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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [Fee Required] For the fiscal year ended June 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934 [No Fee Required] For the transition
period from _____________ to _____________
Commission File No. 0-10248
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FONAR CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 11-2464137
(State of incorporation) (IRS Employer Identification Number)
110 Marcus Drive, Melville, New York 11747
(Address of principal executive offices) (Zip Code)
(631) 694-2929
(Registrant's telephone number, including area code)
_____________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.0001 per share
(Title of Class)
______________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes ___X___ No _______
Indicate by check mark if disclosure of delinquent filers, pursuant to Item 405
of Regulation S-K (ss.229.405 of this Chapter), is not contained herein, and
will not be contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
10-K or any amendment to the Form 10-K. [X]
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 August 31, 2004, 99,431,233 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 96,884,790 shares of Common Stock
held by non-affiliates as of such date based on the closing price per share on
August 31, 2004 as reported on the NASDAQ System, was approximately
$106,573,269. The other outstanding classes do not have a readily determinable
market value.
DOCUMENTS INCORPORATED BY REFERENCE
None
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) Brand MRI scanner and Fonar 360(TM) MRI scanner.
The product we are now most vigorously promoting is our Stand-Up(TM) MRI. The
Stand-Up(TM) MRI is unique in the industry in that it allows patients to be
scanned in a fully weight-bearing condition, such as standing, sitting or
bending in any position that causes symptoms. This means that an abnormality or
injury, such as a slipped disk can be visualized where it may not be visualized
with the patient lying down.
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.
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) MRI and the
Fonar 360(TM).
The Stand-Up(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. In the future 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, 2004, we received orders for 39
Stand-Up(TM) MRI scanners as compared to 22 for the fiscal year ended June 30,
2003. Revenues recognized from the sale of Stand-Up(TM) MRI scanners increased
in fiscal 2004 by 76% over fiscal 2003 from approximately $24.3 million in
fiscal 2003 to approximately $42.7 million in fiscal 2004, following a 119%
increase from fiscal 2002 to fiscal 2003, when revenues from the sale of
Stand-Up(TM) MRI scanners increased from $11.1 million to $24.3 million in
fiscal 2003. The following chart shows the revenues attributable to our
different model scanners for the fiscal years ended June 30, 2003 and June 30,
2004. 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 2003 Fiscal 2004
Stand-Up(TM) $24,298,460 $42,668,377
Fonar 360(TM) 0 0
QUAD(TM) 0 0
Echo(TM) 0 0
Beta(TM)(used) $ 100,000 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 15 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, and six physical
therapy and rehabilitation practices located principally in New York State and
Florida. HMCA discontinued management of primary care offices, selling that
portion of its business in April, 2003.
PRODUCTS
FONAR's principal products are the Stand-Up(TM) MRI and the Fonar 360(TM).
The Stand-Up(TM) MRI is a whole-body open MRI system that enables positional MRI
(pMRI(TM)) applications, such as weight-bearing MRI studies. Operating at a
magnetic field strength of 0.6 Tesla, the scanner is a powerful, diagnostically
versatile and cost-effective open MRI that provides a broad range of clinical
capabilities and a complete set of imaging protocols.
Patients can be scanned standing, 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 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) version, the Fonar
360(TM) serves as an open patient-friendly scanner which allows 360 access to
the patient on the scanner bed.
To optimize the patient-friendly character of the Open Sky(TM) MRI, the walls,
floor, ceiling and magnet poles are decorated with landscape murals. The patient
gap is twenty inches and the magnetic field strength, like that of FONAR's
earlier QUAD(TM) MRI scanner, is 0.6 Tesla.
In the future, we may also develop the Fonar 360(TM) to function as an MRI
guided interventional scanner. In this version, which is in the planning stages,
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 operator 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 by
means of the MRI image. Surgically inoperable lesions may then 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 they are promising possibilities.
With current treatment methods, therapy must always be restricted in the doses
that can be applied to the malignant tissue because of the adverse effects on
the healthy tissues. Thus chemotherapies must be limited at the first sign of
toxic side effects. The same is the case with radiation therapy. 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 enable the operator to make
assessments during treatment whether the treatment is being effective.
The interventional version of the Fonar 360(TM) is still in the planning stages.
There is not a prototype. A separate FDA submission for the interventional Fonar
360(TM) has not been made as yet and might not be necessary in that it was not
required of other MRI manufacturers in similar situations. We note that other
manufacturers have incorporated the use of their imaging machine for use in
interventional procedures without separate FDA submissions.
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 enables 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 2004, sales of our Stand-Up(TM) MRI scanners accounted for
approximately 59.6% of our total revenues and 87.7% of our medical equipment
revenues, as compared to 45.9% of total revenues and 81.1% of medical equipment
revenues in fiscal 2003 and 25.7% of total revenues and 68.7% of medical
equipment revenues in fiscal 2002. 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 2003, less than 1% of both total revenues and of medical equipment
revenues were derived from the sale of a refurbished Beta(TM) scanner and during
fiscal 2002, 1% of total revenues and 2.1% of medical equipment revenues were
derived from the sale of two refurbished Beta(TM) scanners. During fiscal 2004,
no medical equipment sales revenues were derived from sales of Beta(TM)
scanners. The Beta(TM) is an older model scanner which the Company does not
manufacture any longer. Nevertheless, the Company can refurbish and sell used
Beta(TM) scanners where there is a demand for it.
During fiscal 2004 and fiscal 2003, sales of our Fonar 360(TM) scanners
accounted for none of our revenues, although 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 our objective is to achieve profitability as soon as possible,
primarily through product sales, we expect to continue our focus on the
Stand-Up(TM) MRI in the immediate future. Further in the future, we are
optimistic that our other products including the Fonar 360(TM) 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 hospitals and private
scanning centers.
Fonar's internal sales force is approximately 15 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 addition, FONAR has expanded its website to include 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 2004 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.
In 2004, FONAR exhibited for the second time at the annual meeting of the
American Academy of Orthopedic Surgeons (AAOS). FONAR has targeted orthopedic
surgeons as an important market for its Stand-Up(TM) MRI, and plans to attend
future AAOS meetings.
In addition, in April, 2004 FONAR exhibited at the American Association of
Neurosurgeons (AANS) and plans to do so again in 2005 and future years.
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, 2004, 1.2% of the Company's revenues were generated by
foreign sales, as compared to 3.0% and 5.0% for fiscal 2003 and 2002,
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 $2.2 million in fiscal 2002 and $2.5 million
in fiscal 2003 and $3.2 million in fiscal 2004.
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
$386,898 in fiscal 2002 and $205,893 in fiscal 2003. We had no upgrade revenue
in fiscal 2004.
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, 2004, we incurred expenditures of
$6,079,797, $588,735 of which was capitalized, on research and development, as
compared to $5,955,667, $791,216 of which was capitalized and $5,955,394,
$855,612 of which was capitalized, during the fiscal years ended June 30, 2003
and June 30, 2002, 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, 2004 was approximately $40.7 million,
as compared to $26.8 million at July 1, 2003. Of these amounts, approximately
$7.8 million and $4.9 million had been paid to FONAR as customer advances as at
July 1, 2004 and July 1, 2003, respectively. Of the backlog amounts at July 1,
2004 and July 1, 2003, $234,000 and $2.5 million, respectively, represented
orders from affiliates. 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 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 94 patents issued and
approximately 55 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 94 issued patents extend to various times up to 2022.
We have entered into a cross-licensing agreement, utilizing other than FONAR's
MRI technology, with another entity to use prior art developed for nuclear
magnetic resonance technology and have entered into 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 Engalnd. 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 physicians' practices and other
medical providers, in particular diagnostic imaging centers. 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 and six physical therapy and
rehabilitation practices. In April, 2003, HMCA sold its subsidiary A&A Services,
Inc. which managed four primary care medical practices. For the 2004 fiscal
year, the revenues HMCA recognized from the MRI facilities were $13,289,902 and
the revenues recognized from the physical therapy and rehabilitation practices
were $9,690,000. For the 2003 fiscal year, the revenues HMCA recognized from the
MRI facilities were $13,497,837 and the revenues recognized from the physical
therapy and rehabilitation practices were $9,435,000. The revenues recognized
from the primary care medical practices were $1,179,095 through April 9, 2003,
when this part of our business was sold. These revenues have been reclassified
as part of discontinued operations in the consolidated financial statements.
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 Stand-Up(TM) MRI
scanners at the most promising locations. To date, we have installed new
Stand-Up(TM) MRI scanners at the MRI facilities we manage in Islandia, New York,
Staten Island, New York, Bensonhurst, New York and Boca Raton, Florida, which
new site replaced our prior site in Deerfield Beach, Florida. We also plan to
install Stand-Up(TM) MRI scanners at other MRI facilities we manage. The next
locations at which we plan to install Stand-Up(TM) MRI scanners are in East
Elmhurst, New York and Daytona, Florida.
HMCA's longer range plans involve opening new MRI facilities clustered in
selected television and radio media areas in New York, Florida, Houston, Boston,
Los Angeles and Chicago, although at the present time our efforts are focused
only in the New York and Florida markets. Marketing efforts in targeted areas
include television, radio and billboard advertising.
In addition, HMCA has promoted the opening of new physical therapy and
rehabilitation offices by existing clients, expanding the number of such offices
from the initial three offices we managed in August, 1998 to the six offices we
currently manage. HMCA no longer manages any primary care offices and has no
present plans to do so. In April, 2003, HMCA sold A&A Services, Inc., a company
which it had acquired in 1998. This subsidiary managed four primary care
offices.
PHYSICIAN AND DIAGNOSTIC MANAGEMENT SERVICES
HMCA's services to the facilities and practices it manages encompass
substantially all of their business operations. The facilities and practices are
controlled, however, by the physician owners, not HMCA, and all medical services
are performed by the physicians and other medical personnel under their
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.
Additional physicians, physical therapists and technologists have been added
where needed.
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, flat fees are charged on a monthly basis. Fees are
subject to adjustment on an annual basis, but must be based on mutual agreement.
The per procedure charges to the MRI facilities range from $250 to $550 per MRI
scan. The monthly fees charged to the physical therapy and rehabilitation
practices range from approximately $90,000 to $285,000. No MRI facilities or
physical therapy and rehabilitation facilities are owned by HMCA. Only one
chiropractic practice managed by HMCA, providing HMCA with management fees of
approximately $22,500 in fiscal 2003 and $180,000 in fiscal 2002, was owned by a
seller in an acquisition. HMCA discontinued management of this practice in the
beginning of the second quarter of fiscal 2003.
The practices and the facilities enter into contracts with third party payors,
including managed care companies. With the exception of some capitated health
plans in which the medical practices previously managed by HMCA up to April,
2003, participated, neither HMCA's clients nor HMCA participate in any risk
sharing arrangements. Capitated plans are those HMO programs where the provider
is paid a flat monthly fee per patient. All of the fees from capitated health
plans were attributable to medical professional corporations managed by A & A
Services, Inc., representing 48%, and 46% of their revenues in fiscal 2003 and
fiscal 2002, respectively. Since divesting itself of the A&A Services, Inc. as
of April 8, 2003, none of HMCA's clients nor HMCA have participated in any
capitated or other risk sharing arrangements.
HMCA MARKETING
HMCA's marketing strategy is to expand the business and improve the facilities
and practices which it manages. HMCA will also seek to increase the number of
locations of those facilities and practices where market conditions are
promising. HMCA will seek to promote growth of its clients' patient volume and
revenue through installing new Stand-Up(TM) MRI scanners at MRI facilities and
advertising in television, radio and other media.
HMCA's lack of capital resources has prevented HMCA from increasing the number
of clients it manages through acquisitions since it made its most recent
acquisition in August, 1998.
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.
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 2004, approximately 8.5% of the revenues of HMCA's clients were
attributable to Medicare and 1.0% were attributable to Medicaid. In fiscal 2003,
approximately 11.8% of the revenues of HMCA's clients were attributable to
Medicare and 0.5% 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, 2004
approximately 57.9% of our clients' receipts were from patients covered by
no-fault insurance and approximately 6.7% of our client's receipts were from
patients covered by worker's compensation programs. For the fiscal year ended
June 30, 2003, approximately 57.7% of HMCA's clients' receipts were from
patients covered by no-fault insurance and approximately 11.1% 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, 2004, we employed 476 persons on a full-time and part-time basis.
