% .3% - %
Scotland - - .4
Spain - .7 5.8
Switzerland 1.9 - -
England 2.8 - -
Germany .9 - -
------ ------ ------
9.4% 1.0% 6.2%
====== ====== ======
Foreign Service and Repair Fees
-------------------------------
The Company's areas of service and repair are principally in the United States.
The Company had foreign revenues of service and repair of medical equipment
amounting to 9.0%, 14.3% and 12.2% of consolidated net service and repair fees
for the years ended June 30, 2005, 2004 and 2003, respectively. The foreign
service and repair fees, as a percentage of total service and repair fees, were
provided principally to the following countries:
For the Years Ended June 30,
-----------------------------
2005 2004 2003
------ ------ ------
Korea 1.2% 2.2% 2.8%
Spain 2.8 3.5 1.9
Puerto Rico .3 - -
Saudi Arabia 1.4 2.5 3.0
Poland 1.5 2.8 2.6
Scotland 1.8 3.3 1.9
------ ------ ------
9.0% 14.3% 12.2%
====== ====== ======
The Company does not have any material assets outside of the United States.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 21 - QUARTERLY FINANCIAL DATA (UNAUDITED)
(000's omitted, except per share data)
For the Quarters Ended
-----------------------------------------------
September 30, December 31, March 31, June 30,
2004 2004 2005 2005 Total
------------ ----------- -------- --------- ----------
Total Revenues - Net $ 25,068 $ 29,499 $ 25,330 $ 25,002 $ 104,899
Total Costs and Expenses 24,161 28,276 25,355 25,443 103,235
Net Income (Loss) from
Continuing Operations 786 1,141 (480) (433) 1,014
Basic and Diluted Net Income
(Loss) Per Share from
Continuing Operations $ 0.01 $ 0.01 $ - $ - $ 0.02
Basic and Diluted Net
Loss Per Share from
Discontinued Operations $ - $ - $ - $ - $ -
(000's omitted, except per share data)
For the Quarters Ended
-----------------------------------------------
September 30, December 31, March 31, June 30,
2003 2003 2004 2004 Total
------------ ----------- -------- --------- ----------
Total Revenues - Net $ 13,302 $ 17,889 $ 19,353 $ 21,065 $ 71,609
Total Costs and Expenses 17,041 20,352 20,759 21,928 80,080
Net Loss from Continuing
Operations (3,843) (2,630) (1,484) (1,537) (9,494)
Basic and Diluted Net
Loss Per Share from
Continuing Operations $ (0.05) $ (0.03) $ (0.02) $ (0.02) $ (0.12)
Basic and Diluted Net
Loss Per Share from
Discontinued Operations $ - $ - $ - $ - $ -
Income (loss) per share from continuing operations for each quarter was computed
independently using the weighted-average number of shares outstanding during the
quarter. However, income (loss) per share from continuing operations for the
year was computed using the weighted-average number of shares outstanding during
the year. As a result, the sum of the income (loss) per share for the four
quarters may not equal the full year income (loss) per share.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 22 - SALE OF MANAGEMENT COMPANY AND DISCONTINUED OPERATIONS
On April 8, 2003, HMCA sold all of its issued and outstanding stock of A&A
Services, Inc. ("A&A Services"), a physician practice management services
organization engaged in the business of managing four primary care practices
located in Queens County, New York (the "Practices"). The sale was made to the
former owners (the "Buyers"), for a purchase price of $3,000,000, payable as
follows: $500,000 at closing, $2,350,000 due 75 days after closing and $150,000
six months following the closing, together with a release of indebtedness in the
approximate amount of approximately $913,000, which remained owing to the Buyers
by HMCA as a result of the original acquisition. The note receivable from the
buyers of A&A Services of $150,000 was repaid during the year ended June 30,
2004.
A&A Services had provided the Practices with management services, office space,
equipment, repair and maintenance service for the equipment and clerical and
other non-medical personnel. All services were terminated upon the sale.
This reporting unit of the Company's operations has been reflected as
discontinued operations for the year ended June 30, 2003. Accordingly, operating
results have been segregated from continuing operations and are reported as
discontinued operations in the consolidated statements of operations,
comprehensive income (loss) and cash flows for the year ended June 30, 2003.
As a result of this sale, the Company realized a gain of approximately $510,000,
which was recognized in discontinued operations during the year ended June 30,
2003.
Summarized financial information of discontinued operations for the year ended
June 30, 2003 is as follows:
Management and other fees - related medical practices - net $ 1,179,095
------------
Costs and Expenses:
Costs related to management and other fees -
related parties 1,271,121
Amortization of management agreement 220,404
Interest expense 2,933
Loss on impairment of management contract -
------------
Total Costs and Expenses 1,494,458
------------
Loss from Discontinued Operations $ (315,363)
============
Gain on Sale of Discontinued Operations Sales price:
Cash proceeds, net of closing costs $ 2,821,564
Note receivable 150,000
Settlement of liabilities 913,492
------------
Total Selling Price 3,885,056
Investment in discontinued operations 3,375,242
------------
Gain on Sale of Discontinued Operations $ 509,814
============
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 23 - ALLOWANCE FOR DOUBTFUL ACCOUNTS
The following represents a summary of allowance for doubtful accounts for the
years ended June 30, 2005, 2004 and 2003, respectively:
Balance Balance
Description June 30, 2004 Additions Deductions June 30, 2005
----------- ------------- ----------- ---------- -------------
Receivables from equipment sales
and service contracts $ 467,990 (1)$ 30,462 $ - $ 498,452
Receivables from equipment sales
and service contracts - related
parties 655,563 - (1) 8,942 646,621
Management fee receivable from
related medical practices 1,874,390 (1)142,773 - 2,017,163
Advance and notes to related
parties 364,791 - - 364,791
Balance Balance
Description June 30, 2003 Additions Deductions June 30, 2004
----------- ------------- ----------- ----------- -------------
Receivables from equipment sales
and service contracts $ 442,437 (1)$ 25,553 $ - $ 467,990
Receivables from equipment sales
and service contracts - related
parties 694,655 - (1) 39,092 655,563
Management fee receivable from
related medical practices 1,296,390 (1) 578,000 - 1,874,390
Advance and notes to related
parties 446,035 - (1) 81,244 364,791
Balance Balance
Description June 30, 2002 Additions Deductions June 30, 2003
----------- ------------- ---------- ---------- -------------
Receivables from equipment sales
and service contracts $ 382,437 (1)$ 60,000 $ - $ 442,437
Receivables from equipment sales
and service contracts - related
parties 694,655 - - 694,655
Management fee receivable from
related medical practices 1,096,390 200,000 - 1,296,390
Advance and notes to related
parties 366,035 80,000 - 446,035
(1) Included in provision for bad debts.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 24 - SUBSEQUENT EVENTS
Sale of Physical Medicine Management Business
---------------------------------------------
On July 28, 2005, FONAR, HMCA and Dynamic entered into an Asset Purchase
Agreement with Health Plus Management Services, L.L.C. ("Health Plus"), pursuant
to which HMCA and its subsidiary Dynamic sold to Health Plus the portion of
their business which was engaged in the business of managing physical therapy
and rehabilitation facilities, together with the assets used in the conduct of
such business.
The assets sold consisted principally of the management agreements with the
physical therapy and rehabilitation facilities, the assignment of other
agreements and rights utilized in the Company's physical therapy and
rehabilitation facility management business, the physical therapy equipment, a
portion of the accounts receivable and furniture and fixtures the Company
provided to the physical therapy and rehabilitation facilities.
