-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KnEXwGYxuaDwNIPWajxgUQzw0xEDj0xc7KP4NspRZ6Yi2UtmqFxZ++vkqjGK/7VE MrfEAZ6QF7jDF48PtGPxLA== 0000355019-96-000014.txt : 19961016 0000355019-96-000014.hdr.sgml : 19961016 ACCESSION NUMBER: 0000355019-96-000014 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19961015 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FONAR CORP CENTRAL INDEX KEY: 0000355019 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 112464137 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-10248 FILM NUMBER: 96643423 BUSINESS ADDRESS: STREET 1: 110 MARCUS DR CITY: MELVILLE STATE: NY ZIP: 11747 BUSINESS PHONE: 5166942929 MAIL ADDRESS: STREET 1: 110 MARCUS DRIVE CITY: MELVILLE STATE: NY ZIP: 11747 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _____________________ FORM 10-K _____________________ [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, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 [No Fee Required] For the transition period from _____________ to _____________ Commission File No. 0-10248 _______________________ FONAR CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 11-2464137 (State of incorporation) (IRS Employer Identification Number) 110 Marcus Drive, Melville, New York 11747 (Address of principal executive offices) (Zip Code) (516) 694-2929 (Registrant's telephone number, including area code) _____________________ Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.0001 per share (Title of Class) __________________________________________________________________ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ___X___ No _______ As of September 3, 1996, 43,686,751 shares of Common Stock, 5,411 shares of Class B Common Stock, 9,562,824 shares of Class C Common Stock and 7,855,627 shares of Class A Non-voting Preferred Stock of the registrant were outstanding. The aggregate market value of the approximately 41,056,768 shares of Common Stock held by non-affiliates as of such date (based on the bid price per share on September 3, 1996 as reported on the NASDAQ System) was approximately $100,075,872. The other outstanding classes do not have a readily determinable market value. DOCUMENTS INCORPORATED BY REFERENCE None ITEM 1. BUSINESS. GENERAL FONAR Corporation (the "Company" or "FONAR") is a Delaware corporation which was incorporated on July 17, 1978. The Company's address is 110 Marcus Drive, Melville, New York 11747 and its telephone number is (516) 694-2929. FONAR is engaged in the business of designing, manufacturing, selling and servicing magnetic resonance imaging ("MRI" or "MR") scanners which utilize MRI technology for the detection and diagnosis of human disease. FONAR introduced the first MRI scanner in 1980 and is the originator of the iron-core non-superconductive and permanent magnet technology. FONAR is the originator of the iron-core non-superconductive and permanent magnet technology and is engaged in the business of designing, developing, manufacturing, marketing and servicing magnetic resonance imaging ("MRI" or "MR") scanners which utilize that technology for the detection and diagnosis of human disease. FONAR's iron frame technology made FONAR the originator of "open" MRI scanners. FONAR introduced the first "open" MRI in 1980 and maintained its "open" design ever since. RECENT DEVELOPMENTS AND OVERVIEW. The Company's principal products are its new "QUAD" series of MRI scanners. The "QUAD (tm) 12000" MR scanner utilizes a 6000 gauss iron core electromagnet and is accessible from four sides. The QUAD 12000 is the first "open" MR scanner above low field (above 600 gauss). The "QUAD 7000" is similar in design to the QUAD 12000 but utilizes a smaller 3,500 gauss electromagnet. FONAR received FDA approval to market the QUAD 7000 in April, 1995 and for the QUAD 12000 in November 1995. In 1990 the Company introduced the Ultimate (tm) 7000 scanner, which was its principal product prior to the introduction of the QUAD scanners. The Quad and Ultimate scanners are revolutionary new MR scanning products representing the culmination of years of total company wide effort to design and construct the "Ultimate MR" scanner product line. These products replaced the Company's traditional principal products, the Beta (tm) 3000 scanner (which utilizes a permanent magnet) and the Beta 3000M scanner (which utilizes an iron core electromagnet). All of the Company's scanners create cross-sectional images of the human body. The QUAD 7000, utilizing a 3500 gauss iron core electromagnet, is envisioned by the Company as an economical solution to the rising cost of medicine. Priced at $695,000, the Company expects the QUAD 7000 to be a success in the market, not only with first time buyers but with users who must now replace their obsolete MRI equipment. The