Of such employees, 31 were engaged in marketing and sales, 52 in research and
development, 92 in production, 51 in customer support services, 250 in
administration, including 135 on site at facilities and offices managed by HMCA
and 74 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 $993,578,
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
$426,930. The term of the lease extends through September, 2009. In addition,
HMCA maintains leased office premises for its clients at approximately 22 site
locations having an aggregate annual rental rate of approximately $1.3 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 14, 2004, we held our annual meeting of stockholders. The matters before
the meeting were 1. the election of directors, 2. the ratification of certain
stock bonus plans and 3. the ratification of the selection of auditors for
fiscal 2004. 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 2004. 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 Supplemental
2003 Stock Bonus Plan and the 2004 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 324,800,951 3,057,114
Claudette J.V. Chan 324,797,479 3,060,586
Robert J. Janoff 324,969,072 2,889,093
Charles N. O'Data 325,025,571 2,832,494
Robert Djerejian 324,901,727 2,956,338
(2) Ratification of Stock Bonus and Option Plans
FOR AGAINST ABSTAIN BROKER NON-VOTES
--- ------- ------- ----------------
256,049,474 6,642,339 689,345 64,476,907
(3) Ratification of Auditors Marcum & Kliegman LLP
FOR AGAINST ABSTAIN BROKER NON-VOTES
--- ------- ------- ----------------
326,045,921 1,413,213 398,932 0
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 2002 1.99 0.99
October - December 2002 1.30 0.96
January - March 2003 1.12 0.80
April - June 2003 1.45 0.81
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 - August 2004 1.30 1.00
On August 31, 2004, we had approximately 4,671 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 4,031 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, 2004. 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,
2004 2003 2002 2001 2000
--------------- ------------- ------------- ------------- -------------
Revenues(1) $71,609,000 $52,892,000 $43,161,000 $40,274,000 $33,560,000
Cost of $44,407,000 $32,477,000 $24,682,000 $25,959,000 $25,054,000
revenues(1)
Research & $5,491,000 $5,164,000 $5,100,000 $5,866,000 $5,532,000
Development
Expenses
Net Loss $(9,494,000) $(15,201,000) $(16,956,000) $(14,538,000) $(11,054,000)
from
continued
operations
Net Gain $ --- $ 194,000 $(5,926,000) $(646,000) $98,000
(Loss) from
discontinued
operations
Basic and $(.10) $ (.20) $ (.27) $ (.25) $ (.20)
Diluted Net
Loss per
common share-
continuing
operations
Basic and $--- $ --- $ (.09) $ (.01) $ ---
Diluted Net
Gain (Loss)
per common
share-
discontinued
operations
Weighted 91,027,951 75,816,973 63,511,814 57,388,050 55,096,212
average
number of
shares
outstanding
BALANCE SHEET DATA
Working $22,593,000 $13,517,000 $14,107,000 $17,206,000 $24,857,000
capital(1)
Total $77,201,000 $58,749,000 $73,129,000 $84,900,000 $84,599,000
assets
Long- $ 6,702,000 $1,930,000 $ 9,624,000 $17,760,000 $15,443,000
term debt(1)
and
obligations
under
capital
leases
Stock- $43,154,000 $32,379,000 $35,695,000 $41,830,000 $51,285,000
holder's
equity
(1) Amounts as of and for the years ended June 30, 2000 to June 30, 2003 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) 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 2004 and 2003, respectively received orders for 39 and
22 Stand-Up(TM) MRI scanners. The Stand-Up(TM) MRI is the only MRI capable of
producing images in the weight bearing state.
At 0.6 Tesla field strength, the Stand-Up(TM) MRI 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.
All of HMCA's revenues for the fiscal year ended June 30, 2004 and 99% of HMCA's
revenues for the fiscal years ended June 30, 2003, June 30, 2002, 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 $550 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, provide for a term of 20 years. The fees are fixed monthly fees
adjusted annually. Historically, adjustments have been on the basis of changes
in HMCA's costs, plus a percentage of costs. Currently, the monthly fees under
these contracts with the physical rehabilitation practices range from
approximately $90,000 to $285,000. Prior to HMCA's diversiture of A&A Services,
Inc., which managed the medical practices, the monthly fees under the contracts
with the medical practices were $110,000 during fiscal 2003.
Critical Accounting Policies
----------------------------
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to investments, intangible assets, income taxes, contingencies and
litigation. We base our estimates on historical experience and on various
assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements. We recognize revenue and related costs of revenue from
sales contracts for our MRI 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, 2004, 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. During the
year ended June 30, 2002, we recorded an impairment loss of $4,700,000 related
to the management contracts in our physician's management services segment with
the primary care medical practices. In April, 2003, we sold A&A Services, Inc.,
the subsidiary which held those contracts, back to the original sellers for a
purchase price of $4.0 million. In addition, the buyers released HMCA from the
balance of its indebtedness remaining due on the original purchase, in the
amount of $913,495. As depreciated assets attributed to these contracts was
$3,298,443, we recognized a gain of $509,814 on the transaction. These amounts
have been reflected as discontinued operations in the accompanying consolidated
financial statements.
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 represents a decrease in the net loss of 36.7.% and an
increase in revenues of 35.4%. This was due in part to the fact that while
revenues increased by 35.4%, total costs and expenses increased by only 17.7%.
Our consolidated operating loss decreased by 43.7% to $8.5 million for fiscal
2004 as compared to an operating loss of $15.1 million for fiscal 2003.
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. 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, 2004 and
June 30, 2003, respectively, we received orders for 39 and 22 Stand-Up(TM) MRI
scanners.
Confirming our expectation of increased demand for our MRI scanners, 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
decreased, however, by 26.9% in fiscal 2004 from $7.3 million in fiscal 2003 to
$5.3 million in fiscal 2004. We believe that our principal challenges in
achieving greater market penetration are 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 sales shows that we
are successfully meeting that challenge. Sales to related parties in fiscal 2004
were adversely affected, however, by the bankruptcy during the year of their
primary financing source, which had to be replaced. We anticipate that the trend
of increased sales to unrelated parties relative to sales to related parties
will continue to increase as we increase our penetration of the general market.
The operating loss for the medical equipment segment improved by 22.1% from a
loss of $11.3 million in fiscal 2003 to a loss of $8.8 million in fiscal 2004.
This improvement is attributable to our continuing increase in gross margins on
our scanner sales.
We recognized revenues of $42.7 million from the sale of our 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. We no longer manufacture Beta(TM) scanners.
Sales of MRI scanners to affiliated parties, consisting of professional
corporations and other entities in which Dr. Damadian or members of his family
have an interest represented approximately 7.4%, or $5.3 million, of our
revenues in fiscal 2004, as compared to 13.8%, or $7.3 million, of our revenues
in fiscal 2003.
License 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. The improvement was principally
attributable to the medical equipment segment operating at a higher level of
capacity resulting from the increased sales volume.
Research and development expenses, net of capitalized costs, 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, 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 2004 Compared to Fiscal 2003
--------------------------------------------------------------------------------
Revenues attributable to the Company's 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. The reversal of the decline in revenues reflected
anticipated increases in revenues provided by upgraded facilities offsetting the
closing of underperforming facilities. Presently, four 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 $13.3 million or 57.9% of
related revenues for the year ended June 30, 2003 to $13.8 million, or 60% of
related revenue 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 such as the introduction of Stand-Up(TM) MRI scanners at MRI
facilities.
Discussion of Consolidated Results of Operations
Fiscal 2004 Compared to Fiscal 2003
------------------------------------------------
We recognized interest income of $448,571 in 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
and a decrease in interest income from related parties.
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 debt and capital lease obligations in
fiscal 2004.
Selling, general and administrative expenses 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.
Commencing in fiscal 2002, we engaged the services of an advertising agency and
introduced television and radio advertising.
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.
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 and $43.0 in fiscal 2004. Most of
the revenues on the Stand-Up(TM) MRI scanners sold in the last quarter of fiscal
2004, were not recognized as of June 30, 2004, and as of June 30, 2004, our
balance sheet reflects $7.8 million in customer advances, as compared to $4.9
million in customer advances as at June 30, 2003. 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. In addition to increased product sales, the service and repair
fees 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 and $3.2 million in fiscal
2004.
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 2004 we continued
our investment in the development of our new MRI scanners, together with
software and upgrades, with an investment of $6,079,797 in research and
development, $588,735 of which was capitalized, as compared to $5,955,667,
$791,216 of which was capitalized, in fiscal 2003. The research and development
expenditures were approximately 12.5% of revenues attributable to our medical
equipment segment, and 8.5% of total revenues, in 2004 and 19.9% of medical
equipment segment revenues, and 11.3% of total revenues in fiscal 2003. This
represented a 2.1% increase in research and development expenditures in fiscal
2004 as compared to fiscal 2003 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 from fiscal
2001 through fiscal 2004. We anticipate that the increase in scanner sales will
continue due to the unique capability of the Stand-Up(TM) MRI scanner to scan
patients in weight-bearing positions and 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
reversed their decline in the same period, from $28.5 in fiscal 2001 to $27.0
million in fiscal 2002 to $22.9 in fiscal 2003 and $23.0 million in fiscal 2004.
We have reversed the decline in 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. Stand-Up(TM) MRI scanners are now
installed in the sites we manage in Islandia, New York, Bensonhurst, New York,
Staten Island, New York and Boca Raton, Florida. The next managed facilities
which we plan to install Stand-UP(TM) MRI scanners are in East Elmhurst, New
York, and Daytona, Florida. Our longer range plans involve managing new MRI
facilities clustered in selected television and radio media areas in major
metropolitan areas throughout the country.
Expenditures for advertising and marketing are likely to increase, as the
Company continues its efforts to promote sales.
RESULTS OF OPERATIONS. FISCAL 2003 COMPARED TO FISCAL 2002
In fiscal 2003, we experienced a net loss of $15.0 million and a net loss from
continuing operations of $15.2 million on revenues of $52.9 million as compared
to a net loss of $22.9 million and a net loss from continuing operations of
$17.0 million on revenues of $43.2 million for fiscal 2002. This represented an
decrease in the net loss of 34.4%, a decrease in the net loss from continuing
operations of 10.3% and an increase in revenues of 22.5%.
Discussion of Operating Results of Medical Equipment Segment
Fiscal 2003 Compared to Fiscal 2002
------------------------------------------------------------
Revenues attributable to our medical equipment segment increased by 85.2% to
$30.0 million in fiscal 2003 from $16.2 million in fiscal 2002, reflecting an
increase in product sales of 115%, from $11.6 million in fiscal 2002 to $24.9
million in fiscal 2003 and an increase in service revenue of 13.6% from $2.2
million in fiscal 2002 to $2.5 million in fiscal 2003. 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 228% in fiscal 2003 from
$5.4 million in fiscal 2002 to $17.7 million in fiscal 2003.
Product sales to related parties, consisting of professional corporations and
other entities in which Dr. Damadian or members of his family have an interest,
increased by approximately 17.7%, from $6.2 million in fiscal 2002 to $7.3
million in fiscal 2003. Such related party scanner sales represented
approximately 13.8% of our revenues is fiscal 2003 as compared to 13.9% of our
revenues in fiscal 2002.
Licensee and royalty revenue increased by 6.1% to approximately $2.6 million in
fiscal 2003 from approximately $2.4 million in fiscal 2002.
Gross profit margins on product sales improved significantly during fiscal 2003
from 28% in fiscal 2002 to 35.6% in fiscal 2003. 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 26% from an
operating loss of $15.4 million in fiscal 2002 to an operating loss of $11.3
million in fiscal 2003. This improvement was attributable to our increase in
gross margins on our scanner sales.
We recognized revenues of $24.3 million from the sale of Stand-Up(TM) MRI
scanners and of $100,000 from the sale of one refurbished, used, Beta(TM)
scanner in fiscal 2003. In fiscal 2002 we recognized revenues of $11.1 million
from the sale of Stand-Up(TM) MRI scanners and $361,000 from the sale of two
refurbished, used, Beta(TM) scanners.
Research and development expenses, net of capitalized costs, increased by 2% to
$5.2 million in fiscal 2003 as compared to $5.1 million in fiscal 2001. Our
expenses for fiscal 2003 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 2003 Compared to Fiscal 2002
-------------------------------------------------------------------------
Revenues attributable to our physician and diagnostic services management
segment (HMCA) decreased by 15.1% to $22.9 million in fiscal 2003 from $27.0
million in fiscal 2002. The decrease in revenues reflected a decline in MRI scan
volume prior to upgrading older scanners and the closing of certain facilities
managed by HMCA. The $1.2 million and $1.5 million in revenues from the medical
primary care practices in fiscal 2003 and 2002 are not included in HMCA's
revenues; this part of its business was sold and results of operations are shown
separately under discontinued operations.
Costs of revenues for our physician and diagnostic services management segment
increased from $13.7 million, or 50.7%, of related revenues for the year ended
June 30, 2002 to $13.3 million, or 57.9%, of related revenues for the year ended
June 30, 2002.
Operating results of this segment declined from operating income of $1.1 million
in fiscal 2002 to an operating loss of $3.8 in fiscal 2003. 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.
HMCA believes that focusing its efforts on more profitable facilities, including
the introduction of Stand-Up(TM) MRI scanners, will improve HMCA's
profitability.
Discontinued Operations - Fiscal 2003 Compared to Fiscal 2002
-------------------------------------------------------------
The net gain from discontinued operations for fiscal 2003 was $0.2 million as
compared to a loss from discontinued operations of $5.9 million in fiscal 2002.