The sale was made to Health Plus. There is no material relationship between
Health Plus and FONAR, HMCA or Dynamic, or any of their respective directors or
officers or associates of any such person. The two principals of Health Plus
were employed by HMCA and Dynamic up to the time of the closing of the
transaction in HMCA's physical therapy and rehabilitation facility management
business. In consideration for the termination of their employment agreement,
these two individuals each became entitled to receive $800,000. In addition,
each became entitled to receive $200,000 for billing and collection services to
be provided on behalf of HMCA and Dynamic with respect to a portion of the
accounts receivable of certain physical therapy and rehabilitation facilities
which arose during the period when HMCA was engaged in the management of those
facilities. The $1,000,000 payable to each of these individuals may be paid at
the Company's option in shares of FONAR common stock.
The purchase price under the Asset Purchase Agreement was $6.6 million, payable
pursuant to a promissory note (the "Note") in 120 monthly installments
commencing on August 28, 2005. The first twelve installments are interest only
and the remaining 108 payments will consist of equal installments of principal
and interest in the amount of $76,014 each. The Note is secured by a first lien
on all of the assets of Health Plus, including its accounts receivable. The Note
is subject to prepayment provisions to the extent Health Plus resells all or
part of the assets and business or utilizes the assets sold as collateral in any
debt financing.
For accounting purposes in accordance with accounting principles generally
accepted in the United States, the Company determined that the classification of
the disposed business described above as discontinued operations would not be
appropriate. Accordingly, the operating results of the disposed business have
been included in continuing operations in the accompanying consolidated
financial statements.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 24 - SUBSEQUENT EVENTS (Continued)
Sale of Physical Medicine Management Business (Continued)
---------------------------------------------
The Company recognized revenue from the disposed business of approximately $9.6
million during the year ended June 30, 2005. In connection with this sale, the
Company expects to recognize a diminimus loss during the quarter ended September
30, 2005. In addition, the Company will record a charge to earnings during the
quarter ended September 30, 2005 of $1.6 million related to the termination of
the employment contracts discussed above.
Issuances of Common Stock
-------------------------
During the period from July 1, 2005 through August 31, 2005:
a) The Company issued 315,799 shares of common stock to employees as
compensation of $361,193 under stock bonus plans.
b) The Company issued 50,667 shares of common stock to consultants and
others at a value of $60,474.
c) The Company issued 394,384 shares of common stock for costs and expenses of
$469,175.
d) The Company issued 300,000 shares of common stock upon the exercise of stock
options resulting in proceeds of $300,000.
e) The Company issued 1,652,894 shares of common stock for the termination of
the two individual employment contracts in connection with the sale of the
Physical Medicine Management Business at a value of $1,983,473.
Registration Statement
----------------------
On July 18, 2005, the Company filed a registration statement on Form S-8 to
register 3,000,000 shares under the Company's 2005 Stock Bonus Plan.
On August 9, 2005, the Company filed a registration statement on Form S-3 to
register 10,000,000 shares of the Company's common stock.
Amendment of Certification of Incorporation
-------------------------------------------
On July 28, 2005, the Company amended its certificate of incorporation
increasing the number of authorized shares from 130,000,000 to 150,000,000.
Purchase of a Building
----------------------
On July 1, 2005, HMCA entered into a contract with the landlord of the
Tallahassee location to purchase the current premises occupied. The purchase
price is $425,000, of which 10% was paid upon execution of the contract. An
additional 10% is to be paid prior to closing. The remaining 80% is to be
financed with a local bank. The expected date of closing is October 15, 2005.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
There have been no disagreements with our independent registered public
accounting firm or other matters requiring disclosure under Regulation S-K, Item
304(b).
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We have performed an evaluation under the supervision and with the participation
of our management, including our principal executive officer and principal
financial officer, of the effectiveness of our disclosure controls and
procedures, as defined in Rule 13a-15(e) and 15d - 15(e)under the Securities
Exchange Act of 1934 (the "Exchange Act"). As of the end of the period covered
by this report (June 30, 2005), our disclosure controls and procedures were
determined to be effective.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Pursuant to Item 308(a) of Regulation S-K, we are required to furnish an annual
management report on our internal control of our financial reporting
concurrently with the filing of our Annual Report on Form 10-K. In order to
issue our report, management documented both the design of our internal controls
and the testing processes that support management's evaluation and conclusion.
Our management has completed the necessary processes and procedures for issuing
its report on internal controls based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). Our management is responsible for
establishing and maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. The Company's internal control over financial reporting is a process
designed under the supervision of the Company's principal executive officer and
principal financial officer, and effected by the Company's board of directors,
management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with accounting principles generally
accepted in the United States of America. Our internal control over financial
reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.
Internal control over financial reporting includes the controls themselves,
monitoring and internal auditing practices and actions taken to correct
deficiencies as identified. Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
As of June 30, 2005, management, with the participation of our principal
executive officer and principal financial officer, assessed the effectiveness of
our internal control over financial reporting based on the framework established
in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Management's assessment
included an evaluation of the design of our internal control over financial
reporting and testing of the operational effectiveness of our internal control
over financial reporting. Management reviewed the results of its assessment
with the Audit Committee of our Board of Directors, and based on this
assessment, management has determined that as of June 30, 2005, there were no
material weaknesses in our internal control over financial reporting. In the
absence of material weaknesses, management has concluded that, as of June 30,
2005, Fonar Corporation and Subsidiaries did have effective internal control
over financial reporting. As defined by the Public Company Accounting Oversight
Board ("PCAOB") Auditing Standard No. 2, a material weakness is a significant
control deficiency or a combination of significant control deficiencies, that
results in there being more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. Marcum & Kleigman LLP, our independent registered public accounting
firm, which audited our consolidated financial statements included in our Annual
Report on Form 10-K, has issued its attestation report on our management's
assessment of our internal control over financial reporting.
SIGNIFICANT DEFICIENCIES
The following two significant deficiencies have been identified.
These deficiencies in the design and implementation of the Company's internal
control over financial reporting did not result in an actual misstatement to the
financial statements, but because of these significant deficiencies, there was
more than a remote likelihood that a more than inconsequential misstatement in
our annual or interim financial statements could have been made and not
detected. The likelihood of a material misstatement resulting from these
significant deficiencies, however, was remote.
1. Management identified a significant deficiency relating to the lack of
information security and access to initiate, authorize, and record transactions
in one or more of our computer software modules. In addition, the information
technology department does not sufficiently use enhanced passwords or restrict
access to only appropriate personnel. Management needs to continue to document
completed enhancements in the information technology environment.
2. Management identified the following significant deficiencies in the area of
financial reporting. Management identified the need for, a) formalized
documentation as it relates to consultations with outside consultants regarding
technical accounting and reporting issues, and b) formal adoption of certain
company accounting policies and procedures.
ACTIONS TAKEN TO CORRECT SIGNIFICANT DEFICIENCIES
We have taken the following actions to remediate the above identified
significant deficiencies.
With respect to our first significant deficiency (the lack of information
security and access to initiate, authorize, and record transactions in one or
more of the Company's computer software modules), we have prevented access to
these applications that certain personnel previously had, which permitted them
to change or record transactions in our computer software applications. We plan
to conduct further review and evaluation of the access to our computer software
applications by all personnel, and to reassign the access rights used to control
the ability to change or affect data. New forms have been designed and
implemented with respect to the ability to enter, change and delete vendors that
requires authorization before the personnel with access rights can make any
entries into the system.
We have begun drafting, and are in the process of implementing policies and
procedures in key areas of certain financial reporting processes. We have
engaged a consultant who will a) review closing packages and the end of each
quarter b) insure that the closing checklist is completed and all functions
marked complete are in fact complete c) review and research current accounting
pronouncements and advise the Company of any that would effect how
transactions are recorded or disclosure is made in public filings. We are
in the process of further enhancing the documentation of the system of internal
control and formal policies and procedures in the critical areas of the
financial reporting process.
The Company believes that the corrective actions described above, taken as a
whole, will remediate the internal control significant deficiencies identified
in this report, but the Company and the Audit Committee will continue to monitor
the effectiveness of these actions and will make any other changes or take such
other actions as management determines to be appropriate.