QUAD 12000 scanner utilizes a 6000 gauss (.6 Tesla field strength) iron core electromagnet. The greater field strength of the 6000 gauss magnet, when enhanced by the electronics already utilized by the Company's scanners, produces images of a quality and clarity competitive with high field superconductive magnets. The QUAD 12000 scanner magnet is the highest field "open MRI" in the industry. As a result of these new products and other research and development, the Company is positioning itself to dramatically increase sales and improve its competitive position in the marketplace. In tandem with new product and software developments, the Company has been strengthening and continues to strengthen its legal position for the purpose of protecting its proprietary technology as well as other interests. The Company does not intend to permit its competitors and would-be competitors to capitalize, to the detriment of the Company, on its inventions and exhaustive research and development efforts, as the Company believes has happened in the past. On September 2, 1992, the Company filed a patent infringement suit against Hitachi Ltd., General Electric Company and others in the United States District Court for the Eastern District. In April, 1995, the Company reached a settlement with Hitachi Ltd. and related defendants. In May, 1995, the jury rendered a verdict in FONAR's favor against General Electric Company. In October, 1995, the Court awarded FONAR judgment of $62 million, plus interest and issued an injunction (stayed pending appeal) enjoining General Electric from future violations of Fonar's Multi-Angle Oblique (MAO) (tm) patent. The appeal is scheduled for oral argument on October 8, 1996. Following its favorable jury verdict against General Electric Company, FONAR filed patent infringement suits against Siemens Medical Systems, Inc., Siemens, AG, Philips Electronics, NV, Philips Medical Systems, Inc. and Philips Electronics North America Corporation. The patents sought to be enforced against both defendants include the Multi-Angle Oblique improvement patent (U.S. Patent No. 4,871,966 entitled "Apparatus and Method for Multiple Angle Oblique Magnetic Resonance Imaging"). Subsequently, in March 1996, the Company commenced a patent infringement suit against Toshiba America Medical Systems, Inc. and Toshiba American MRI, Inc. In April 1996, the litigation with the Philips companies was resolved. The Company is optimistic about sales of its new scanner products. At September 1, 1996, the Company's backlog of unfilled orders had increased to $6.8 million as compared to $4.0 million at September 1, 1995. To further promote product recognition and sales, FONAR will attend the RSNA (Radiological Society of North America) trade show in November 1996 to exhibit its new products. The RSNA is the leading trade show in the MRI industry. Approximately 25,000 radiologists, who are among the principal groups to whom the Company directs its marketing efforts, are expected to attend to view MRI industry's most current product developments. In addition, the Company is in the process of establishing a network of independent sales representatives to supplement its internal domestic sales force. The Company is actively seeking to promote foreign sales, thus enhancing America's competitive position as well as its own. Since commencing its current foreign sales program, the Company has sold scanners in Korea, Mexico and Poland. Based on numerous indications of interest, meetings, sales trips abroad and negotiations, the Company is cautiously optimistic that foreign sales will produce significant revenues. The Company believes there are and will be significant market opportunities abroad, particularly in Asia and Eastern Europe. PRODUCTS OFFERED The Company's principal products are its new "QUAD" series of MRI scanners. The QUAD 12000 MR scanner utilizes a 6000 gauss iron core electromagnet and is accessible from four sides. The QUAD 12000 is the first "open" MR scanner above low field (above 600 gauss). The QUAD 7000 is similar in design to the QUAD 12000 but utilizes a smaller 3,500 gauss electromagnet. The Ultimate 7000 utilizes a 3500 gauss electromagnet. In addition to the patient comfort, increased throughput and new applications (such as MRI directed surgery and MRI mammography) made possible by the QUAD scanners' open design, the QUAD scanners are designed to maximize image quality through an optimal combination of signal-to-noise (S/N) and contrast-to-noise (C/N) ratios. The technical improvements realized in the QUAD's design over its predecessors also include increased image-processing speed and diagnostic flexibility. The "QUAD" scanners are unique MR scanners in that four sides are open, thus allowing access to the scanning area from four