The net gain from discontinued operations in fiscal 2003 consists of a loss from
discontinued operations of $0.3 million offset by a gain from the sale of
discontinued operations of $0.5 million. The loss from discontinued operations
for fiscal 2002 was attributable primarily to an impairment loss of $4.7 million
due to the reduction of the value of the management contracts with the medical
primary care practices reflected on our balance sheet because of past and
anticipated performance. This portion of HMCA's business was sold and
accordingly all results for the current and prior fiscal years have been
reclassified as discontinued operations. In addition, included in the loss from
discontinued operations in fiscal 2002, we recorded a debt conversion expense of
$545,000 in connection with a premium associated with the repayment of
approximately $2.5 million in long-term debt incurred in connection with the
initial acquisition of A&A by HMCA.
The gain on the sale of discontinued operations in fiscal 2003 was $509,814, and
represented the excess of the consideration received over the depreciated value
of the contracts and other assets of the sold subsidiary.
Discussion of Consolidated Results of Operations.
Fiscal 2003 Compared to Fiscal 2002
-------------------------------------------------
We recognized interest income of $670,678 in fiscal 2003 as compared to $973,862
in fiscal 2002, representing a decrease of 31.1%. The decrease was attributable
primarily to a decrease in interest on the Company's investments in marketable
securities.
Interest expense of $626,450 was recognized in fiscal 2003 decreasing from
$691,126 in fiscal 2002 and representing a decrease of 9.4%. The decrease was
attributable primarily to the repayment of long-term debt and capital lease
obligations in fiscal 2002.
In fiscal 2002, we recorded non-cash financing costs of $2.4 million in
connection with the payment of our convertible debentures to The Tailwind Fund
in common stock and the issuance of related warrants. This expense represented
the discount from the market price on the stock issued to The Tailwind Fund and
the value of the purchase warrants granted to the investor.
Selling, general and administrative expenses increased by 9.3% to $23.4 million
in fiscal 2003 from $21.4 million in fiscal 2002. The increase in selling,
general and administrative expenses was attributable primarily to the expansion
of Fonar's increased manufacturing, advertising, marketing and sales activity.
Commencing in fiscal 2002, we engaged the services of an advertising agency and
introduced television and radio advertising.
The increase in compensatory element of stock issuances from approximately $4.7
million in fiscal 2002 to $4.8 million in fiscal 2003 reflected the continued
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 $702,000 in fiscal 2003 as compared to
$972,000 in fiscal 2002, reflected a decrease in reserves and write-offs of
certain indebtedness. This represented primarily a reduction in the reserves for
fees due to HMCA from $729,000 in fiscal 2002 to $335,000 in fiscal 2003 offset
by an increase in Fonar's bad debt from $243,000 in fiscal 2002 to $367,000 in
fiscal 2003.
The amortization expense in fiscal 2002 and 2001 of approximately $696,000 in
each year reflects the amortization of management agreements attributable to
HMCA's acquisitions. The loss on impairment of management agreements of $795,000
was attributable to the closure of the primary care practices managed by HMCA's
subsidiary, Central Health Care Services, Inc. because of a significant decline
in overall patient volume.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and marketable securities increased by 35.7% from $15.2
million at June 30, 2003 to $20.6 million at June 30, 2004.
Marketable securities approximated $11.1 million as of June 30, 2004, as
compared to $5.8 million as of June 30, 2003. At June 30, 2004, we increased our
investments in U.S. Government obligations from approximately $3.9 million at
June 30, 2003 to approximately $5.2 million, increased our investments in
corporate and government agency bonds from approximately $1.9 million at June
30, 2003 to approximately $3.4 million and increased our investments in
certificates of deposits, notes and equivalents from $0 at June 30, 2003 to $2.5
million.
Cash provided by operating activities for fiscal 2004 approximated $6.5 million.
Cash provided by operating activities was attributable substantially to the
retention of cash payments made by customers through the issuance of stock
valued at $12.0 million to pay costs and expenses, the issuance of stock valued
at $4.1 million, the compensatory element of stock issuance, the increase of
accounts payable of $1.7 million, the increase of various, or "other" current
liabilities of $2.6 million and the increase in customer advances of $2.9
million.
Cash used in investing activities for fiscal 2004 approximated $8.4 million. The
principal uses of cash from investing activities were purchases of marketable
securities of $5.4 million, purchases of property and equipment of $1.9 million,
costs of capitalized software development of $630,000 and costs of patents and
copyrights of $573,000.
Cash provided by financing activities for fiscal 2004 approximated $2.0 million.
The principal sources of cash in financing activities were proceeds from the
exercise of stock options and warrants of $3.9 million, offset by the repayment
of borrowings and capital lease obligations of $1.0 and distributions to holders
of minority interests of $916,000. Proceeds from long-term debt of $5.5 million
were offset by an increase of restricted cash of $5.5 million.
Total liabilities increased by 29.4% during fiscal 2004, from approximately
$26.0 million at June 30, 2003 to approximately $33.7 million at June 30, 2004.
The increase in total liabilities reflected principally an increase of 485.4% in
the current portion of long-term debt and capital leases, from $1.0 million at
June 30, 2003 to $6.0 million at June 30, 2004, an increase in accounts payable
of 44.9% from $3.7 million at June 30, 2003 to $5.4 million at June 30, 2004 and
an increase in customer advances of 58.1% from $4.9 million at June 30, 2003 to
$7.8 million at June 30, 2004. The increase was offset in part by other items,
principally a decrease in billings in excess of costs and estimated earnings of
38.2% from $4.8 million at June 30, 2003 to $2.9 million at June 30, 2004 and a
decrease in deferred revenue from a license fee, from $2.3 million at June 30,
2003 to $0 at June 30, 2004.
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 Years years years years
---------- ----------- ---------- ---------- ---------- ----------
Long-term debt $ 6,245,388 $5,742,570 $ 461,078 $ 41,740 $ -
Capital lease
Obligation 457,105 240,421 127,355 86,435 2,894
Employment Contract
Obligations 2,083,334 500,000 1,500,000 83,334 -
Operating
leases 12,899,484 2,685,922 5,041,273 3,651,311 1,520,978
----------- ---------- ---------- ---------- ----------
Total cash
Obligations $21,685,311 $9,168,913 $7,129,706 $3,862,820 $1,523,872
=========== ========== ========== ========== ==========
As at June 30, 2004, our obligations included approximately $1.7 million in
various state sales taxes.
Our working capital surplus as of June 30, 2004 approximates $22.6 million, as
compared to a working capital surplus of $13.5 million as of June 30, 2003.
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 2004, the compensatory element of stock
issuances was $4.1 million as compared to $4.8 million for fiscal 2003.
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 2004 approximated $1.9 million and substantially
consisted of office and research and development equipment, in the amount of
$1.0 million, capitalized software costs of $630,000, and capitalized patent
costs of $573,000.
Fonar has not committed to making capital expenditures in the 2005 fiscal year
other than its intention to continue research and development expenditures at
current levels. In addition, HMCA plans to incur expenditures of approximately
$250,000 for leasehold improvement costs for a new managed MRI facility in
Daytona, Florida, together with expenditures of $495,000 and $120,000 for CT and
x-ray equipment, respectively, at the Daytona site, $375,000 in connection with
a new managed MRI facility in Elmhurst, New York and $220,000 in connection with
a managed physical rehabilitation and treatment facility in Elmhurst, New York.
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 and $2.5 million for the year ended June 30, 2003 and $3.2 million
for the year ended June 30, 2004.
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, 2004. Below is a tabular
presentation of the maturity profile of the fixed rate instruments held by us at
June 30, 2004.
INTEREST RATE SENSITIVITY
PRINCIPAL AMOUNT BY EXPECTED MATURITY
WEIGHTED AVERAGE INTEREST RATE
Date Investments in Fixed Rate Weighted Average
Instruments Interest Rate
6/30/05 7,032,322 1.47%
6/30/06 1,100,000 3.43%
6/30/07 1,100,000 3.19%
6/30/08 650,000 3.38%
6/30/09 1,048,500 3.33%
6/30/11 100,000 3.56%
6/30/14 100,000 4.16%
Total: 11,130,822
Fair Value
at 6/30/04 11,088,437
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 AND SUPPLEMENTARY DATA
FONAR CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No.
--------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED BALANCE SHEETS
At June 30, 2004 and 2003
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Years Ended June 30, 2004, 2003 and 2002
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Three Years Ended June 30, 2004, 2003 and 2002
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Years Ended June 30, 2004, 2003 and 2002
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
To the Audit Committee of the Board of Directors
FONAR Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of FONAR
Corporation and Subsidiaries (the "Company") as of June 30, 2004 and 2003, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended June 30, 2004. 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 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, 2004 and 2003, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended June 30, 2004, in conformity with U.S. generally accepted
accounting principles.
During each of the three years in the period ended June 30, 2004, a significant
portion of the Company's revenues was from related parties.
/s/ Marcum & Kliegman LLP
New York, New York
September 14, 2004
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
------
June 30,
--------------------------
2004 2003
------------ ------------
Current Assets:
Cash and cash equivalents $ 9,473,989 $ 9,334,378
Marketable securities 11,120,141 5,837,017
Restricted cash 5,500,000 -
Accounts receivable - net of allowances for
doubtful accounts of $467,990 and $442,437
at June 30, 2004 and 2003, respectively 1,006,287 716,435
Accounts receivable - related parties - net of
allowances for doubtful accounts of $655,563
and $694,655 at June 30, 2004 and 2003,
respectively 296,909 114,004
Management fee receivable - related medical
practices - net of allowances for doubtful
accounts of $1,874,390 and $1,296,390 at
June 30, 2004 and 2003, respectively 14,314,657 12,261,288
Costs and estimated earnings in excess of
billings on uncompleted contracts 1,711,306 359,873
Costs and estimated earnings in excess of
on uncompleted contracts - related party 111,941 -
Inventories 9,585,346 5,057,261
Investment in sales-type leases 153,413 135,456
Current portion of advances and notes to related
medical practices 240,127 464,181
Prepaid expenses and other current assets 1,571,550 1,285,861
Investment in sales-type lease - related party - 14,285
Note receivable from buyers of A&A Services - 150,000
------------ ------------
Total Current Assets 55,085,666 35,730,039
Property and Equipment - Net 8,210,621 8,625,434
Advances and Notes to Related Medical Practices -
Net of allowances for doubtful accounts of
$364,791 and $446,035 at June 30, 2004 and
2003, respectively 480,707 802,568
Investment in Sales-Type Lease 452,778 606,191
Management Agreements - Net 8,730,273 9,363,850
Other Intangible Assets - Net 3,957,687 3,375,187
Other Assets 283,114 245,392
------------ ------------
Total Assets $ 77,200,846 $ 58,748,661
============ ============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
June 30,
--------------------------
2004 2003
------------ ------------
Current Liabilities:
Current portion of long-term debt and capital
leases $ 5,982,991 $ 1,021,952
Accounts payable 5,368,461 3,703,689
Other current liabilities 10,004,799 7,552,223
Unearned revenue on service contracts - related
parties 373,333 240,139
Customer advances 7,800,305 4,305,918
Customer advances - related parties - 626,847
Income taxes payable 25,831 10,401
Billings in excess of costs and estimated
earnings on uncompleted contracts 2,936,905 4,390,012
Billings in excess of costs and estimated
earnings on uncompleted contracts - related
party - 361,427
------------ ------------
Total Current Liabilities 32,492,625 22,212,608
------------ ------------
Long-Term Liabilities:
Due to related medical practices 154,357 262,335
Long-term debt and capital leases, less
current maturities 719,502 907,624
Deferred revenue - license fee, less current
portion - 2,340,000
Other liabilities 298,916 301,684
------------ ------------
Total Long-Term Liabilities 1,172,775 3,811,643
------------ ------------
Total Liabilities 33,665,400 26,024,251
------------ ------------
Minority Interest 381,022 345,118
------------ ------------
Commitments, Contingencies and Other Matters
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
(Continued)
June 30,
--------------------------
2004 2003
------------ ------------
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, 2004 and 2003 $ 784 $ 784
Preferred stock - $.001 par value;
authorized - 10,000,000 shares; issued
and outstanding - none - -
Common stock - $.0001 par value; authorized -
110,000,000 shares at June 30, 2004 and 2003;
issued - 98,704,937 and 82,452,958 shares
at June 30, 2004 and 2003, respectively;
outstanding - 98,413,873 and 82,161,894
shares at June 30, 2004 and 2003, respectively 9,840 8,246
Class B common stock (10 votes per share) -
$.0001 par value; authorized - 4,000,000
shares; issued and outstanding - 4,153 shares
at June 30, 2004 and 2003 - -
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, 2004 and 2003 956 956
Paid-in capital in excess of par value 152,090,431 131,519,579
Accumulated other comprehensive (loss) income (45,871) 68,672
Accumulated deficit (107,383,692) (97,889,309)
Notes receivable from employee stockholders (842,634) (654,246)
Treasury stock, at cost - 291,064 shares
of common stock at June 30, 2004 and 2003 (675,390) (675,390)
------------ ------------
Total Stockholders' Equity 43,154,424 32,379,292