Changes in Internal Control Over Financial Reporting
During the fourth quarter the Company enhanced its controls and procedures
related to the financial reporting process. This included hiring an
outside consultant to assist with technical accounting and reporting issues,
developing more standardized closing procedures and adopting a more formal
process for documenting the weekly management meetings to review operating
performance and results. During the fourth quarter the Company enhanced its
procedures related to the financial reporting process. This included hiring an
outside consultant to assist with technical accounting and reporting issues,
developing more standardized closing procedures and adopting a more formal
process for documenting the weekly management meetings to review operating
performance and results.
There have been no other changes in our internal control over financial
reporting that occurred during the most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Directors serve from the date of their election until the next annual meeting of
stockholders and until their successors are elected and qualify. With the
exception of Dr. Raymond V. Damadian, who does not receive any fees for serving
as a director, each director receives $20,000 per annum for his or her service
as a director. Officers serve at the discretion of the Board of Directors.
A majority of our board of directors is composed of independent directors:
Robert J. Janoff, Charles N. O'Data and Robert Djerejian. These three
individuals also serve as the three members of the audit committee, which is a
standing committee of board of directors having a charter describing its
responsibilities. Mr. O'Data has been designated as the audit committee
financial expert. His relevant experience is described in his biographical
information.
We have adopted a code of ethics applicable to, among other personnel, our
principal executive officer, principal financial officer, controllers and
persons performing similar functions. The code is designed to deter wrongdoing
and to promote: 1. honest and ethical conduct, including the ethical handling of
actual or apparent conflicts of interest between personal and professional
relationships; 2. full, fair, accurate, timely and understandable disclosure in
reports and documents that we file or submit to the Securities and Exchange
Commission and in other public communications we make; 3. compliance with
applicable governmental laws, rules and regulations; 4. the prompt internal
reporting of violations of the code to an appropriate person or persons
identified in the code and 5. accountability for adherence to the code. We will
provide a copy of the code to any person who requests a copy. A person may
request a copy by writing to FONAR Corporation, 110 Marcus Drive, Melville, New
York 11747, to the attention of the Legal Department or Investor Relations.
The officers and directors of the Company are set forth below:
Raymond V. Damadian, M.D. 69 President, Treasurer,
Chairman of the Board
and a Director
David B. Terry 58 Senior Vice President
and Secretary
Claudette J.V. Chan 67 Director
Robert J. Janoff 78 Director
Charles N. O'Data 69 Director
Robert Djerejian 73 Director
Raymond V. Damadian, M.D. has been the Chairman of the Board and President of
FONAR since its inception in 1978 and Treasurer since February, 2001. Dr.
Damadian was employed by the State University of New York, Downstate Medical
Center, New York, as an Associate Professor of Biophysics and Associate
Professor of Internal Medicine from 1967 until September 1979. Dr. Damadian
received an M.D. degree in 1960 from Albert Einstein College of Medicine, New
York, and a B.S. degree in mathematics from the University of Wisconsin in 1956.
In addition, Dr. Damadian conducted post-graduate work at Harvard University,
where he studied extensively in the fields of physics, mathematics and
electronics. Dr. Damadian is the author of numerous articles and books on
the nuclear magnetic resonance effect in human tissue, which is the theoretical
basis for the FONAR MRI scanners. Dr. Damadian is a 1988 recipient of
the National Medal of Technology and in 1989 was inducted into the National
Inventors Hall of Fame, for his contributions in conceiving and developing
the application of magnetic resonance technology to medical applications
including whole body scanning and diagnostic imaging. Dr. Damadian is the
President, Treasurer and director of HMCA.
David B. Terry is the Senior Vice President and Secretary of the Company. Mr.
Terry has been serving as Vice President since December 1998 and as Secretary
since May 1990. Previously, he served as Treasurer from May 1990 to December
1998, as Secretary from July 1978 through June 1987 and as Treasurer from August
1981 through June 1987. From July 1978 through June 1987, he was also a
Director of the Company. Between July 1987 and January 1990, Mr. Terry was a
co-owner and actively engaged in the business of Carman-Terry Realty, a real
estate brokerage firm. In January 1990, Mr. Terry resumed his employment with
the Company. Mr. Terry is a brother-in-law of Raymond V. Damadian.
Claudette J.V. Chan has been a Director of Fonar since October 1987. Mrs. Chan
was employed from 1992 through 1997 by Raymond V. Damadian, M.D. MR Scanning
Centers Management Company and since 1997 by HMCA, as "site inspector," in which
capacity she is responsible for supervising and implementing standard procedures
and policies for MRI scanning centers. From 1989 to 1994 Mrs. Chan was employed
by St. Matthew's and St. Timothy's Neighborhood Center, Inc., as the director of
volunteers in the "Meals on Wheels" program, a program which cares for the
elderly. In approximately 1983, Mrs. Chan formed the Claudette Penot
Collection, a retail mail-order business specializing in women's apparel and
gifts, of which she was the President until she stopped operating the business
in approximately 1989. Mrs. Chan practiced and taught in the field of nursing
until 1973, when her son was born. She received a bachelor of science degree in
nursing from Cornell University in 1960. Mrs. Chan is the sister of Raymond V.
Damadian.
Robert J. Janoff has been a Director of FONAR since February 1989. Mr. Janoff
has been a self-employed New York State licensed private investigator for more
than thirty-five years and was a Senior Adjustor in Empire Insurance Group for
more than 15 years until retiring from that position on July 1, 1997. Mr. Janoff
also served, from June 1985 to June 1991, as President of Action Data Management
Strategies, Ltd., a supplier of computer programs for use by insurance
companies. Mr. Janoff is a member of the Board of Directors of Harmony Heights
of Oyster Bay, New York, which is a nonprofit residential school for girls with
learning disabilities.
Charles N. O'Data has been a Director of FONAR since February 1998. From 1968
to 1997, Mr. O'Data was the Vice President for Development for Geneva College, a
liberal arts college located in western Pennsylvania. In that capacity, he
acted as the College's chief investment officer. His responsibilities included
management of the College's endowment fund and fund raising. In July 1997, Mr.
O'Data retired from Geneva College after 36 years of service to assume a
position of National Sales Executive for SC Johnson Company's Professional
Markets Group, a unit of SC Johnson Wax, and specialized in healthcare and
education sales, a position he held until the spring of 1999. In his capacity
with SC Johnson he was responsible for sales to the nation's three largest Group
Purchasing Organizations which included some 4,000 hospitals. Mr. O'Data
presently acts as an independent financial consultant to various entities. Mr.
O'Data served on the board of the Medical Center, Beaver, Pennsylvania, now a
part of Heritage Valley Health System, a 500 bed acute care facility, for 22
years, three as its Chair. Mr. O'Data also served on the board of the Hospital
Council of Western Pennsylvania, a shared-services and group purchasing
organization covering seven states. He founded The Beaver County Foundation, a
Community Foundation, in 1992, and serves as its President. Mr. O'Data is
listed as a finance associate in the Middle States Association, Commission on
Higher Education. The commission is the formal accrediting body for higher
education in the eastern region of the country. In this capacity he evaluates
the financial aspects of educational organizations. Mr. O'Data is a graduate of
Geneva College, where he received a B.S. degree in Economics in 1958.
Robert Djerejian, has been a Director for Fonar since June 2002. Since 1996 he
has served as a senior consultant for Haines, Lundberg & Waehler International,
an architecture, design and engineering firm, which among other specialties
designs hospitals and laboratories. Prior to that time he was the senior
managing partner of the firm. Mr. Djerejian serves on the Board of Trustees of
Pratt Institute, where he is also Vice Chairman of the Executive Committee and
on the Board of Directors of the Delaware College of Art and Design, of which he
was one of the founding directors. He is a graduate of Pratt Institute, where
he received a B.A. in Architecture in 1955.