vantage points. Equipped with up to four beds, the user is able to prep one or more "on deck" patients while another patient is being scanned, thereby increasing throughput and reducing scan prices. The star shaped open design of the QUAD will also make possible a host of new applications, particularly MRI mammography and MRI directed surgery (Interventional MRI). The principal difference between the Quads and other open MRI scanners is in field strength. Other open MRIs operate at significantly lower magnetic field strengths and, therefore, are unable to produce the amount of MRI image-producing signal necessary to make high-quality MRI images (measured by signal-to-noise ratios, S/N). With the QUAD's multi-bed patient handling system, many more short scan procedures such as those used in breast imaging can be done in a day, allowing the price of MRI mammography to drop without reducing the scanner's revenue-generating capacity. At the same time, there is not the painful compression of the breast characteristic of X-ray mammography. MRI directed surgery (laproscopic surgical procedures) is made possible by the QUAD's ability to supply images to a monitor positioned next to the patient, enabling a surgeon to view in process surgical procedure from an unlimited number of vantage points. The increased patient space in the QUAD permits the utilization of the Company's software for the taking of "moving scans." Those "moving scans" or "CINE," enable the physician to observe the scanned body part (e.g., knee, neck and elbow) in motion. The QUAD enables a full range of motion studies that cannot be completely performed in the claustrophobic cylindrical tubes of today's superconductive magnets. FONAR's works-in-progress include CINE-FLEX (tm), which is a set of specialized coils and matching fixtures that enable full-range CINEs of the knee, shoulder, C-spine, L-spine and TMJ - an impossibility with supercon MRIs. The principal difference between the QUAD scanners and other open MRI scanners is in field strength. Other open MRIs operate at significantly lower magnetic field strengths and, therefore, are unable to produce the amount of MRI image-producing signal necessary to make high-quality MRI images (measured by signal-to-noise ratios, S/N). The QUAD 12000 scanner utilizes a 6000 gauss (.6 Tesla field strength) iron core electromagnet. The greater field strength of the 6000 gauss magnet, when enhanced by the electronics already utilized by the Company's scanners, produces images of a quality and clarity competitive with high field superconductive magnets. The QUAD 12000 scanner magnet is the highest field "open MRI" in the industry. The QUAD scanners are designed to maximize image quality through an optimal combination of signal-to-noise (S/N) and contrast-to-noise (C/N) ratios. The technical improvements realized in the QUAD's design over its predecessors also include increased image-processing speed and diagnostic flexibility. Maximal S/N is achieved when the direction of the magnetic field and the direction of the receiving coil axis are perpendicular to one another, as is the case with the QUAD scanners. The orientation of the magnetic field is vertical and when combined with any one of FONAR's array of solenoidal (wrap-around) surface coils, the QUAD 7000, for example, produces as much S/N as a supercon MRI at twice the field strength. So that prospective buyers can make an accurate comparison, the number 7000 is used to describe the S/N equivalency of the QUAD 7000 to 7000-gauss superconductive machines. Several technological advances have been engineered into the QUAD scanners for extra improvements in S/N, including: new high-S/N Organ Specific (tm) receiver coils; new ceramic magnet poles that provide advanced eddy-current control; new advanced front-end electronics featuring high-speed, wide-dynamic-range analog-to-digital conversion and a miniaturized ultra-low-noise pre-amplifier; high-speed automatic tuning, bandwidth-optimized pulse sequences, multi-bandwidth sequences, and off-center FOV imaging capability. In addition to the signal-to-noise ratio, however, the factor that must be considered when it comes to image quality is contrast, the quality that enables reading physicians to clearly distinguish adjacent, and sometimes minute, anatomical structures. This quality is measured by contrast-to-noise ratios (C/N). Unlike S/N, which increases with increasing field strength, relaxometry studies have shown that C/N peaks in the mid-field range and actually falls off precipitously at higher field strengths. The QUAD 7000 and QUAD 12000 scanners operate squarely in the optimum C/N range. The QUAD's state-of-the-art electronics package features five computer processors performing parallel processing. Its speed is demonstrated