------------ ------------
Total Liabilities and Stockholders' Equity $ 77,200,846 $ 58,748,661
============ ============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30,
---------------------------------------
2004 2003 2002
Revenues ----------- ------------ ------------
Product sales - net $37,658,710 $17,652,799 $ 5,364,809
Product sales - related parties - net 5,315,837 7,276,209 6,229,195
Service and repair fees - net 2,729,352 2,063,999 1,901,954
Service and repair fees - related
parties - net 480,556 415,691 254,173
Management and other fees - related
medical practices - net 22,979,902 22,932,837 27,007,974
License fees and royalties 2,445,000 2,550,000 2,403,000
----------- ------------ ------------
Total Revenues - Net 71,609,357 52,891,535 43,161,105
----------- ------------ ------------
Costs and Expenses
Costs related to product sales 23,160,484 11,681,213 3,815,081
Costs related to product sales -
related parties 3,447,944 4,351,860 4,523,940
Costs related to service and repair 3,323,862 2,539,563 2,338,361
Costs related to service and repair
fees - related parties 688,606 627,661 312,493
Costs related to management and other
fees - related medical practices 13,786,039 13,277,016 13,691,973
Research and development 5,491,062 5,164,451 5,099,782
Selling, general and administrative 25,091,363 23,361,212 21,379,598
Compensatory element of stock
issuances for selling, general and
administrative expenses 4,125,717 4,842,748 4,712,163
Provision for bad debts 330,997 701,534 972,236
Loss on impairment of management
agreement - 795,237 -
Amortization of management agreements 633,577 696,285 696,285
----------- ------------ ------------
Total Costs and Expenses 80,079,651 68,038,780 57,541,912
----------- ------------ ------------
Loss from Operations (8,470,294) (15,147,245) (14,380,807)
Other Income (Expenses)
Financing Costs Due to the change in
term of Warrants (238,950) - (2,368,541)
Interest Expense (263,803) (580,748) (691,126)
Interest Expense - Related Parties (4,325) (45,702) -
Investment Income 403,398 470,271 824,858
Interest Income - Related Parties 45,173 200,407 149,004
Other Income (Expense) 16,247 (25,499) (69,133)
Minority Interests in Income of
Partnerships (951,940) (776,222) (392,842)
----------- ------------ ------------
Loss Before (Provision for)
Benefit from Income Taxes (9,464,494) (15,904,738) (16,928,587)
(Provision for) Benefit from Income
Taxes (29,889) 703,871 (27,039)
----------- ------------ ------------
Net Loss from Continuing
Operations (9,494,383) $(15,200,867) $(16,955,626)
----------- ------------ ------------
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30,
---------------------------------------
2004 2003 2002
----------- ------------ ------------
Discontinued Operations:
Loss from discontinued operations $ - $ (315,363) $ (5,926,581)
Gain on sale of discontinued
operations - 509,814 -
----------- ------------ ------------
Net Gain (Loss)from Discontinued
Operations - 194,451 (5,926,581)
----------- ------------ ------------
Net Loss $(9,494,383) $(15,006,416) $(22,882,207)
=========== ============ ============
Basic and Diluted Net Loss Per Share -
Continuing Operations $(0.10) $(0.20) $(0.27)
Basic and Diluted Net Loss Per share -
Discontinued Operations - - (0.09)
------ ------ ======
Basic and Diluted Net Loss Per Share $(0.10) $(0.20) $(0.36)
====== ====== ======
Weighted Average Number of Shares
Outstanding 91,027,951 75,816,973 63,511,814
=========== ============ ============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2004
Common Stock Class C
-------------------------- Common
Shares Amount Stock
------------ ------------ ------------
Balance - June 30, 2003 82,452,958 $ 8,246 $ 956
Net loss - - -
Other comprehensive (loss) income, 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 98,413,873 $ 9,840 $ 956
============ ============ ============
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 Paid-in
Non-Voting Capital in
Preferred Excess of Treasury
Stock Par Value Stock
------------ ------------ ------------
Balance - June 30, 2003 $ 784 $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 $ 784 $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 Accumulated
Receivable Other
From 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) income,
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 Income (Loss)
------------ -------------
Balance - June 30, 2003 $ 32,379,292 $ -
Net loss (9,494,383) (9,494,383)
Other comprehensive income, 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 B
Common
Common Stock Stock Class C
---------------------- -------- Common
Shares Amount Shares Stock
---------- --------- -------- -------
Balance - June 30, 2002 71,582,243 $ 7,158 4,211 $ 956
Net loss - - - -
Other comprehensive income, 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 - (58) -
---------- --------- -------- -------
BALANCE - JUNE 30, 2003 82,452,958 $ 8,246 4,153 $ 956
========== ========= ======== =======
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 Paid-in
Non-Voting Capital in
Preferred Excess of Treasury
Stock Par Value Stock
---------- ------------ ----------
Balance - June 30, 2002 $ 784 $120,156,196 $ (675,390)
Net loss - - -
Other comprehensive income, 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 - - -
---------- ------------ ----------
BALANCE - JUNE 30, 2003 $ 784 $131,519,579 $ (675,390)
========== ============ ==========
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2003
Notes Accumulated
Receivable Other
From Comprehensive Accumulated
Stockholders Income Deficit
------------ ------------ ------------
Balance - June 30, 2002 $(997,132) $ 85,569 $(82,882,893)
Net loss - - (15,006,416)
Other comprehensive income, 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 $ (654,246) $ 68,672 $(97,889,309)
=========== =========== ============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2003
Comprehensive
Total Income (Loss)
------------ -------------
Balance - June 30, 2002 $ 35,695,248 $ -
Net loss (15,006,416) (15,006,416)
Other comprehensive income, 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 $ 32,379,292 $(15,023,313)
============ ============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2002
Common Stock Class C
-------------------------- Common
Shares Amount Stock
------------ ------------ ------------
Balance - June 30, 2001 59,524,455 $ 5,952 $ 956
Net loss - - -
Other comprehensive income, net of tax:
Unrealized gains on securities
arising during the year, net
of tax - - -
Exercise of stock options 13,868 1 -
Exercise of callable warrants 1,000,000 100 -
Stock issued to employees under
stock bonus plans 2,108,674 211 -
Issuance of stock for
professional services 604,492 60 -
Issuance of stock under
consulting contracts 1,116,078 112 -
Issuance of stock for note
receivable - stockholders 140,100 14 -
Issuance of stock for
conversion of convertible
debentures 3,832,073 383 -
Issuance of stock for financing
costs 1,099,503 110 -
Issuance of stock for notes
payable 2,045,000 205 -
Issuance of stock for equipment 98,000 10 -
Net reduction in notes
receivable from stockholders - - -
Amortization of unearned
compensation - - -
Amortization of value assigned
to warrants in debt financing - - -
---------- -------- --------
BALANCE - JUNE 30, 2002 71,582,243 $ 7,158 $ 956
========== ======== ========
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2002
Class A Paid-in
Non-Voting Capital in Treasury
Preferred Excess of Stock
Stock Par Value Amount
------------ ------------ ------------
Balance - June 30, 2001 $ 784 $104,984,020 $(675,390)
Net loss - - -
Other comprehensive income, net of tax:
Unrealized gains on securities
arising during the year, net
of tax - - -
Exercise of stock options - 15,045 -
Exercise of callable warrants - 1,499,900 -
Stock issued to employees under
stock bonus plans - 2,762,301 -
Issuance of stock for
professional services - 728,196 -
Issuance of stock under
consulting contracts - 1,497,916 -
Issuance of stock for note
receivable - stockholders - 159,161 -
Issuance of stock for
conversion of convertible
debentures - 4,499,617 -
Issuance of stock for financing
costs - 1,291,036 -
Issuance of stock for notes
payable - 2,602,391 -
Issuance of stock for equipment - 116,613 -
Net reduction in notes
receivable from stockholders - - -
Amortization of unearned
compensation - - -
Amortization of value assigned
to warrants in debt financing - - -
-------- ------------ ------------
BALANCE - JUNE 30, 2002 $ 784 $120,156,196 $(675,390)
======== ============ ============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2002
Notes Accumulated
Receivable Other
from Unearned Comprehensive
Stockholders Compensation Income
------------ ------------ ------------
Balance - June 30, 2001 $(1,040,457) $(1,529,018) $ 84,133
Net loss - - -
Other comprehensive income,
net of tax:
Unrealized gains on securities
arising during the year,
net of tax - - 1,436
Exercise of stock options - - -
Exercise of callable warrants - - -
Stock issued to employees under
stock bonus plans - - -
Issuance of stock for
professional services - - -
Issuance of stock under
consulting contracts - - -
Issuance of stock for
notes receivable - stockholders (159,175) - -
Issuance of stock for conversion
of convertible debentures - - -
Issuance of stock for
financing costs - - -
Issuance of stock for notes payable - - -
Issuance of stock for Equipment - - -
Net reduction in notes receivable
from stockholders 202,500 - -
Amortization of unearned
Compensation - 451,623 -
Amortization of value assigned to
warrants in debt financing - 1,077,395 -
------------ ------------ ------------
BALANCE - JUNE 30, 2002 $ (997,132) $ - $ 85,569
============ ============ ============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2002
Accumulated Comprehensive
Deficit Total Income (Loss)
-------------- ------------ --------------
Balance - June 30, 2001 $ (60,000,686) $41,830,294 $ -
Net loss (22,882,207) (22,882,207) (22,882,207)
Other comprehensive income,
net of tax:
Unrealized gains on securities
arising during the year,
net of tax - 1,436 1,436
Exercise of stock options - 15,046 -
Exercise of callable warrants - 1,500,000 -
Stock issued to employees under
stock bonus plans - 2,762,512 -
Issuance of stock for
professional services - 728,256 -
Issuance of stock under
consulting contracts - 1,498,028 -
Issuance of stock for
notes receivable - stockholders - - -
Issuance of stock for conversion
of convertible debentures - 4,500,000 -
Issuance of stock for
financing costs - 1,291,146 -
Issuance of stock for notes payable - 2,602,596 -
Issuance of stock for Equipment - 116,623 -
Net reduction in notes receivable
from stockholders - 202,500 -
Amortization of unearned
Compensation - 451,623 -
Amortization of value assigned to
warrants in debt financing - 1,077,395 -
------------ ------------ -------------
BALANCE - JUNE 30, 2002 $(82,882,893) $35,695,248 $(22,880,771)
============ ============ =============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30,
-------------------------------------------
2004 2003 2002
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (9,494,383) $(15,006,416) $(22,882,207)
(Income) loss from discontinued operations - (194,451) 5,926,581
------------- ------------- -------------
Loss from continuing operations (9,494,383) (15,200,867) (16,955,626)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Minority interest in income of
partnerships 951,940 776,222 392,842
Depreciation and amortization 3,880,898 4,433,490 4,809,468
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 (21,500) (1,608) -
Provision for bad debts 330,997 701,534 972,236
Compensatory element of stock issuances 4,125,717 4,842,748 4,712,163
Stock issued for costs and expenses 12,002,712 5,473,949 3,093,797
(Increase) decrease in operating assets, net:
Accounts and management fee receivable (2,938,367) (73,152) (1,320,499)
Notes receivable - 170,000 200,000
Costs and estimated earnings in excess of
billings on uncompleted contracts (1,463,374) 792,733 616,250
Inventories (4,528,085) (393,494) (938,392)
Principal payments received on
sales-type lease - related parties 14,285 2,597,331 93,391
Principal payments received on
sales-type lease 135,456 119,601 119,550
Prepaid expenses and other current assets (285,689) (333,959) (198,151)
Other assets (37,722) 80,124 (44,584)
Receivables and advances to
related parties and affiliates 519,181 492,594 62,151
Increase (decrease) in operating
Liabilities, net:
Accounts payable 1,664,772 (295,413) 1,031,617
Other current liabilities 2,674,269 472,617 (682,950)
Customer advances 2,867,540 (2,774,867) 6,035,110
Billings in excess of costs and estimated
earnings on uncompleted contracts (1,814,534) 3,636,527 763,320
Other liabilities (2,768) (57,850) 32,123
Income taxes payable 15,430 (734,104) (7,162)
------------- ------------- -------------
NET CASH PROVIDED BY CONTINUING
OPERATIONS 6,495,725 3,179,393 446,654
NET CASH PROVIDED BY (USED IN)
DISCONTINUED OPERATIONS - 232,939 (244,905)
------------- ------------- -------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 6,495,725 3,412,332 201,749
------------- ------------- -------------
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30,
-------------------------------------------
2004 2003 2002
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
(Purchases) sales of marketable securities $ (5,397,667) $ (280,431) $ 513,219
Purchases of property and equipment (1,935,186) (1,273,557) (3,097,512)
Repayment of note receivable from buyers of
A&A Services 150,000 - -
Costs of capitalized software development (630,263) (791,216) (855,612)
Proceeds from sale of discontinued
operations, net - 2,821,564 -
Proceeds from sale of equipment 21,500 133,898 39,465
Cost of patents and copyrights (572,709) (424,761) (548,290)
------------- ------------- -------------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES (8,364,325) 185,497 (3,948,730)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 5,500,000 950,000 -
Decrease (increase) in restricted cash (5,500,000) 5,500,000 -
Repayment of borrowings and capital
lease obligations (1,003,935) (8,674,362) (3,930,289)
Net proceeds from exercise of
stock options and warrants 3,928,182 1,104,275 1,515,046
Distributions to holders of minority interests (916,036) (604,230) (273,508)
------------- ------------- -------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 2,008,211 (1,724,317) (2,688,751)
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 139,611 1,873,512 (6,435,732)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 9,334,378 7,460,866 13,896,598
------------- ------------- -------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 9,473,989 $ 9,334,378 $ 7,460,866
============= ============= =============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
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).