ITEM 11. EXECUTIVE COMPENSATION.
With the exception of the Chief Executive Officer, the compensation of the
Company's executive officers is based on a combination of salary and bonuses
based on performance. The Chief Executive Officer's compensation consists only
of a salary which has remained constant for more than the past three fiscal
years.
The Board of Directors does not have a compensation Committee. Dr. Raymond V.
Damadian, President, Chief Executive Officer and Chairman of the Board, controls
over 50% of the voting power of our capital stock. Dr. Damadian is the only
executive officer who is a member of the Board of Directors. Dr. Damadian
participates in the determination of executive compensation for our officers.
The Board of Directors has established an audit committee. The members of the
committee are Robert J. Janoff, Charles N. O'Data and Robert Djerejian.
There is set forth in the following Summary Compensation Table the compensation
provided by us during fiscal 2005 to its Chief Executive Officer. There is set
forth in the following Option Grant Table and Option Exercise Table any stock
options granted and exercised by Dr. Damadian during fiscal 2005.
I. SUMMARY COMPENSATION TABLE
Long Term Compensation
-----------------------------------
Annual Compensation Awards Payouts
------------------------------------------ ------------------ ---------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name Other All
and Annual Restricted Other
Principal Compen- Stock Options LTIP Compen-
Position Salary Bonus sation Award(s) SARs Payouts sation
2 Year ($) ($) ($) ($) (#) ($) ($)
--------- ---- ---------- ----- ------- ---------- ------- ------- -------
Raymond V. 2005 $86,799.98 - - - - - -
Damadian, 2004 $86,799.99 - - - - - -
CEO 2003 $86,799.98 - - - - - -
--------- ---- ---------- ----- ------- ---------- ------- ------- -------
II. OPTION/SAR GRANTS IN LAST FISCAL YEAR
Potential
Realizable
Value at
Assumed
Annual Rates Alternative
of Stock Price to (f) and
Appreciation (g): Grant
Individual Grants for Option Term Date Value
--------------------------------------------------- --------------- -----------
(a) (b) (c) (d) (e) (f) (g) (h)
% of Total
Options/
SARs
Options/ Granted to Excercise Grant
SARs Employees or Base Date
Granted in Fiscal Price Expiration Present
Name (#) Year ($/Sh) Date 5%($) 10%($) Value $
---------- -------- ---------- --------- ---------- ----- ------ -----------
Raymond V.
Damadian, 0 - - - - - -
President
& CEO
III. OPTION/SAR EXERCISES AND YEAR-END VALUE TABLE
Aggregated Options/SAR Exercises in Last Fiscal Year and FY-End Option/Sar Value
--------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Number of Value of Unexercised
Name Shares Acquired Value Realized Unexercised In-the-Money
on Exercise (#) ($) Options/SARs Options/SARs at
at FY-End (#) FY-End ($)
Exercisable/ Exercisable/
Unexercisable Unexercisable
--------- --------------- -------------- ------------- --------------------
Raymond V. 0 - 0 -
Damadian,
President and CEO
EMPLOYEE COMPENSATION PLANS
Equity Compensation Plan Information as of June 30, 2004
(a) (b) (c)
Plan category Number of Weighted- Number of securities
securities average remaining available
to be issued exercise price for future issuance
upon exercise of outstanding under equity
of outstanding options, compensation plans
options, warrants warrants (excluding securities
and rights and rights reflected in column (a)
----------------- -------------- -----------------------
Equity compensation 2,835,648 $1.22 5,422,296
plans approved by
security holders
Equity compensation - N/A -
plans not approved
by security holders
Total 2,835,648 $1.22 5,422,296
========= ===== =========
Fonar's 1993 Incentive Stock Option Plan, adopted on March 26, 1993, is intended
to qualify as an incentive stock option plan under Section 422A of the Internal
Revenue Code of 1954, as amended. The 1993 Incentive Stock Option Plan
permitted the issuance of stock options covering an aggregate of 1,500,000
shares of Common Stock of FONAR. The 1993 Stock Option Plan terminated on March
25, 2003. No options to purchase shares of Common Stock remained available for
grant under the plan at that time. There are 59,000 options that were issued
under the plan that remain outstanding.
Fonar's 1997 Nonstatutory Stock Option Plan, adopted on May 9, 1997, permits the
issuance of stock options covering an aggregate of 5,000,000 shares of Common
Stock of FONAR. The options may be issued at such prices and upon such terms
and conditions as are determined by FONAR. The 1997 Nonstatutory Stock Option
Plan will terminate on May 8, 2007. As of June 30, 2005, options to purchase
2,098,724 shares of Common Stock of FONAR were available for future grant. Of
the options granted under this plan, 2,189,002 remain outstanding.
Fonar's 2002 Incentive Stock Option Plan, adopted on July 1, 2002, is intended
to qualify as an incentive stock option plan under Section 422A of the Internal
Revenue Code of 1954, as amended. The 2002 Incentive Stock Option Plan permits
the issuance of stock options covering an aggregate of 2,500,000 shares of
Common Stock of Fonar. The options have an exercise price equal to the fair
market value of the underlying stock on the date the option is granted, are
nontransferable, are exercisable for a period not exceeding ten years and expire
upon the voluntary termination of employment. The 2002 Stock Option Plan will
terminate on June 30, 2012. As of June 30, 2005, options to purchase 1,323,572
shares of Common Stock of Fonar were available for future grant under the plan.
Of the options granted under this plan 587,646 remain outstanding.
Fonar's 2003 Supplemental Stock Bonus Plan, adopted May 1, 2003, permits Fonar
to issue an aggregate of 5,000,000 shares of Common Stock of Fonar as bonus or
compensation. Fonar selects the persons to whom bonus stock will be issued, the
number of shares to be awarded and such other terms and conditions as it deems
advisable. The 2003 Supplemental Stock Bonus Plan will terminate on April 30,
2013. As of June 30, 2005 there were no shares of Common Stock of Fonar were
available for future grant under the plan.
Fonar's 2004 Stock Bonus Plan, adopted on February 4, 2004, permits Fonar to
issue an aggregate of 5,000,000 shares of Common Stock of Fonar as bonus or
compensation. As of June 30, 2005, there were no shares of Common Stock of
Fonar available for future grant under the plan.
HMCA's 1997 Incentive Stock Option Plan, adopted on March 10, 1997, is intended
to qualify as an incentive stock option plan under Section 422A of the Internal
Revenue Code of 1954, as amended. The 1997 Incentive Stock Option Plan permits
the issuance of stock options covering an aggregate of 2,000,000 shares of
Common Stock of HMCA. The options have an exercise price equal to the fair
market value of the underlying stock on the date the option is granted, are
nontransferable, are exercisable for a period not exceeding ten years and expire
upon the voluntary termination of employment. The exercisability of the options
granted to date is contingent upon the successful completion by HMCA of a public
offering of its securities or the recognition by HMCA of at least $10 million in
revenues for at least two consecutive fiscal quarters. The 1997 Stock Option
Plan will terminate on March 9, 2007. As of June 30, 2005, options to purchase
400,000 shares of HMCA Common Stock were available for future grant under the
plan.
HMCA's 1998 Incentive Stock Option Plan, adopted on December 16, 1998, is
intended to qualify as an incentive stock option plan under Section 422A of the
Internal Revenue Code of 1954, as amended. The 1998 Incentive Stock Option Plan
permits the issuance of stock options covering an aggregate of 2,000,000 shares
of Common Stock of HMCA. The options have an exercise price equal to the fair
market value of the underlying stock on the date the option is granted, are
nontransferable, are exercisable for a period not exceeding ten years and expire
upon the voluntary termination of employment. The excerciseability of the
options granted to date is contingent upon the successful completion by HMCA of
a public offering of its securities. The 1998 Stock Option Plan will terminate
on December 15, 2008. As of June 30, 2005, options to purchase 1,330,000 shares
of HMCA Common Stock were available for future grant under the plan.