by its ability to scan and reconstruct images simultaneously and its ability to reconstruct a 256x256 image in 0.7 seconds, the fastest of any MRI scanner on the market. The QUAD provides various features allowing for versatile diagnostic capability. For example, SMART (TM) scanning allows for same-scan customization of up to 63 slices, each slice with its own thickness, resolution, angle and position. This is an extremely important feature for scanning parts of the body that include small-structure sub-regions requiring finer slice parameters. There's also Evolving Images (tm), Multi-Angle Oblique (MAO) (tm) imaging, and oblique imaging. The QUAD console includes a mouse-driven, multi-window interface for easy operation and a 19-inch, 1280x1280-pixel, 20-up, high-resolution image monitor with features such as electronic magnifying glass and real-time, continuous zoom and pan. Because of the openness of the QUAD 7000 and FONAR's coil development and CINE, QUAD 7000 users can plan on adding the works-in-progress CINE-FLEX (tm) option to their scanners. CINE-FLEX (tm) is a set of specialized coils and matching fixtures that enable full-range CINEs of the knee, shoulder, C-spine, L-spine and TMJ - an impossibility with supercon MRIs. The Beta 3000 initiated the Company's product line and resulted in over 150 worldwide FONAR installations to date. The effort to achieve the QUAD and the Ultimate product line represented a company-wide aspiration to seize the opportunity to incorporate into the Company's product line all of the desirable features FONAR had learned since it opened the industry in 1980. The facility of these features have been achieved in FONAR's "QUAD" and "Ultimate" MR machines. MARKETS AND MARKETING The principal markets for the Company's scanners are hospitals and private scanning centers. The Company is conducting its marketing through its own sales network and selected distributors. Direct domestic marketing is accomplished through field solicitation of potential users by Company personnel. The Company is in the process of establishing a network of independent sales representatives and distributors working on a commission basis in the domestic market. Sales in foreign markets are made through independent sales representatives and distributors. In addition, the Company exhibited its new products at the trade show held by the Radiological Society of North America ("RSNA") in Chicago in November 1995 and plans to attend the RSNA trade shows in November 1996 and future years as well. The RSNA trade show is held annually and is attended by most manufacturers of MRI scanners. The Company is directing its marketing efforts to meet the demand for both "open" and high field strength MRI scanners. Utilizing a 6000 gauss (.6 Tesla field strength) iron core electromagnet, the QUAD 12000 scanner magnet is the highest field "open MRI" in the industry. The Company also plans to direct its marketing efforts to meeting the increasing demand for low price MRI. To date, the increased pressure for lower scanning prices has come largely from preferred provider organizations, health maintenance organizations and other private sector group plans and stricter insurance requirements, but government mandated health care reform is also under consideration. To meet this demand, the Company has set a base price of $895,000 for the QUAD 12000 and of $695,000 for the QUAD 7000 scanner. In addition to reducing the health care provider's equipment cost, the QUAD scanners' improved image processing speed and extra-bed(s) option (allowing patients to be prepped while another patent is being scanned) would enable the provider to increase patient volume and further reduce per scan costs. The reduced per scan costs will enable the Company to promote the QUAD 7000 in particular for short scan procedures such as MRI mammograms. MRI mammograms have the advantage over traditional x-rays of involving no radiation, and an MRI breast scan can be taken in most cases through ordinary street clothes without any painful compression. The Company also will seek to introduce new MRI applications for the QUAD scanners such as MRI-directed surgery and head-to-toe MRI preventive screening. The Company is actively seeking to promote foreign sales. Since commencing its current foreign sales program, the Company has sold scanners in various foreign countries. Based on indications of interest, meetings, sales trips abroad and negotiations, the Company is optimistic that foreign sales will continue to be an important source of revenue. The Company believes there are and will be significant market opportunities abroad, particularly in Asia and Eastern Europe. See "Note 9 to Notes to Consolidated Financial Statements" for the percentage of foreign sales as in relation