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 U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities in the consolidated financial
statements and accompanying notes. The most significant estimates relate to
allowances, intangible assets, income taxes, useful lives of equipment,
contingencies, revenue recognition and litigation. In addition, healthcare
industry reforms and reimbursement practices will continue to impact the
Company's operations and the determination of contractual and other allowance
estimates. Actual results could differ from those estimates.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investment in Marketable Securities
-----------------------------------
The Company accounts for its investments using Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS No. 115"). This standard requires that certain debt
and equity securities be adjusted to market value at the end of each accounting
period. Unrealized market value gains and losses are charged to earnings if the
securities are traded for short-term profit. Otherwise, such unrealized gains
and losses are charged or credited to comprehensive income.
Management determines the proper classifications of investments in obligations
with fixed maturities and marketable equity securities at the time of purchase
and re-evaluates such designations as of each balance sheet date. At June 30,
2004 and 2003, all securities covered by SFAS No. 115 were designated as
available for sale. Accordingly, these securities are stated at fair value, with
unrealized gains and losses reported in comprehensive income. Realized gains and
losses on sales of investments, as determined on a specific identification
basis, are included in investment income in the Consolidated Statements of
Operations.
Inventories
-----------
Inventories consist of purchased parts, components and supplies, as well as
work-in-process, and are stated at the lower of cost determined on the first-in,
first-out method or market.
Property and Equipment
----------------------
Property and equipment procured in the normal course of business is stated at
cost. Property and equipment purchased in connection with an acquisition is
stated at its estimated fair value, generally based on an appraisal. Property
and equipment is being depreciated for financial accounting purposes using the
straight-line method over the shorter of their estimated useful lives, generally
five to seven years, or the term of a capital lease, if applicable. Leasehold
improvements are being amortized over the shorter of the useful life or the
remaining lease term. Upon retirement or other disposition of these assets, the
cost and related accumulated depreciation of these assets are removed from the
accounts and the resulting gains or losses are reflected in the results of
operations. Expenditures for maintenance and repairs are charged to operations.
Renewals and betterments are capitalized.
Management Agreements
---------------------
Amounts allocated to management agreements, in connection with four acquisitions
completed during the period from June 1997 through August 1998, are being
amortized using the straight-line method over the 20-year term of the
agreements.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
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 requires considerable judgement
by management with respect to certain external factors, including, but not
limited to, technological feasibility, anticipated future gross revenue,
estimated economic life and changes in software and hardware technology.
Amortization of capitalized 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, intangibles and management agreements, when
there are indications of potential impairment, based on estimates of
undiscounted future cash flows. The amount of impairment is calculated by
comparing anticipated discounted future cash flows with the carrying value of
the related asset. In performing this analysis, management considers such
factors as current results, trends, and future prospects, in addition to other
economic factors (see Note 3).
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition
-------------------
Revenue on sales contracts for scanners is recognized under the
percentage-of-completion method. The Company manufactures its scanners under
specific contracts that provide for progress payments. Production and
installation take approximately six months. The percentage of completion is
determined by the ratio of costs incurred to date on completed sub-assemblies to
the total estimated cost for each scanner. Contract costs include 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 under various long-term agreements with related
medical providers (the "PC's"). The PC's are primarily owned by Raymond V.
Damadian, M.D., President and Chairman of the Board of FONAR. The Company's
agreements with the PC's stipulate fees for services rendered and equipment
leased, are primarily calculated on activity based efforts at pre-determined
rates per unit of activity. All fees are re-negotiable at the anniversary of the
agreements and each year thereafter.
Research and Development Costs
------------------------------
Research and development costs are charged to expense as incurred. The costs of
materials and equipment that are acquired or constructed for research and
development activities, and have alternative future uses (either in research and
development, marketing or production), are classified as property and equipment
and depreciated over their estimated useful lives.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Advertising Costs
-----------------
Advertising costs are expensed as incurred.
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 11. 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
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock Options and Warrants and Similar Equity Instruments and Earnings (Loss)
Per Share (Continued)
-----------------------------------------------------------------------------
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, 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.
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," the Company's participating convertible securities, which include the
Class A Non-voting Preferred stock, Class B common stock and Class C common
stock, are not included in the computation of basic EPS because the
participating securities do 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 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, are as
follows: 7,690,392, 9,841,956 and 6,213,083 as of June 30, 2004, 2003 and 2002,
respectively.
The following table illustrates the effect on net loss and 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,
----------------------------------------
2004 2003 2002
------------ ------------ ------------
Net Loss As Reported $ (9,494,383) $(15,006,416) $(22,882,207)
Deduct:
Total stock-based employee compensation
expense determined under fair value
based method for all awards 438,751 559,416 514,581
------------ ------------ ------------
Proforma Net Loss $ (9,933,134) $(15,565,832) $(23,396,788)
============ ============ ============
Basic and Diluted Net Loss Per Share
as Reported $(0.10) $(0.20) $(0.36)
Basic and Diluted Proforma Net Loss ====== ====== ======
Per Share $(0.11) $(0.21) $(0.37)
====== ====== ======
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock Options and Warrants and Similar Equity Instruments and Earnings (Loss)
Per Share (Continued)
-----------------------------------------------------------------------------
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,
----------------------------------------
2004 2003 2002
------------ ------------ ------------
Expected life (years) 3 3 3
Interest rate 2.69% 4.00% 4.00%
Annual rate of dividends 0% 0% 0%
Volatility 55% 55% 92%
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, 2004, 2003 and 2002 was
estimated at $0.75, $0.60 and $0.67, 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, 2004, the Company had cash on deposit of approximately $8,259,000 in excess
of federally insured limits.
Related Parties: Net revenues from related parties accounted for approximately
40%, 58% and 78% of the consolidated net revenues for the years ended June 30,
2004, 2003 and 2002, respectively.
Fair Value of Financial Instruments
-----------------------------------
The financial statements include various estimated fair value information at
June 30, 2004, 2003 and 2002, 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:
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Value of Financial Instruments (Continued)
----------------------------------------------
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.
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 Pronouncement
-------------------------------
In January 2003, as revised in December 2003, the FASB issued Interpretation No.
46 ("FIN 46"), "Consolidation of Variable Interest Entities, an Interpretation
of ARB No. 51." FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the equity investors in
t he entity do not have the characteristics of controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after March 15, 2004. The effect of the adoption of
this new accounting pronouncement did not have a significant impact on the
Company's consolidated financial statements for the year ended June 30, 2004.
Reclassifications
-----------------
Certain prior year balances have been reclassified to conform to the current
year presentation. The reclassifications did not have any effects on reported
net losses for any periods presented
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
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, 2004 and 2003 is as follows:
As of June 30, 2004
-------------------
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. August 1998 8,951,907 2,685,572 6,266,335
----------- ----------- -----------
$12,671,547 $ 3,941,274 $ 8,730,273
=========== =========== ===========
As of June 30, 2003
-------------------
Acquisition Accumulated Net Carrying
Date Cost Amortization Value
----------- ----------- ------------ ------------
Affordable Diagnostics, Inc. June 1997 $ 3,719,640 $ 1,069,720 $ 2,649,920
Dynamic Health Care
Management, Inc. August 1998 8,951,907 2,237,977 6,713,930
----------- ----------- -----------
$12,671,547 $ 3,307,697 $ 9,363,850
=========== =========== ===========
Amortization of management agreements for the years ended June 30, 2004, 2003
and 2002 was $633,577, $696,285 and $696,285, respectively.
The estimated amortization expense of management agreements for each of the next
5 years is approximately $634,000.
Impairment Loss and Sale of Management Company - A&A Services, Inc.
-------------------------------------------------------------------
During the quarter ended June 30, 2002, the primary care medical practices
managed by the Company's subsidiary, A&A Services, Inc., experienced a
significant overall decline in patient volume and related operating cash flows
which led to the inability of the medical practices to fully and timely pay the
contractual management fees to the Company. As a result of the continued
occurrence of this negative trend, the Company recorded an impairment loss of
$4,700,000 (see Note 22) during the quarter ended June 30, 2002 related to those
management agreements, which reduced the carrying value of such agreements to
$3,518,847 at June 30, 2002.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 3 - MANAGEMENT AGREEMENTS (Continued)
Impairment Loss and Sale of Management Company - A&A Services, Inc. (Continued)
-------------------------------------------------------------------------------
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 quarter ended June 30, 2003, related to the management agreement, which
reduced the carrying value of such agreement to $-0-.
NOTE 4 - MARKETABLE SECURITIES
The following is a summary of marketable securities at June 30, 2004 and 2003:
June 30, 2004
----------------------------------------
Unrealized
Holding Fair Market
Cost Gain (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
=========== ============ ============
June 30, 2003
----------------------------------------
Unrealized
Holding Fair Market
Cost Gain Value
----------- ------------ ------------
U.S. Government Obligations $3,919,329 $ 11,887 $3,931,216
Corporate and government agency bonds 1,849,016 56,785 1,905,801
---------- ------------ ------------
$5,768,345 $ 68,672 $5,837,017
========== ============ ============
All debt securities are due within five years. At June 30, 2004, the amount of
cost due within one year was $5,082,322.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
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 PC's substantially consists of fees
outstanding under management agreements, service contracts and lease agreements.
Payment of the outstanding fees is dependent on collection by the PC's of fees
from third party medical reimbursement organizations, principally insurance
companies and health management organizations.
Collection by the Company of its accounts receivable may be impaired by the
uncollectibility of PC's medical fees from third party payors, particularly
insurance carriers covering automobile no-fault and workers compensation claims
due to longer payment cycles and rigorous informational requirements.
Approximately 65%, 69% and 52%, respectively, of the PC's 2004, 2003 and 2002
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.
Net revenues from management and other fees charged to the related PC's
accounted for approximately 32%, 43% and 63%, of the consolidated net revenues
for the years ended June 30, 2004, 2003 and 2002, respectively.
Unaudited Financial Information of Unconsolidated Managed Medical Practices
---------------------------------------------------------------------------
Audited financial information related to the 17 unconsolidated related PC's
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,
2003, 2002 and 2001 related to the 17 unconsolidated medical practices managed
by the Company are as follows:
(000's omitted)
2003 2002 2001
-------- -------- --------
Patient Revenue - Net $ 30,974 $ 31,316 $ 32,268
======== ======== ========
(Loss) Income from
Operations (Income Tax
- Cash Basis) $ (53) $ (160) $ 207
======== ======== ========
Net (Loss) Income (Income
Tax - Cash Basis) $ (554) $ (608) $ (21)
======== ======== ========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
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, 2004 and 2003 is
as follows:
As of June 30,
---------------------------------
2004 2003
----------- -----------
Costs incurred on uncompleted Contracts $11,961,900 $ 5,999,120
Estimated earnings 8,298,538 3,712,940
----------- -----------
20,260,438 9,712,060
Less: Billings to date 21,374,096 14,103,626
----------- -----------
$(1,113,658) $(4,391,566)
=========== ===========
Included in the accompanying consolidated balance sheets under the following
captions:
As of June 30,
--------------------------
2004 2003
------------ ------------
Costs and estimated earnings in excess
of billings on uncompleted contracts $ 1,711,306 $ 359,873
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 2,936,905 4,390,012
Less: Billings in excess of costs and
estimated earnings on uncompleted
contracts - related party - 361,427
------------ ------------
$(1,113,658) $(4,391,566)
============ ============
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 6 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND CUSTOMER
ADVANCES (Continued)
2) Customer advances consist of the following:
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
============ ============ ============
As of June 30, 2003
----------------------------------------
Related
Total Parties Other
------------ ------------ ------------
Total advances $19,036,391 $ 1,203,473 $17,832,918
Less: Advances on contracts
under construction 14,103,626 576,626 13,527,000
------------ ------------ ------------
$ 4,932,765 $ 626,847 $ 4,305,918
============ ============ ============
NOTE 7 - INVENTORIES
Inventories included in the accompanying consolidated balance sheets consist of:
As of June 30,
--------------------------
2004 - 2003
------------ ------------
Purchased parts, components and
Supplies $ 7,016,218 $ 3,733,783
Work-in-process 2,569,128 1,323,478
------------ ------------
$ 9,585,346 $ 5,057,261
============ ============
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
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, 2004 and 2003 is as
follows:
As of June 30,
--------------------------
2004 2003
---------- ----------
Net minimum lease payments receivable $ 733,281 $ 978,112
Less: Unearned income 127,090 222,180
---------- ----------
Net investment in sales-type leases $ 606,191 $ 755,932
========== ==========
Current portion $ 153,413 $ 149,741
Non-current portion 452,778 606,191
---------- ----------
$ 606,191 $ 755,932
========== ==========
Future minimum lease payments are as follows:
Years Ending June 30:
---------------------
2005 $ 153,413
2006 173,751
2007 79,027
2008 200,000
----------
$ 606,191
==========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 8 - INVESTMENT IN SALES-TYPE LEASES (Continued)
Interest income from sales-type leases with related parties for the years ended
June 30, 2004, 2003 and 2002 amounted to $-0-, $172,363 and $126,297,
respectively.