HMCA's 1998 Nonstatutory Stock Option Plan, adopted on December 16, 1998,
permits the issuance of stock options covering an aggregate of 500,000 shares of
Common Stock of HMCA. The options may be issued at such prices and upon such
terms and conditions as are determined by HMCA. The exercisability of the
options granted to date is contingent upon the successful completion by HMCA
of a public offering of its securities. The 1998 Nonstatutory Stock Option Plan
will terminate on December 15, 2008. As of June 30, 2005, options to purchase
100,000 shares of common stock were available for future grant.
Fonar's 2005 Incentive Stock Option Plan, adopted on February 15, 2005, is
intended to qualify as an incentive stock option plan under Section 422A of the
Internal Revenue code of 1954, as amended. The Plan permits the issuance of
stock options covering an aggregate of 2,000,000 shares of common stock of
Fonar. The options have an exercise price equal to the fair market value of the
underlying stock on the date the option is granted, are non-transferable, are
exercisable for a period not exceeding ten years, and expire upon the voluntary
termination of employment. The Plan will terminate on February 14, 2015. As of
June 30, 2005, 2,000,000 shares of common stock of Fonar were available for
future grant under this plan.
Fonar's 2005 Stock Bonus Plan, adopted on February 15, 2005, permits Fonar to
issue an aggregate of 3,000,000 shares of Common stock of Fonar as bonus or
compensation. As of June 30, 2005, 2,261,424 shares of common stock of Fonar
were available for future grant under this plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table sets forth the number and percentage of shares of Fonar's
securities held by each director, by each person known by us to own in excess of
five percent of Fonar's voting securities and by all officers and directors as
a group as of September 1, 2005.
Name and Address of Shares Percent
Beneficial Owner (1) Beneficially Owned of Class
Raymond V. Damadian, M.D.
c/o FONAR Corporation
Melville, New York
Director, President
CEO, 5% + Stockholder
Common Stock 2,488,274 2.32%
Class C Stock 9,561,174 99.98%
Class A Preferred 477,328 6.09%
Claudette Chan
Director
Common Stock 2,648 *
Class A Preferred 800 *
Robert J. Janoff
Director
Common Stock 80,000 *
Class A Preferred 1,999 *
Charles N. O'Data
Director
Common Stock 700 *
All Officers and Directors
as a Group (5 persons) (2) (3)
Common Stock 2,593,287 2.42%
Class C Stock 9,561,174 99.98%
Class A Preferred 480,165 6.13%
___________________________
* Less than one percent
1. Address provided for each beneficial owner owning more than Five percent of
the voting securities of FONAR.
2. Includes 101 shares of our Common Stock and 19 shares of our Class A Non-
voting Preferred Stock held by an officer jointly with his wife and 192 shares
of our Common Stock and 38 shares of our Class A Non-voting Preferred Stock held
in trust by an officer for his children.
3. Includes options to purchase 21,372 shares of Common Stock held by an
officer.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Background.
Between 1990 and 1996, Raymond V. Damadian, M.D. MRI Scanning Centers Management
Company, also referred to as "RVDC", a Delaware corporation of which Dr.
Damadian was the sole stockholder, director and President, purchased and leased
scanners from FONAR to establish a network of professional corporations
operating MRI scanning centers, also referred to as the "Centers", in New York,
Florida, Georgia and other locations. Dr. Raymond V. Damadian is the Chairman,
President and principal stockholder of FONAR and also the owner, director and
President of each of these professional corporations. RVDC provided the
necessary management and the scanners to the Centers, although in certain
situations, a Center would acquire the scanner directly from FONAR.
ACQUISITION OF RVDC.
Effective June 30, 1997, Fonar's wholly-owned subsidiary, Health Management
Corporation of America, also referred to as "HMCA", formerly known as U.S.
Health Management Corporation, acquired RVDC by purchasing all of the issued and
outstanding shares of RVDC from Dr. Damadian for 10,000 shares of the Common
Stock of FONAR. The transactions can be rescinded by Dr. Damadian, however, in
the event of a change of control in FONAR or the bankruptcy of FONAR. There is
no time limit on the right to rescind. In connection with the transaction,
FONAR granted RVDC a nonexclusive royalty free license to Fonar's patents and
software. These licenses may be terminated by FONAR in the event of the
bankruptcy of RVDC or a change in control of RVDC.
AGREEMENTS WITH HMCA.
Effective July 1, 1997, new management agreements were entered into by the
Centers and HMCA. Since that time certain of the original Centers have been
closed and new Centers opened. Each new Center also entered into a management
agreement with HMCA.
Pursuant to the management agreements, HMCA is providing comprehensive
management and administrative services and office facilities, including billing
and collection of accounts, payroll and accounts payable processing, supplies
and utilities to the Centers. Under the management agreements, HMCA provides
service through FONAR for the scanners at the Centers. In total, 11 MRI Centers
have management agreements with HMCA. Dr. Damadian is the stockholder, director
and president of each of the Centers.
HMCA entered the business of performing management services for physical therapy
and rehabilitation practices beginning with the acquisition of Dynamic Health
Care Management, Inc., also referred to as Dynamic, in August, 1998. HMCA
expanded its participation in this business by performing management services
for additional facilities. Dr. Damadian was the stockholder, director and
President of the physical therapy and rehabilitation professional service
corporations. During the fourth quarter of fiscal 2005 the professional
corporations owned by Dr. Damadian ceased operation of these facilities and new
professional corporations owned by physicians not affiliated with Dr. Damadian,
HMCA, Dynamic or Fonar commenced operations at these sites. In connection with
this change, the professional corporations owned by Dr. Damadian entered into
termination agreements with HMCA and Dynamic. Pursuant to these agreements, the
professional corporations owned by Dr. Damadian, assigned accounts receivable
to HMCA and Dynamic, in payment of unpaid management fees and termination
fees, in the aggregate amount of $11,775,000. In addition, the professional
corporations agreed to find replacement professional entities and management
agreements for five of the six terminated management agreements. In the event
they failed to do so, the professional corporations would be obligated to
continue to pay the monthly management fees that would have been paid under
the terminated management agreements until a total of $4,000,000 was received by
HMCA and Dynamic.
Subsequent to the end of fiscal 2005, on July 28, 2005, HMCA sold the portion of
its business managing physical therapy and rehabilitation facilities for $6.6
million, payable over a period of ten years, and in connection therewith,
assigned its management agreements with the new professional corporations of the
new physician owners to the buyer. Neither the new physician owners nor the
purchaser are affiliated with us.
The fees to HMCA under the management agreements with the MRI Centers are based
on the number of procedures performed. The per procedure charges to the MRI
Centers range from $250 to $500 per MRI scan. The fees to HMCA under the
management agreements with the physical therapy and rehabilitation practices
were flat fees charged on a monthly basis. The monthly fees to the physical
therapy and rehabilitation facilities ranged from approximately $90,000 to
$285,000.
During the fiscal years ended June 30, 2005 and June 30, 2004 the net revenues
received by HMCA from the MRI Centers owned by Dr. Damadian were approximately
$13.9 million and $13.3 million respectively, and the net revenues received from
the physical therapy and rehabilitation practices were $9.7 million, in each
case in fiscal 2004.
OTHER TRANSACTIONS
Effective December 1, 1993, one of the Centers, Albany Magnetic Resonance
Imaging, P.C., also referred to as the "Albany Center", a Georgia professional
corporation of which Raymond V. Damadian is the sole shareholder, director and
President, purchased the scanner being utilized at its site from the Company for
a purchase price of $1,128,844, which in Fonar's opinion represented a fair
market price based on sales of like equipment by Fonar to its customers. Of the
purchase price, $574,077 was paid by the assumption and payment of our
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 us, providing for 18 monthly payments of
$35,000 each. Following payment of the lease, the remaining $554,767 of the
purchase price due to us was required to be paid pursuant to a promissory note,
with interest at 10% per annum, over an 18 month term, consisting of 17 payments
of $35,000 each and one final payment of $2,454.08. In June 1997, the payment
terms for the outstanding balance of $344,766 were restructured to provide for
60 equal monthly payments, including interest at the rate of 10% per annum, of
$7,325.27 each, commencing July 1997. The Albany Center has been closed and the
remaining amounts due were paid in the first quarter of fiscal 2004.