to the Company's total revenues. SERVICE AND UPGRADES The Company regards its customer base of over 100 scanners installed or in the process of being installed as a major asset. It has been and will continue to be a significant source of income, independent of direct sales. Income is generated from the installed base in two principal areas namely, service and upgrades. Service and maintenance revenues from the Company's installed base were approximately $7.7 million in fiscal 1994, $6.6 million in fiscal 1995 and $6.1 million in fiscal 1996. The decreases in fiscal 1995 and 1996 were principally the result of the retirement of old scanners. Substantial upgrades income, which is new to the medical instrument industry, originates in the exceptional versatility and productivity of the MRI technology. New medical uses for the technology are constantly being discovered. Dramatic new features can often be added to the scanner by the implementation of little more than versatile new software packages. Such enhancements are attractive to the end users because they extend the useful life of the equipment and enable the user to avoid obsolescence and the expense of having to purchase new equipment. RESEARCH AND DEVELOPMENT During the fiscal year ended June 30, 1996, the Company incurred expenditures of $3,607,703 ($251,659 of which was capitalized) on research and development, as compared to $3,508,101 ($151,981 of which was capitalized) and $3,604,785 ($687,551 of which was capitalized) incurred during the fiscal years ended June 30, 1995 and June 30, 1994, respectively. Research and development activities have focused, in large part, on the development and enhancement of the Company's QUAD MR scanners and on the continued enhancement of the Ultimate and Beta 3000 and Beta 3000M products. The QUAD and Ultimate scanners involved significant software and hardware development as the new products represented entirely new hardware design and architecture requiring a complete new operating software system. Most recently, the Company's research activity has centered on developing a multitude of new features for the QUAD series scanners made possible by the QUAD's high speed processing power. BACKLOG The Company's backlog of unfilled orders at September 1, 1996 increased to approximately $6.8 million, as compared to $4.0 million at September 1, 1995. Of these amounts, approximately $1.3 million and $2.4 million had been paid to the Company as customer advances as at September 1, 1996 and September 1, 1995, respectively. It is expected that the existing backlog of orders will be filled within the current fiscal year. The Company's contracts generally provide that if a customer cancels an order, the customer's initial down payment for the MRI scanner is nonrefundable. PATENTS AND LICENSES There are currently numerous foreign and domestic patents in effect which relate to the technology and components of the MRI scanners, some of which are registered in the name of the Company and others which are registered in the name of Dr. Raymond V. Damadian, the President and principal stockholder of the Company. The Company believes that these patents, which expire at various times from 1999 to 2013, and the know-how it developed, are material to its business. Dr. Damadian has granted an exclusive world-wide license to the Company to make, use and sell apparatus covered by certain domestic and foreign patents relating to his MRI technology. The license continues until the expiration of the last patent included within the licensed patent rights, but is terminable earlier, at the option of Dr. Damadian, if he is removed from his position as Chairman of the Board or President of the Company without his consent, or if any stockholder or group of stockholders acting in concert becomes the beneficial owner of Company securities having voting power equal to or greater than the voting power of the securities held directly by him, his executors, administrators, successors or heirs. The agreement can also be terminated by Dr. Damadian upon the commission of an act of bankruptcy by the Company. If Dr. Damadian is unable to serve the Company by reason of his death or disability, the license agreement will remain in effect. One of the patents, issued in the name of Dr. Damadian and covered by said license, is United States patent No. 3,789,832, Apparatus and Method for Detecting Cancer in Tissue (the "1974 Patent"). The development of the Beta 3000 was based upon the 1974 Patent, and Management believes that the 1974 Patent was the first of its kind to utilize MR to scan the human body and to detect cancer. The 1974 Patent was extended beyond its original 17-year term and expired in February, 1992. The Company has significantly enhanced its patent position within the