NOTE 9 - PROPERTY AND EQUIPMENT
Property and equipment, at cost, less accumulated depreciation and amortization,
at June 30, 2004 and 2003, is comprised of:
As of June 30,
--------------------------
2004 2003
------------ ------------
Diagnostic equipment under capital
leases $ 621,411 $ 1,776,450
Diagnostic equipment 3,096,638 3,993,324
Research, development and
demonstration equipment 9,506,134 8,566,952
Machinery and equipment 7,689,317 7,433,921
Furniture and fixtures 3,357,549 3,334,334
Equipment under capital leases 1,939,863 1,684,380
Leasehold improvements 5,127,950 4,710,718
----------- -----------
31,338,862 31,500,079
Less: Accumulated depreciation
and amortization 23,128,241 22,874,645
----------- -----------
$ 8,210,621 $ 8,625,434
=========== ===========
Depreciation and amortization of property and equipment for the years ended June
30, 2004, 2003 and 2002 was $2,626,849, $3,247,798 and $3,581,268, respectively.
Equipment under capital leases has a net book value of $785,130 and $842,762 at
June 30, 2004 and 2003, respectively.
NOTE 10 - OTHER INTANGIBLE ASSETS
Other intangible assets, net of accumulated amortization, at June 30, 2004 and
2003 are comprised of:
As of June 30,
-------------------------
2004 2003
---------- ----------
Capitalized software development costs $3,371,561 $3,940,915
Patents and copyrights 2,671,568 2,098,860
---------- ----------
6,043,129 6,039,775
Less: Accumulated amortization 2,085,442 2,664,588
---------- ----------
$3,957,687 $3,375,187
========== ==========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 10 - OTHER INTANGIBLE ASSETS (Continued)
Information related to other intangible assets for the years ended June 30,
2004, 2003 and 2002 is as follows:
2004 2003 2002
---------- ---------- ----------
Balance - Beginning of Year $3,375,187 $2,648,618 $1,853,506
Amounts capitalized 1,202,972 1,215,977 1,403,902
Amortization (620,472) (489,408) (608,790)
---------- ---------- ----------
Balance - End of Year $3,957,687 $3,375,187 $2,648,618
========== ========== ==========
Amortization of patents and copyrights for the years ended June 30, 2004, 2003
and 2002 amounted to $82,429, $72,382 and $66,224, respectively.
Amortization of capitalized software development costs for the years ended June
30, 2004, 2003 and 2002 was $538,043, $417,026 and $271,837, respectively.
Amortization of deferred financing costs for the years ended June 30, 2004, 2003
and 2002 was $-0-, $-0- and $270,729, respectively.
The estimated amortization of patents and copyrights and capitalized software
development costs for the five years ending June 30, 2009 is as follows:
Capitalized
Software
For the Years Patents and Development
Ending June 30, Total Copyrights Costs
--------------- ---------- ----------- -----------
2005 $ 749,468 $ 106,965 $ 642,503
2006 674,410 120,402 554,008
2007 549,332 141,166 408,166
2008 493,930 152,415 341,515
2009 294,001 143,257 150,744
---------- ---------- ----------
$2,761,141 $ 664,205 $2,096,936
========== ========== ==========
The weighted average amortization period for other intangible assets is 9.3
years.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 11 - CAPITAL STOCK
Common Stock
------------
Cash dividends payable on the common stock shall, in all cases, be on a per
share basis, one hundred twenty percent (120%) of the cash dividend payable on
shares of Class B common stock and three hundred sixty percent (360%) of the
cash dividend payable on a share of Class C common stock. In addition, as
revised, pursuant to a legal settlement agreement on April 29, 1997, a special
cash dividend was paid in an amount equal to 3-1/4% on first $10 million, 4-1/2%
on next $20 million, and 5-1/2% on amounts in excess of $30 million of the
amount of any cash awards or settlements received by the Company in connection
with the enforcement by the Company of United States Patent No. 3,789,832
(Apparatus and Method of Detecting Cancer in Tissue).
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 October 6, 2003 and June 25, 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. During the year ended June 30, 2004, 8,927,183 shares of the Company's
common stock were issued for goods and services that were registered under these
Registration Statements.
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 4,153 of such
shares outstanding at June 30, 2004 and 2003.
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, 2004, the
Company does not have enough common stock available for the conversion of the
Class C common stock.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 11 - CAPITAL STOCK (Continued)
Class A Non-Voting Preferred Stock
----------------------------------
On April 3, 1995, the stockholders ratified a proposal consisting of the
creation of a new class of Class A non-voting preferred stock with special
dividend rights and the declaration of a stock dividend on the Company's common
stock consisting of one share of Class A non-voting preferred stock for every
five shares of common stock. The stock dividend was payable to holders of common
stock on October 20, 1995. Class A non-voting preferred stock issued pursuant to
such stock dividend approximates 7.8 million shares.
The Class A non-voting preferred stock is entitled to a special dividend equal
to 3-1/4% of first $10 million, 4-1/2% of next $20 million and 5-1/2% on 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, 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, 2004, options to purchase
2,098,724 shares of common stock of FONAR were available for future grant. Of
the options granted under this plan, 2,364,122 remain outstanding.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 11 - CAPITAL STOCK (Continued)
Options (Continued)
-------
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 Incentive Stock Option
Plan will terminate on June 30, 2012. As of June 30, 2004, options to purchase
1,457,744 shares of common stock of FONAR were available for future grant under
this plan and 623,884 shares remain outstanding.
Stock option activity and weighted average exercise prices under these plans and
grants for the years ended June 30, 2004, 2003 and 2002 were as follows:
Weighted
Average
Number of Exercise
Options Price
--------- ---------
Outstanding, June 30, 2001 3,014,059 $1.47
Granted - -
Exercised (13,868) 1.09
Forfeited - -
--------- -----
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
========= =====
Exercisable at:
June 30, 2002 1,184,811 $2.00
June 30, 2003 1,972,777 $1.62
June 30, 2004 2,425,311 $1.24
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 11 - CAPITAL STOCK (Continued)
Options (Continued)
-------
The range of exercise prices for options outstanding as of June 30, 2004 was as
follows:
Weighted
Average
Number of Remaining
Options Contractual
Range of Exercise Price Outstanding Life in Years
----------------------- ----------- -------------
$0.75 - $2.00 3,047,006 6.7
===========
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, 2004, 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. As of June 30, 2004, 100,000
shares of HMCA common stock were available for future grant under this plan.
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 1997 Incentive and 1998 Non-Statutory Stock
Option Plans.
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, 2004. As of
June 30, 2004, options to purchase 1,300,000 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, 2004, 2003 and 2002 were as
follows:
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 11 - CAPITAL STOCK (Continued)
Options (Continued)
-------
Weighted
Average
Number of Exercise
Options Price
--------- ---------
Outstanding, June 30, 2001 and 2002 2,670,000 $0.46
Exchanged for common stock of FONAR (2,000,000) $0.28
---------- -----
Outstanding, June 30, 2003 670,000 $1.00
Forfeited (10,000) $1.00
---------- -----
Outstanding, June 30, 2004 660,000 $1.00
========== =====
Stock Bonus Plans
-----------------
On June 1, 2002, October 1, 2000 and May 9, 1997, the Board of Directors adopted
Stock Bonus Plans. Under the terms of the Plans, 2,000,000, 5,000,000 and
5,000,000 shares of common stock, respectively, were available for issuance
under each plan. The stock bonuses may be awarded no later than May 31, 2012 for
the 2002 Plan, September 30, 2010 for the 2000 Plan and March 31, 2007 for the
1997 Plan. As of June 30, 2004, no shares of common stock of FONAR were
available for future grant under these 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, 2004, 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, 2004, 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, 2004, 1,651,565 shares of common
stock of FONAR were available for future grant under this plan.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 11 - CAPITAL STOCK (Continued)
Warrants
--------
In connection with the convertible debenture financing with The Tail Wind Fund,
Ltd. (the "investor") completed in May of 2001 (Note 13), the Company granted to
the investor and the placement agent warrants to purchase a total of 959,501
common shares at an exercise price of $1.801 per share. The warrants 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.
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.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 11 - CAPITAL STOCK (Continued)
Warrants (Continued)
--------
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.
As of June 30, 2004, 1,454,875 purchase warrants remain outstanding under the
terms indicated above.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 12 - LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASES
Long-term debt, notes payable and capital leases consist of the following:
June 30,
-------------------------
2004 2003
------------ ------------
Line of credit to a bank expiring 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 $ -
Deferred payment obligation, aggregating $5,490,000,
payable to the former shareholders of Dynamic Health
Care Management, Inc. ("Dynamic"). The obligation
was payable over three years, commencing August 20,
2000. The obligation was recorded, net of discount
of $739,324, representing interest imputed at a rate
of 7.5%. The obligation was collateralized by all of
the assets of the acquired business and guaranteed
by FONAR. - 165,052
Capital lease that required monthly payments of
$28,997, including interest at a rate of 9.95% per
annum through April 2004. The loan was
collateralized by the related equipment. - 303,654
Capital lease requiring monthly payments of $8,468,
including interest at a rate of 8.63% through April
2005. The loan is collateralized by the related
equipment. 73,544 164,505
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 equipment. 703,822 890,938
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. 129,491 -
Other (including capital leases for property and
equipment). 295,636 405,427
------------ ------------
6,702,493 1,929,576
Less: Current maturities 5,982,991 1,021,952
------------ ------------
$ 719,502 $= 907,624
============ ============
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 12 - LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASES (Continued)
The maturities of long-term debt over the next five years are as follows:
Years Ending
June 30,
------------
2005 $5,982,991
2006 293,222
2007 295,470
2008 103,413
2009 24,763
Thereafter 2,634
----------
$6,702,493
==========
Modification of Notes Payable
-----------------------------
Pursuant to a stock payment agreement consummated January 11, 2002 between the
Company and the former stockholders of A&A, these stockholders agreed to accept
payment of certain debt obligations in shares of the Company's common stock. The
promissory notes were initially issued by HMCA in partial payment of the
purchase price for the acquisition of A&A Services, Inc. Payments under the
notes were due quarterly through December 2002.
In order to induce the former A&A stockholders to accept payment in stock, and
in the manner provided in the stock payment agreement, the Company agreed to pay
a 15% premium on the note obligations and related accrued interest. On January
11, 2002, the Company issued 1,000,000 shares of common stock to each of them,
or 2,000,000 shares in the aggregate, at $1.27 per share, totaling $2,540,000.
The shares were issued in partial payment of four promissory notes. The debt
conversion expense of $544,370, as a result of the agreement, has been recorded
as part of discontinued operations in the statement of operations for the year
ended June 30, 2002 (see Note 22).
Under the terms of the stock payment agreement, the Company was required to
issue shares and the net proceeds from the sale of the shares would be applied
to the indebtedness. The quarterly payment due dates were waived, but the net
proceeds received by the selling stockholders from the shares of the Company's
stock issued to them was required to be sufficient to pay the full indebtedness
for each note, including the premium on the note. The notes were settled in full
in April 2003 in connection with the sale by HMCA of all of its issued and
outstanding stock of A&A Services, Inc. (see Note 22).
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 13 - CONVERTIBLE DEBENTURES
Pursuant to a securities purchase agreement, dated May 24, 2001, between the
Company and an investor group, the Company issued and sold to the investor
group:
- 4% convertible debentures due June 30, 2002 in the aggregate principal amount
of $4.5 million, convertible into shares of the Company's common stock at a
conversion price of $2.047 per share, subject to adjustment.
- Purchase warrants to the investor group to purchase an aggregate of 659,501
shares of the Company's common stock at an initial exercise price of $1.801 per
share, subject to adjustment, exercisable through May 24, 2006 (Note 11).
In connection with the issuance of the debentures, the Company paid a placement
fee in the amount of $157,500. In addition, the Company issued 300,000 purchase
warrants to the placement agent at the same terms as to the investor group.