On June 30, 1994, Melville MRI, P.C., also referred to as the "Melville Center",
a New York professional corporation of which Raymond V. Damadian is the sole
shareholder, director and President, purchased the scanner being utilized at its
site from the Company for a purchase price of $1,011,431.12, which in Fonar's
opinion represented a fair market price based on sales of like equipment by
Fonar to its customers. Of the purchase price, $900,000 was to be paid by the
assumption and payment of our indebtedness to the lender secured by the scanner
pursuant to a note bearing interest at 14% per annum and providing for 60
monthly payments of $20,700 each. The remaining $111,431.12 of the purchase
price was to be paid concurrently with the payments to the lender. The payment
terms for the principal balance, plus accrued interest, in the aggregate amount
of $139,290, were restructured to provide for 60 equal monthly payments,
including interest at the rate of 10% per annum, of $2,959.50 each commencing
July 1998. In fiscal 2001, following the payment in full by Fonar, as
guarantor, of the indebtedness due to the lender, there was as a result a
balance of $893,606 then owing to Fonar by the Melville Center. The $2,959.50
monthly payment to Fonar was increased by an additional principal amount of
$10,000 per month to be applied toward the balance due. The outstanding balance
as of June 30, 2005 was $45,872. The payment terms were restructured in March
2004 to be $15,418.32 per month, inclusive of interest at the rate of 5% per
annum, over an 18 month period commencing April 2004.
Robert Janoff, a director of the Company, is a limited partner in a partnership
in which we have a 92% partnership interest. The partnership manages an MRI
scanning center in Bensonhurst, Brooklyn, New York and was party to a service
contract at an annual rate of $50,000 on its scanner for the period of July 1,
2004 through June 30, 2005. The service contract has been renewed at the same
rate for the period July 1, 2006 through June 30, 2007.
Pursuant to an agreement dated February 1, 2000, Deerfield Magnetic Resonance
Imaging, P.A., also referred to as "Deerfield", a Florida professional
association of which Raymond V. Damadian is the sole stockholder, director and
President, agreed to lease a Fonar QUAD(TM) 12000 MRI Scanner from the Company
for a term of five years at a monthly rental of $12,356.09. The term of the
lease commenced on July 18, 2000 upon the acceptance of the scanner. In
September 2002, Deerfield purchased the Scanner, paying $800,000 toward the
purchase price. A balance of $14,285 owing as of June 30, 2003 was paid in the
first quarter of fiscal 2004.
Subsequently, Deerfield obtained new premises, changed its name to Stand-Up MRI
of Boca Raton, P.A., also referred to as Boca Raton, and entered into an
agreement to purchase a Stand-Up(TM) MRI scanner from FONAR for $1,500,000 in
October 2003. The installation has been completed and the balance of the
purchase price was paid in June, 2004.
Canarsie MRI Associates, also referred to as "Canarsie", a joint venture
partnership of which MRI Specialties, Inc., also referred to as "Specialties",
is an owner, is party to a service agreement for its scanner with the Company at
an annual fee of $85,000 for the period from March 24, 2005 through March 23,
2006. It is expected that the service contract will be renewed when it expires.
During fiscal 2001, Canarsie entered into an agreement to purchase a QUAD(TM)
12000 MRI scanner from FONAR for a purchase price of $850,000. Of the purchase
price, $400,000 was paid and $450,000 was payable pursuant to a note over a
period of 7 years with 6% interest per annum. The monthly payment is $6,573.85
and commenced on December 1, 2001. The principal balance owing to FONAR as of
June 30, 2005, was $243,149. Timothy Damadian, the son of Raymond V. Damadian,
is the sole stockholder, director and President of Specialties.
Pompano MRI Associates, also referred to as "Pompano", a joint venture
partnership of which Guardian MRI, Inc., also referred to as "Guardian", is
party to a service agreement with FONAR at the rate of $85,000 per annum for
its Stand-Up(TM) MRI scanner. The service agreement commenced on December 13,
2004 and runs through December 12, 2005. It is anticipated that the service
agreement will be renewed. Timothy Damadian, the son of Raymond V. Damadian, is
a stockholder, director and officer of Guardian. Jevan Damadian and Keira
Reinmund, also children of Dr. Damadian, are also stockholders of Guardian.
A one-year service agreement between FONAR and Orlando MRI Associates, L.P.,
also referred to as "Orlando Partnership", commenced on July 13, 2004 at the
rate of $85,000 per annum for a Stand-Up(TM) MRI scanner. It was renewed for an
additional one-year period at the same price on July 13, 2005. It is
anticipated that the service agreement will be renewed upon its expiration in
July 2006. Timothy Damadian, the son of Raymond V. Damadian is a limited
partner in the Orlando Partnership.
Black Bear Management LLC, a New York limited liability company of which TRD
Services, Inc., also referred to as "TRD", is a member, is party to a service
agreement with FONAR for its Stand-Up(TM) MRI at a fee of $85,000 per annum.
The term runs from November 23, 2004 through November 22, 2005. It is expected
that the service agreement will be renewed. Timothy Damadian, the son of
Raymond V. Damadian, is the stockholder, director and President of TRD.
During fiscal 2002, Damadian MRI at Elmhurst, P.C., also referred to as
"Elmhurst", a New York professional corporation of which Raymond V. Damadian is
the sole stockholder, director and President, agreed to lease an Echo(TM) MRI
scanner from FONAR on a fee per scan basis of $200 per MRI scan performed.
Bronx Management Associates, LLC, a New York limited liability company of which
Raymond V. Damadian and Donna Damadian, jointly, TRD Services, Inc., also
referred to as "TRD", JAD Ventures, Inc., also referred to as "JAD", Keira
Reinmund, Thomas Terry and Constance Terry, among others, are members, is party
to a service agreement with FONAR for its Stand-Up(TM) MRI scanner running from
March 23, 2005 through March 22, 2006 for an annual fee of $85,000. It is
anticipated that the service agreement will be reviewed upon its expiration.
Donna Damadian is the wife of Raymond Damadian. TRD is owned by Timothy
Damadian, a son of Raymond and Donna Damadian, JAD is owned by Jevan Damadian, a
son of Raymond and Donna Damadian and Keira Reinmund is the daughter of Dr. and
Mrs. Damadian. Constance Terry is the wife of David B. Terry, Vice President
and Secretary of Fonar and brother-in-law of Dr. Damadian. Thomas Terry is also
the brother-in-law of Dr. Damadian. In addition, FONAR has a 20% interest in
Bronx Management Associates, LLC.
Deer Park Management Services, LLC, a New York limited liability company of
which TRD and JAD are, among others, members, is party to a service agreement
with FONAR for its Stand-Up(TM) MRI scanner running from May 1, 2005 through
April 30, 2006 at an annual fee of $85,000. It is expected that the service
agreement will be renewed upon its expiration. TRD and JAD are owned by Timothy
Damadian and Jevan Damadian, respectively, who are the sons of Raymond V.
Damadian.
Long Island Management Services, LLC, a New York limited liability company of
which TRD, JAD and Donna Damadian are, among others, members, is party to a
service agreement with FONAR for its Stand-Up(TM) MRI scanner running from
September 10, 2005 through September 9, 2006 at a fee of $85,000 per annum. It
is anticipated that the service agreement will be renewed upon its expiration.
Donna Damadian is the wife of Raymond Damadian. TRD and JAD are owned by
Timothy Damadian and Jevan Damadian, respectively, the sons of Raymond and Donna
Damadian.
Miami MRI Associates, LLC, also referred to as Miami, a Florida limited
liability company of which TRD, JAD and Donna Damadian are, among other parties,
members, purchased a Stand-Up(TM) MRI from Fonar on which the warranty expired
in October, 2004. Miami then entered into a one year service agreement with
FONAR at a rate of $85,000 per annum. It is anticipated that the service
agreement will be renewed upon its expiration. Donna Damadian is the wife of
Raymond Damadian. TRD and JAD are owned by Timothy Damadian and Jevan Damadian,
respectively, the sons of Raymond and Donna Damadian.
During the second quarter in fiscal 2003, Manhattan Management Services, LLC, a
New York limited liability company of which TRD, JAD, Donna Damadian, Keira
Reinmund and Robert Djerejian are among other parties, members, agreed to
purchase a Stand-Up(TM) MRI from Fonar for a purchase price of $1,400,000. The
construction and installation of this scanner was completed in December, 2003
and payment has been made in full. Donna Damadian is the wife of Raymond
Damadian. TRD and JAD are owned by Timothy Damadian and Jevan Damadian,
respectively, the sons of Raymond and Donna Damadian. Keira Reinmund is the
daughter of Raymond and Donna Damadian. Robert Djerejian is a member of the
Board of Directors of Fonar.
During the fourth quarter of fiscal 2003, Queens Management Services, LLC, a New
York limited liability company of which TRD, JAD, Keira Reinmund, Donna Damadian
and Robert Djerejian are among other parties, members, agreed to purchase a
Stand-Up(TM) MRI from Fonar for $1,400,000. The construction and installation
of this scanner was completed in February, 2004, and payment has been made in
full. Donna Damadian is the wife of Raymond Damadian. TRD and JAD are owned by
Timothy Damadian and Jevan Damadian, respectively, the sons of Raymond and Donna
Damadian. Keira Reinmund is the daughter of Raymond and Donna Damadian. Robert
Djerejian is a member of the Board of Directors of Fonar.
During the third quarter of fiscal 2004, South Shore Management Services, LLC, a
New York limited liability company of which TRD, JAD, Keira Reinmund, Donna
Damadian and Robert Djerejian are among other parties, members, agreed to
purchase a Stand-Up(TM) MRI from FONAR for $1,400,000 payable in installments as
the work progresses in accordance with Fonar's usual terms. The construction
and installation of this scanner was completed in October 2004. Donna Damadian
is the wife of Raymond Damadian. TRD and JAD are owned by Timothy Damadian and
Jevan Damadian, respectively, the sons of Raymond and Donna Damadian. Keira
Reinmund is the daughter of Raymond and Donna Damadian. Robert Djerejian is a
member of the Board of Directors of Fonar.
Melville MRI P.C., a New York professional corporation of which Raymond V.
Damadian is the sole shareholder, director and President, entered into an
agreement to purchase a Stand-Up(TM) MRI scanner from Fonar for $1,500,000 in
December 2004. The installation has been completed and the purchase price paid
in full as of February 2005.
Stand-Up MRI of East Elmhurst, P.C., a New York professional corporation of
which Raymond V. Damadian is the sole shareholder, director and President,
entered into an agreement to purchase a Stand-Up(TM) MRI scanner from Fonar for
$1,500,000 in October 2004. The installation has been completed and the
purchase price paid in full as of May 2005.
Stand-Up MRI & Diagnostic Center, P.A., a Florida professional association of
which Raymond V. Damadian is the sole shareholder, director and President,
entered into an agreement to purchase a Stand-Up(TM) MRI scanner from Fonar for
$1,500,000 to be installed in Ormond Beach, Florida in January 2005. The
installation has been completed and the purchase price paid in full as of May
2005.
Stand-Up MRI of Islandia, P.C., a New York professional corporation of which
Raymond V. Damadian is the sole shareholder, director and President, entered
into an agreement to purchase a Stand-Up(TM) MRI scanner from Fonar for
$1,500,000 to be installed in East Setauket, New York in March 2005. The
installation has been completed and the purchase price paid in full as of August
2005.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit Fees
The aggregate fees billed by Marcum & Kliegman LLP for the audit of our annual
consolidated financial statements for the fiscal year ended June 30, 2005 and
the reviews of the financial statements included in our Forms 10-Q for the
fiscal year ended June 30, 2005 were $542,643.
The aggregate fees billed by Marcum & Kliegman LLP for the audit of our annual
financial statements for the fiscal year ended June 30, 2004 and the reviews of
the financial information included in our Forms 10-Q for the fiscal year ended
June 30, 2004 were $418,276.
Audit Related Fees
No fees were billed by Marcum & Kliegman LLP for the fiscal years ended June 30,
2005 or June 30, 2004 for services related to the audit or review of our
financial statements that are not included under the caption "Audit Fees".
No fees were billed by Marcum & Kliegman LLP for the fiscal years ended June 30,
2005 or June 30, 2004 for designing, operating, supervising or implementing any
of our financial information systems or any hardware or software systems for our
financial information.
Tax Fees
The aggregate fees billed by Marcum & Kliegman LLP for tax compliance, tax
advice and tax planning in the fiscal year ended June 30, 2005 were $149,793.
The aggregate fees billed by Marcum & Kliegman LLP for tax compliance, tax
advice and tax planning in the fiscal year ended June 30, 2004 were $172,542.
All Other Fees
The aggregate fees billed by Marcum & Kliegman LLP for all other services
rendered by them during the fiscal years ended June 30, 2005 and June 30, 2004
were $264,646 and $106,452, respectively, which included services in connection
with the registration of securities, internal control reviews, employee benefit
plan audits and reviews and procedures that we requested Marcum & Kliegman to
undertake to provide assurances on matters not required by laws or regulations.
Since January 1, 2003, the audit committee has adopted policies and procedures
for pre-approving all non-audit work performed by the auditors. Specifically,
the committee must pre-approve the use of the auditors for all such services.
The audit committee has pre-approved all non-audit work since that time and in
making its determination has considered whether the provision of such services
was compatible with the independence of the auditors.
Our audit committee believes that the provision by Marcum & Kliegman LLP of
services in addition to audit services in fiscal 2005 and 2004 were compatible
with maintaining their independence.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
a) FINANCIAL STATEMENTS AND SCHEDULES
The following consolidated financial statements are included in Part II, Item 8.
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm on Internal
Control over Financial Reporting
Consolidated Balance Sheets as at June 30, 2005 and 2004.
Consolidated Statements of Operations for the Three Years Ended June
30, 2005, 2004 and 2003.
Consolidated Statements of Stockholders' Equity for the Three Years
Ended June 30, 2005, 2004 and 2003.
Consolidated Statements of Cash Flows for the Three Years Ended June
30, 2005, 2004 and 2003.
Notes to Consolidated Financial Statements.
Information required by schedules called for under Regulation S-X is
either not applicable or is included in the consolidated financial statements or
notes to the financial statements.
b) REPORTS ON FORM 8-K
None.
c) EXHIBITS
3.1 Certificate of Incorporation, as amended, of the Registrant
incorporated 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 Registrant incorporated by reference to Exhibit 4.1 to the Registrant's
registration statement on Form S-8, Commission File No. 33-62099.
3.3 Section A of Article Fourth of the Certificate of Incorporation, as
amended, of the Registrant incorporated by reference to Exhibit 4.3 to the
Registrant's registration statement on Form S-3, Commission File No. 333-63782.
3.4 Section A of Article Fourth of the Certificate of Incorporation, as
amended, of the Registrant incorporated by reference to Exhibit 3.3 of the
Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2003,
Commission File No. 0-10248.
3.5 By-Laws, as amended, of the Registrant incorporated 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 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 by reference
to Exhibit 4.2 to the Registrant's registration statement on Form S-1,
Commission File No. 33-13365.