The debentures were convertible at the option of the holder at a price of $2.047
per share. The debentures were payable in ten monthly installments of $450,000,
commencing October 1, 2001. At the option of the Company, the principal
installments could have been either paid in cash or shares of the Company's'
common stock, valued at 90% of the market value, as defined. By amendment, dated
October 25, 2001, however, the payments originally due October 1, 2001 and
November 1, 2001, were extended to November 5, 2001, and for those payments, the
stock was valued at the average of the two lowest closing bid prices for October
2001 less $0.25. During the year ended June 30, 2002, the Company repaid the
principal on the debentures of $4,500,000 and related accrued interest of
$132,022 through the issuance of 4,931,576 shares of the Company's common stock.
NOTE 14 - INCOME TAXES
Components of the current benefit from (provision for) income taxes are as
follows:
Years Ended June 30,
----------------------------------------
2004 2003 2002
------------ ------------ ------------
Current:
Federal $ - $ 554,642 $ -
State (29,889) 149,229 (27,039)
---------- ---------- ----------
$ (29,889) $ 703,871 $ (27,039)
========== ========== ==========
During the quarter 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.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 14 - INCOME TAXES (Continued)
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,
------------------------------------
2004 2003 2002
---------- ---------- ----------
Taxes at federal
statutory rate (34.0)% (34.0)% (34.0)%
State and local income
taxes (benefit), net
of federal benefit 0.3 (0.9) 0.1
Permanent differences 1.8 (2.6) 0.6
Increase in the valuation
allowance against
deferred tax assets 32.2 33.1 33.5
------ ------ ------
Effective income tax rate 0.3% (4.4)% 0.2%
====== ====== ======
As of June 30, 2004, the Company has net operating loss ("NOL") carryforwards of
approximately $106,887,000 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,
--------
2007 $ 660,000
2008 527,000
2009 145,000
2010 32,000
2011 414,000
2012 5,842,000
2013 845,000
2019 15,852,000
2020 18,718,000
2021 19,619,000
2022 19,680,000
2023 16,228,000
2024 8,109,000
------------
$106,671,000
============
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 14 - INCOME TAXES (Continued)
The Company has, for federal income tax purposes, research and development tax
credit carryforwards aggregating $3,250,107, which are accounted for under the
flow-through method. The tax credit carryforwards expire as follows:
June 30,
--------
2005 $ 172,207
2012 70,145
2013 402,590
2018 432,195
2019 378,193
2020 448,221
2022 441,865
2023 444,970
2024 459,721
----------
$3,250,107
==========
In addition, for New York State income tax purposes, the Company has tax credit
carryforwards aggregating approximately $1,080,000, 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 $172,000, which expire
during the years ending June 30, 2005 to June 30, 2009.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 14 - INCOME TAXES (Continued)
Significant components of the Company's deferred tax assets and liabilities at
June 30, 2004 and 2003 are as follows:
June 30,
----------------------------
2004 2003
------------ ------------
Deferred tax assets:
Allowance for doubtful accounts $ 1,186,827 $ 1,226,941
Non-deductible accruals 726,668 638,198
Net operating carryforwards 42,668,436 39,292,945
Tax credits 4,440,506 4,130,022
Inventory capitalization for tax purposes 128,616 111,115
Capital losses carryforwards 1,333,663 1,333,663
Charitable contributions 95,481 68,686
------------ -----------
50,580,197 46,801,570
Valuation allowance (48,145,223) (44,626,322)
------------ -----------
Net deferred tax assets 2,434,974 2,175,248
------------ -----------
Deferred tax liabilities:
Fixed assets and depreciation (1,409,355) (1,373,163)
Capitalized software development costs (1,025,619) (802,085)
------------ -----------
Gross deferred tax liabilities (2,434,974) (2,175,248)
------------ -----------
Net deferred tax liabilities $ - $ -
============ ===========
The net change in the valuation allowance for deferred tax assets increased by
approximately $3,518,901 and $8,031,600, respectively, for the years ended June
30, 2004 and 2003.
NOTE 15 - OTHER CURRENT LIABILITIES
Included in other current liabilities are the following:
2004 2003
----------- -----------
Royalties $ 510,550 $ -
Current portion of deferred revenue
- license fee 2,340,000 2,340,000
Unearned revenue on service contracts 1,644,505 936,750
Accrued salaries, commissions and
payroll taxes 1,858,904 1,015,534
Accrued interest 502,609 519,741
Litigation judgements 430,207 281,549
Sales tax payable 1,667,088 1,443,388
Other 1,050,936 1,015,261
----------- -----------
$10,004,799 $ 7,552,223
=========== ===========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
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, 2004 and 2003 amounted to $39,971 and
$39,775, respectively.
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, 2004 and 2003 amounted to approximately
$130,000 and $18,000, respectively.
Future minimum operating and capital lease commitments, along with sub-lease
income consisted of the following at June 30, 2004:
Facilities
And
Equipment Equipment
Year Ending (Operating Sub-Lease Capital
June 30, Lease) (Income) Lease
----------- ------------ --------- -----------
2005 $ 2,685,922 $(212,978) $ 268,533
2006 2,638,577 (214,346) 86,541
2007 2,402,695 (84,000) 66,505
2008 2,147,022 (84,000) 66,504
2009 1,504,289 (84,000) 25,358
Thereafter 1,520,979 (91,000) 2,914
----------- --------- -----------
Total minimum obligations $12,899,484 $(770,324) 516,355
=========== =========
Less: Amount representing interest (65,168)
-----------
Present value of net minimum lease
obligations $ 451,187
===========
Rent expense for operating leases approximated $3,286,000, $3,166,000 and
$3,227,000 for the years ended June 30, 2004, 2003 and 2002, respectively.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 16 - COMMITMENTS AND CONTINGENCIES (Continued)
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, 2004, 2003 and 2002 approximated $802,000, $126,000 and $70,000,
respectively.
The Company is self-insured with respect to product liability. During the fiscal
years ended June 30, 2004, 2003 and 2002, no material claims arose.
In July 2000, the Company entered into a license agreement, pursuant to which it
licensed certain of its intellectual assets on a non-exclusive basis.
Remuneration payable to the Company under this agreement is $11.7 million, of
which $9.0 million was received in September of 2000 and $2.7 million in January
of 2001. The license fee of $11.7 million is being recognized as income ratably
over the five-year period ending June 30, 2005.
Employment Agreements
---------------------
On August 20, 1998, a wholly-owned subsidiary of HMCA entered into two
employment agreements with the former owners of Dynamic. Each agreement provides
for base compensation of $150,000 during the first year with annual cost of
living increases for the first five years. Each agreement also provides for an
increase in base compensation of $100,000 per annum commencing in the sixth
year. In addition, the agreements provide for bonus compensation contingent upon
pretax earnings of Dynamic. The employment agreements expire ten years from
August 20, 1998.
Minimum annual payments, excluding bonuses, incentives and cost of living
increases under these contracts are as follows:
Years Ending
June 30,
------------
2005 $ 500,000
2006 500,000
2007 500,000
2008 500,000
2009 83,334
----------
$2,083,334
==========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 16 - COMMITMENTS AND CONTINGENCIES (Continued)
Employee Benefit Plans
----------------------
The Company has a non-contributory 401(k) plan (the "Plan"). The Plan covers all
non-union employees who are at least 21 years of age with no minimum service
requirements. There were no employer contributions to the Plan for the years
ended June 30, 2004, 2003 and 2002.
The stockholders of the Company approved the 2000 Employee Stock Purchase Plan
("ESPP") at the Company's annual stockholders' meeting in April 2000. The ESPP
provides for eligible employees to acquire common stock of the Company at a
discount, not to exceed 15%. The Plan has not been put into effect as of June
30, 2004.
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.
NOTE 17 - OTHER INCOME (EXPENSE) AND SUPPLEMENTARY PROFIT AND LOSS DATA
Other income (expense) consists of:
For the Years Ended June 30,
------------------------------------
2004 2003 2002
------------ ------------ ------------
Other income (expense) $ 248,356 $ (15,499) $ (19,133)
Litigation settlement (32,109) (10,000) (50,000)
Litigation reserve (200,000) - -
---------- ---------- ----------
$ 16,247 $ (25,499) $ (69,133)
========== ========== ==========
Advertising expense approximated $2,576,000, $3,558,000 and $2,076,000 for the
years ended June 30, 2004, 2003 and 2002, respectively. Maintenance and repair
expenses totaled approximately $598,000, $625,000 and $656,000 for the years
ended June 30, 2004, 2003 and 2002, respectively.
NOTE 18 - SUPPLEMENTAL CASH FLOW INFORMATION
During the years ended June 30, 2004, 2003 and 2002, the Company paid $264,819,
$1,142,741 and $799,600 for interest, respectively. During the years ended June
30, 2004, 2003 and 2002, the Company paid $14,459, $30,233 and $32,420 for
income taxes, respectively.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 18 - SUPPLEMENTAL CASH FLOW INFORMATION (Continued)
Non-Cash Transactions
---------------------
- 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.
- 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.
- During the year ended June 30, 2002:
a) The Company issued 2,045,000 shares of its common stock, valued at
$2,602,596, in connection with the repayment of notes payable.
b) The Company acquired equipment of $357,056 under capital lease obligations.
c) The Company issued 98,000 shares of its common stock, valued at $116,623,
in connection with the acquisition of equipment.
d) The Company issued 3,832,073 shares of its common stock in connection with
repayment of $4,500,000 of convertible debentures.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 19 - ADVANCES AND NOTES TO RELATED PARTIES
Effective December 1, 1993, Albany Magnetic Imaging Center, P.C. ("Albany
Center"), a Georgia professional corporation, of which Raymond V. Damadian is
the sole stockholder, purchased the scanner being utilized at its site from the
Company for a purchase price of $1,128,844. In June of 1997, the payment terms
for the outstanding balance of $344,766 were restructured to provide for 60
equal monthly payments (including interest at the rate of 10% per annum) of
$7,325 each, commencing July 1997. The balance due under this note as of June
30, 2003 was $84,951. The note was repaid in full in September 2003. Interest
income on this note for the years ended June 30, 2004, 2003 and 2002 amounted to
$5,277, $-0- and $-0-, respectively.
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 March of
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, 2004, was $223,749, the payment terms of which
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. Interest income on
this note for the years ended June 30, 2004, 2003 and 2002 amounted to $19,649,
$3,993 and $2,900, respectively.
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, 2004 was
$305,404. Interest income on this note for the years ended June 30, 2004, 2003
and 2002 amounted to $20,247, $23,654 and $15,292, respectively.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 19 - ADVANCES AND NOTES TO RELATED PARTIES (Continued)
The maturities of advances and notes to related medical practices over the next
five years are as follows:
Years Ending June 30,
---------------------
2005 $240,127
2006 303,653
2007 70,172
2008 74,500
2009 32,382
--------
$720,834
========
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.
Summarized financial information concerning the Company's reportable segments is
shown in the following table:
FONAR Physician
Medical Management
Equipment Services Totals
------------ ------------ -----------
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 $ 3,415,012
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 20 - SEGMENT AND RELATED INFORMATION (Continued)
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 Physician
Medical Management
Equipment Services Totals
------------ ------------ ------------
Fiscal 2002:
-----------
Net revenues from external
customers $ 16,153,131 $ 27,007,974 $ 43,161,105
Intersegment net revenues $ 1,050,599 $ - $ 1,050,599
Operating (loss) income $(15,433,351) $ 1,052,544 $(14,380,807)
Depreciation and amortization $ 2,804,669 $ 2,081,674 $ 4,886,343
Compensatory element of stock
issuances $ 1,715,678 $ 2,996,485 $ 4,712,163
Total identifiable assets $ 40,179,100 $ 32,949,723 $ 73,128,823
Capital expenditures $ 2,107,509 $ 1,463,682 $ 3,571,191
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 1.0%, 6.2% and 26.6%
of product sales revenues to third parties for the years ended June 30, 2004,
2003 and 2002, respectively.
The foreign product sales, as a percentage of product sales to unrelated
parties, were made to customers in the following countries:
2004 2003 2002
------ ------ ------
Puerto Rico .3% - % - %
Scotland - .4 26.6
Spain .7 5.8 -
------ ------ ------
1.0% 6.2% 26.6%
====== ====== ======
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 20 - SEGMENT AND RELATED INFORMATION (Continued)
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 12.5%, 12.2% and 27.7% of consolidated net service and repair fees
for the years ended June 30, 2004, 2003 and 2002, 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,
-----------------------------------
2004 2003 2002
------- ------- -------
Korea 2.2% 2.8% 9.3%
Spain 3.5 1.9 3.7
Mexico - - 3.0
Puerto Rico - - 3.5
Saudi Arabia 2.5 3.0 4.5
Poland 2.8 2.6 3.7
Scotland 3.3 1.9 -
------ ------ ------
14.3% 12.2% 27.7%
====== ====== ======
The Company does not have any material assets outside of the United States.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 21 - QUARTERLY FINANCIAL DATA (UNAUDITED)
(000's omitted, except per share data)
For the Quarters Ended
------------------------------------------------
Sep. 30, Dec. 31, Mar. 31, June 30,
2003 2003 2004 2004
--------- --------- --------- ---------
Total Revenues - Net $ 13,302 $ 17,889 $ 19,353 $ 21,065
Total Costs and Expenses 17,041 20,352 20,759 21,928
Net Loss from Continuing
Operations (3,843) (2,630) (1,484) (1,537)
Basic and Diluted Net
Loss Per Share from
Continuing Operations $ (0.05) $ (0.03) $ (0.02) $ (0.02)
Basic and Diluted Net
Loss Per Share from
Discontinued Operations $ - $ - $ - $ -
Selling, general and administrative expenses for the quarter ended June 30, 2004
reflect approximately $344,000 of expenses, which relates to the prior three
quarters. Other income for the quarter ended June 30, 2004 reflects
approximately $215,000 of income, which relates to the prior three quarters.