4.3 Form of 4% Convertible Debentures due June 30, 2002 incorporated by
reference to Exhibit 4.1 of the Registrant's current report on Form 8-K filed on
June 11, 2001. Commission File No. 0-10248.
4.4 Form of Purchase Warrants incorporated by reference to Exhibit 4.2 of
the Registrant's current report on Form 8-K filed on June 11, 2001.
Commission File No. 0-10248.
4.5 Form of Callable Warrants incorporated by reference to Exhibit 4.3 of
the Registrant's current report on Form 8-K filed on June 11, 2001.
Commission File No. 0-10248.
4.6 Form of Replacement Callable Warrants incorporated by reference to
Exhibit 4.7 of the Registrant's registration statement on Form S-3, Commission
File No. 333-10677.
4.7 Form of Amended and Restated Purchase Warrant for The Tail Wind Fund,
Ltd. incorporated by reference to Exhibit 4.7 of the Registrants registration
statement on Form S-3, Commission File No. 333-116908.
4.8 Form of Amended and Restated Purchase Warrant for Placement Agent and
Designees incorporated by reference to Exhibit 4.8 of the Registrant's
registration statement on Form S-3, Commission File No. 333-116908.
10.1 License Agreement between the Registrant and Raymond V. Damadian
incorporated 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 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 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 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 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 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 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 the Registrant
and Reckson Associates incorporated 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 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 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 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 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 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 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 by reference to Exhibit 28.2 to
the Registrant's registration statement on Form S-8, Commission File No.
33-62099.
10.15 1997 Non-Statutory Stock Option Plan incorporated by reference to
Exhibit 28.1 to the Registrant's registration statement on Form S-8, Commission
File No.: 333-27411.
10.16 1997 Stock Bonus Plan incorporated by reference to Exhibit 28.2 to
the Registrant's registration statement on Form S-8, Commission File No:
333-27411.
10.17 Stock Purchase Agreement, dated July 31, 1997, by and between U.S.
Health Management Corporation, Raymond V. Damadian, M.D. MR Scanning Centers
Management Company and Raymond V. Damadian, incorporated by reference to Exhibit
2.1 to the Registrant's Form 8-K, July 31, 1997, commission File No: 0-10248.
10.18 Merger Agreement and Supplemental Agreement dated June 17, 1997 and
Letter of Amendment dated June 27, 1997 by and among U.S. Health Management
Corporation and Affordable Diagnostics Inc. et al., incorporated by reference to
Exhibit 2.1 to the Registrant's 8-K, June 30, 1997, Commission File No:
0-10248.
10.19 Stock Purchase Agreement dated March 20, 1998 by and among Health
Management Corporation of America, FONAR Corporation, Giovanni Marciano, Glenn
Muraca et al., incorporated by reference to Exhibit 2.1 to the Registrant's 8-K,
March 20, 1998, Commission File No: 0-10248.
10.20 Stock Purchase Agreement dated August 20, 1998 by and among Health
Management Corporation of America, FONAR Corporation, Stuart Blumberg and Steven
Jonas, incorporated by reference to Exhibit 2 to the Registrant's 8-K, September
3, 1998, Commission File No. 0-10248.
10.21 2000 Stock Bonus Plan incorporated by reference to Exhibit 99.1 to
the Registrant's registration Statement on Form S-8, Commission File No.:
333-66760.
10.22 2002 Stock Bonus Plan incorporated by reference to Exhibit 99.1 to
the Registrant's registration statement on Form S-8, Commission File No.:
333-89578.
10.23 2002 Incentive Stock Option Plan incorporated by reference to
Exhibit 99.1 to the Registrant's registration statement on Form S-8, Commission
File No.: 333-96557.
10.24 2003 Stock Bonus Plan incorporated by reference to Exhibit 99.1 to
the Registrant's registration statement on Form S-8, Commission File No:
333-106626.
10.25 2003 Supplemental Stock Bonus Plan incorporated by reference to
Exhibit 99.1 to the Registrant's registration statement on Form S-8, Commission
File No: 333-106626.
10.26 2004 Stock Bonus Plan incorporated by reference to Exhibit 99.1 to
the Registrant's registration statement on Form S-8, Commission File No.
333-112577.
10.27 Purchase Agreement dated May 24, 2001 by and between the Registrant
and The Tail Wind Fund Ltd. incorporated by reference to Exhibit 10.1 to the
Registrant's current report on Form 8-K filed June 11, 2001. Commission
File No. 0-10248.
10.28 Registration Rights Agreement dated May 24, 2001 by and among the
Registrant, The Tail Wind Fund Ltd. and Roan Meyers, Inc. incorporated herein
by reference to Exhibit 10.2 to the Registrant's current report on Form 8-K
filed June 11, 2001. Commission File No. 0-10248.
10.29 Amendment to Callable Warrant dated April 28, 2004 by and between
The Tail Wind Fund, Ltd. and the Registrant incorporated by reference to Exhibit
10.17 to the Registrant's registration statement on Form S-3, Commission File
No. 333-116908.
10.30 First Amendment to Purchase Warrant dated April 28, 2004 by and
between The Tail Wind Fund, Ltd. and the Registrant incorporated by reference to
Exhibit 10.18 to the Registrant's registration statement on Form S-3, Commission
File No. 333-116908.
10.31 Form of First Amendment to Purchase Warrant dated June 1, 2004 by
and between each of Roan/Meyers Associates, L.P. and its designees and the
Registrant, incorporated by reference to Exhibit 10.19 to the Registrant's
registration statement on Form S-3, Commission File No. 333-116908.
10.32 Asset Purchase Agreement dated July 28, 2005 among Health Plus
Management Services, L.L.C., Health Management Corporation of America, Dynamic
Healthcare Management, Inc. and Fonar Corporation, incorporated by reference to
Exhibit 2 to the Registrant's Form 8-K, August 2, 2005, Commission File No.
0-10248.
14.1 Code of Ethics, incorporated by reference to Exhibit 14.1 of
registrant's Form 10-K for the fiscal year ended June 30, 2004, Commission File
No.: 0-10248.
21.1 Subsidiaries of the Registrant. See Exhibits.
23.1 Independent Registered Public Accounting Firm's Consent
31.1 Section 302 Certification. See Exhibits.
32.1 Section 906 Certification. See Exhibits.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this amended report to be signed
on its behalf by the undersigned, thereunto duly authorized.
FONAR CORPORATION
Dated: October 20, 2005
By: /s/ Raymond Damadian
Raymond V. Damadian, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
amended report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Raymond Damadian Chairman of the October 20, 2005
Raymond V. Damadian Board of Directors,
President, Director
Principal Executive
Officer and Acting
Principal Financial
Officer)
/s/ Claudette J.V. Chan Director October 20, 2005
Claudette J.V. Chan
/s/ Robert J. Janoff Director October 20, 2005
Robert J. Janoff
/s/ Charles N. O'Data Director October 20, 2005
Charles N. O'Data
/s/ Robert Djerejian Director October 20, 2005
Robert Djerejian
CORPORATE INFORMATION
Corporate Headquarters
110 Marcus Drive
Melville, NY 11747
(631) 694-2929
Investor Relations
FONAR Corporation
110 Marcus Drive
Melville, NY 11747
(631) 694-2929
Stock Transfer Agency
Computershare Trust Company, Inc.
350 Indiana Street, Suite 800
Golden, Colorado 80401
Auditors
Marcum & Kliegman, LLP
New York, New York
Board of Directors
Raymond V. Damadian, M.D.
Chairman of the Board
Claudette Chan, Director
Robert Janoff, Director
Charles O'Data, Director
Robert Djerejian, Director
Officers
Raymond V. Damadian, M.D.
President, Chief Executive Officer and Treasurer
David B. Terry
Senior Vice President and Secretary