(000's omitted, except per share data)
For the Quarters Ended
------------------------------------------------
Sep. 30, Dec. 31, Mar. 31, June 30,
2002 2002 2003 2003
--------- --------- --------- ---------
Total Revenues - Net $ 13,277 $ 15,954 $ 9,775 $ 13,886
Total Costs and Expenses 15,730 18,707 15,221 18,381
Net Loss from Continuing
Operations (2,597) (2,805) (6,256) (3,543)
Net (Loss) Gain from
Discontinued Operations (109) (116) (70) 490
Basic and Diluted Net
Loss Per Share from
Continuing Operations $ (0.04) $ (0.04) $ (0.08) $ (0.04)
Basic and Diluted Net
Loss Per Share from
Discontinued Operations $ - $ - $ - $ -
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 21 - QUARTERLY FINANCIAL DATA (UNAUDITED) (Continued)
Loss per share from continuing operations for each quarter was computed
independently using the weighted-average number of shares outstanding during the
quarter. However, loss per share from continuing operations for the year were
computed using the weighted-average number of shares outstanding during the
year. As a result, the sum of the loss per share for the four quarters may not
equal the full year loss per share.
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 years ended June 30, 2003 and 2002. 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 years ended June
30, 2003 and 2002.
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.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 22 - SALE OF MANAGEMENT COMPANY AND DISCONTINUED OPERATIONS (Continued)
Summarized financial information of discontinued operations is as follows:
For the Years Ended
June 30,
--------------------------
2003 2002
------------ ------------
Management and other fees - related medical
practices - net $ 1,179,095 $ 1,517,465
------------ ------------
Costs and Expenses:
Costs related to management and other fees -
related parties 1,271,121 1,638,354
Amortization of management agreement 220,404 522,407
Interest expense 2,933 583,285
Loss on impairment of management contract - 4,700,000
------------ ------------
Total Costs and Expenses 1,494,458 7,444,046
------------ ------------
Loss from Discontinued Operations $ (315,363) $ (5,926,581)
============ ============
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, 2004
NOTE 23 - ALLOWANCE FOR DOUBTFUL ACCOUNTS
The following represents a summary of allowance for doubtful accounts for the
years ended June 30, 2004, 2003 and 2002, respectively:
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
Receivables from related medical
Practices 1,296,390 (1),(2) 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
Receivables from related medical
Practices 1,096,390 200,000 - 1,296,390
Advance and notes to related
Parties 366,035 80,000 - 446,035
Balance Balance
Description June 30, 2001 Additions Deductions June 30, 2002
----------- ------------- --------------- ------------ -------------
Receivables from equipment sales
and service contracts $ 338,676 (1)$ 43,761 $ - $ 382,437
Receivables from equipment sales
and service contracts - related
parties 694,655 - - 694,655
Receivables from related medical
Practices 538,297 558,093 - 1,096,390
Advance and notes to related
Parties 316,035 (1) 50,000 - 366,035
(1) Included in provision for bad debts.
(2) Excludes bad debt recoveries of $152,220.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 24 - SUBSEQUENT EVENT
Issuances of Common Stock
-------------------------
During the period from July 1, 2004 through August 31, 2004:
a) The Company issued 468,249 shares of common stock to employees as
compensation of $539,233 under stock bonus plans.
b) The Company issued 82,102 shares of common stock to consultants and others
at a value of $92,520.
c) The Company issued 308,457 shares of common stock for costs and expenses of
$2,004,970.
d) The Company issued 151,625 shares of common stock upon the exercise of
warrants resulting in proceeds of $119,784.
e) The Company issued 6,410 shares of common stock upon the exercise of stock
options resulting in proceeds of $7,500.
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
In performing their audit of our consolidated financial statements for the year
ended June 30, 2004, our independent registered public accounting firm noted
that certain royalties under a patent license had not been accrued during the
first three quarters. This was corrected through appropriate adjustments and our
internal procedures and controls modified to assure that such accruals will be
made on an ongoing basis. Having made these modifications, we believe that our
disclosure controls and procedures in place are effective to ensure that
material information relating to FONAR, including its consolidated subsidiaries,
is made known to us by others in FONAR and these entities in a timely manner so
that appropriate disclosures can be made and appropriate corporate action be
taken.
Based upon the controls evaluation, we have concluded that, as of the end of the
period covered by this annual report, except as described above, our disclosure
controls are effective to ensure that material information relating to our
company is made known to management, including our chief executive officer and
principal accounting personnel, particularly during the period when our periodic
reports are being prepared, and that our internal controls are effective to
provide reasonable assurance that our consolidated financial statements are
fairly presented in conformity with generally accepted accounting principles.
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. 68 President, Treasurer,
Chairman of the Board
and a Director
David B. Terry 57 Senior Vice President
and Secretary
Claudette J.V. Chan 66 Director
Robert J. Janoff 77 Director
Charles N. O'Data 68 Director
Robert Djerejian 72 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 2004 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 2004.
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. 2004 $86,799.99 - - - - - -
Damadian, 2003 $86,799.98 - - - - - -
CEO 2002 $86,799.96 - - - - - -
--------- ---- ---------- ----- ------- ---------- ------- ------- -------
II. OPTION/SAR GRANTS IN LAST FISCAL YEAR
Potential
Realizable
Value at Assumed
Annual Rates of Alternative
Stock Price to (f) and
Appreciation for (g): Grant
Individual Grants Option Term Date Value
----------------------------------------------------------- ---------------- -----------
(a) (b) (c) (d) (e) (f) (g) (h)
% of Total
Options/
SARs
Options/ Granted to Excercise
SARs Employees or Grant Date
Granted in Fiscal Base Price Expiration Present
Name (#) Year ($/Sh) Date 5% ($) 10% ($) Value $
---------- -------- ---------- ---------- ---------- ------- ------- ----------
Raymond V.
Damadian, 0 - - - - - -
President
& CEO
III. OPTION/SAR EXERCISES AND YEAR-END VALUE TABLE
Aggregated Options/SAR Exercises in Last Fiscal Year and FY-End Option/Sar Value
--------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Number of Value of Unexercised
Name Shares Acquired Value Realized Unexercised In-the-Money
on Exercise (#) ($) Options/SARs Options/SARs at
at FY-End (#) FY-End ($)
Exercisable/ Exercisable/
Unexercisable Unexercisable
--------- --------------- -------------- ------------- --------------------
Raymond V. 0 - 0 -
Damadian,
President
and CEO
EMPLOYEE COMPENSATION PLANS
Equity Compensation Plan Information as of June 30, 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 3,047,006 $1.22 3,556,468
plans approved by
security holders
Equity compensation - N/A -
plans not approved
by security holders
Total 3,047,006 $1.22 3,556,468
========= ===== =========
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, 2004, options to purchase
2,098,724 shares of Common Stock of FONAR were available for future grant. Of
the options granted under this plan, 2,364,122 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, 2004, options to purchase 1,457,744
shares of Common Stock of Fonar were available for future grant under the plan.
Of the options granted under this plan 623,884 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, 2004 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, 2004, 1,651,565 shares of Common Stock of Fonar
were available for future grant under the plan.
HMCA's 1997 Incentive Stock Option Plan, adopted on March 10, 1997, is intended
to qualify as an incentive stock option plan under Section 422A of the Internal
Revenue Code of 1954, as amended. The 1997 Incentive Stock Option Plan permits
the issuance of stock options covering an aggregate of 2,000,000 shares of
Common Stock of HMCA. The options have an exercise price equal to the fair
market value of the underlying stock on the date the option is granted, are
nontransferable, are exercisable for a period not exceeding ten years and expire
upon the voluntary termination of employment. The exercisability of the options
granted to date is contingent upon the successful completion by HMCA of a public
offering of its securities or the recognition by HMCA of at least $10 million in
revenues for at least two consecutive fiscal quarters. The 1997 Stock Option
Plan will terminate on March 9, 2007. As of June 30, 2004, 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, 2004, 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, 2004, options to purchase
100,000 shares of Common Stock were available for future grant.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the number and percentage of shares of 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 August 16, 2004.
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 2.50%
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 2,588,843 2.60%
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 16,928 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. Dynamic
performed management services for two New York professional service corporations
having three office locations: Hempstead, New York, Bellmore, New York and Deer
Park, New York. These professional service corporations are Alliance Physical
Medicine and Rehabilitation, P.C. and Bellmore Medical Practice, P.C. In
addition, HMCA performs management services for Superior Medical Services, P.C.,
a New York professional service corporation, which conducts physical therapy and
rehabilitation at three locations in Elmont, Elmhurst and the Bronx, New York.
Dr. Damadian is the stockholder, director and President of each of these three
physical therapy and rehabilitation professional service corporations.
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 $550 per MRI scan. The fees to HMCA under the
management agreements with the physical therapy and rehabilitation practices are
flat fees charged on a monthly basis. The monthly fees to the physical therapy
and rehabilitation facilities range from approximately $90,000 to $285,000.
During the fiscal years ended June 30, 2004 and June 30, 2003 the net revenues
received by HMCA from the MRI Centers owned by Dr. Damadian were approximately
$13.3 million and $13.5 million respectively, and the net revenues received from
the physical therapy and rehabilitation practices were $9.7 million and $9.4
million, respectively.
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
of June 30, 2004 was $223,744. 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,
2003 through June 30, 2004. The service contract has been renewed at the same
rate for the period July 1, 2004 through June 30, 2005.
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, 2004 through March 23,
2005. 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, 2004, was $305,404. 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 3, 2003
and runs through December 12, 2004. 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, 2003 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, 2004. It is anticipated
that the service agreement will be renewed upon its expiration in July, 2005.
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, 2003 through November 22, 2004. 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 MRI 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,
2004 through March 22, 2005 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.
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, 2004 through
April 30, 2005 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, 2004 through September 9, 2005 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 will
expire in October, 2004. It is anticipated that Miami will enter into a one year
service agreement with FONAR at that time at a rate of $85,000 per annum. 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 has not yet been completed. 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.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit Fees
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 statements included in our Forms 10-Q for the fiscal year ended
June 30, 2004 were $418,276.
The aggregate fees billed by Marcum & Kliegman LLP for the audit of our annual
financial statements for the fiscal year ended June 30, 2003 and the reviews of
the financial information included in our Forms 10-Q for the fiscal year ended
June 30, 2003 were $460,805.
Audit Related Fees
No fees were billed by Marcum & Kliegman LLP for the fiscal years ended June 30,
2004 or June 30, 2003 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,
2004 or June 30, 2003 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, 2004 were $172,542.
The aggregate fees billed by Marcum & Kliegman LLP for tax compliance, tax
advice and tax planning in the fiscal year ended June 30, 2003 were $189,094.
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, 2004 and June 30, 2003
were $106,452 and $124,417, respectively, which included services in connection
with the registration of securities, and financing transactions.
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 2004 and 2003 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.
Independent Auditors' Report.
Consolidated Balance Sheets as at June 30, 2004 and 2003.
Consolidated Statements of Operations for the Three Years Ended June 30,
2004, 2003 and 2002.
Consolidated Statements of Stockholders' Equity for the Three Years Ended
June 30, 2004, 2003 and 2002.
Consolidated Statements of Cash Flows for the Three Years Ended June 30,
2004, 2003 and 2002.
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.
14.1 Code of Ethics. See Exhibits.
21.1 Subsidiaries of the Registrant. See Exhibits.
23.1 Independent Registered Public Accounting Firm's Consent. See Exhibits.
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 report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FONAR CORPORATION
Dated: September 15, 2004
By: /s/ Raymond Damadian
Raymond V. Damadian, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/ Raymond Damadian Chairman of the September 15, 2004
Raymond V. Damadian Board of Directors,
President, Director
Principal Executive
Officer and Acting
Principal Financial
Officer)
/s/ Claudette J.V. Chan Director September 15, 2004
Claudette J.V. Chan
/s/ Robert J. Janoff Director September 15, 2004
Robert J. Janoff
/s/ Charles N. O'Data Director September 15, 2004
Charles N. O'Data
/s/ Robert Djerejian Director September 15, 2004
Robert Djerejian