industry and now possesses a substantial patent portfolio which provides the Company, under the aegis of United States patent law, "the exclusive right to make, use and sell" many of the scanner features which FONAR pioneered and which are now incorporated in most MRI scanners sold by the industry. The patents further enhance Dr. Damadian's pioneer patent (the 1974 Patent), that initiated the MRI industry and provided the original invention of MRI scanning. The Company has entered into a cross-licensing agreement (utilizing other than FONAR's MRI technology) with another entity to use prior art developed for nuclear magnetic resonance technology and has entered into a license to utilize the MRI technology covered by the existing patent portfolio of a patent holding company. ENFORCEMENT LITIGATION On September 2, 1992, the Company commenced legal action to enforce its patent rights, filing suit against Hitachi Ltd., General Electric Company and others in the United States District Court for the Eastern District of New York. Prior to trial in April 1995, FONAR settled with Hitachi. On May 26, 1995 the jury rendered a verdict against General Electric Company awarding FONAR $110,575,000 for infringement of its multi-angle oblique patent (Apparatus and Method for Multiple Angle Oblique MRI, 10/3/89, U.S. Patent No. 4,871,966) and Dr. Damadian's pioneer cancer detection patent (Apparatus and Method for Detecting Cancer in Tissue, 2/5/74, U.S. Patent No. 3,789,832). On October 6, 1995, the Court announced its decisions on the parties' respective post-trial motions, awarding FONAR $61,950,000 and an injunction (stayed pending appeal) on the multi-angle oblique patent (U.S. Patent No. 4,871,966). Although finding that the cancer detection patent was valid (U.S. Patent No. 3,789,832), the Court overturned the jury's determination that General Electric Company's MRI scanners infringed the patent. Both the Company and General Electric Company have appealed. Oral argument is scheduled to be held on the appeals on October 8, 1996. The Company is represented by Robins, Kaplan, Miller and Ciresi, the Minneapolis based national law firm that represented Honeywell in its lawsuit against Minolta for infringement of Honeywell's autofocus patents. Following the rendering of the jury's verdict in favor of FONAR against General Electric Company, the Company, represented by Robins, Kaplan, Miller and Ciresi, filed suits against Siemens Medical Systems, Inc., Philips Electronics North America Corporation and related parties for infringement of FONAR's multi-angle oblique patent, Dr. Damadian's pioneer cancer detection patent and, in the case of Siemens Medical Systems, Inc., two additional MRI patents. Thereafter, Fonar commenced a patent infringement suit against Toshiba American MRI, Inc. and Toshiba American Medical Systems, Inc. The litigation with Philips Electronics of North America Corporation and its affiliates was settled in April 1996. The Company believes that it has achieved a significant milestone in protecting and enforcing its proprietary rights in its lawsuit against General Electric Company, and having pioneered the establishment and development of the medical MRI scanning industry, the Company intends to take the steps necessary to enforce its rights and protect its proprietary technology against other infringers as well. (See "Litigation.") COMPETITION MRI SCANNERS A majority of the MRI scanners in use in hospitals and outpatient facilities and at mobile sites in the United States are based on superconductive magnet technology while the balance are based on non-superconductive magnet technology. FONAR's non-superconductive MRI scanners are competing principally with superconductive scanners. FONAR believes that its MRI scanners have significant advantages as compared to the superconductive scanners. These advantages include: 1. There is no fringe magnetic field. Super conductive scanners require a more expensive shielded room than is required for the non-superconductive scanners. The shielded room required for the non-superconductive scanners is intended to prevent interference from external radio frequencies. 2. They do not require costly coolants (liquid nitrogen and liquid helium) or highly complex technology to handle them. 3. They are more open, quiet and in the case of the QUAD scanners allow for faster throughput of patients. 4. They require smaller space to install. 5. Their annual operating costs are lower. 6. The set-up and disconnect time for a Mobile Scanner is shorter than for a mobile superconductive scanner. 7. They can scan the trauma victim, the cardiac arrest patient, the respirator-supported patient, and premature and newborn babies. This is not possible with superconductive scanners because their magnetic field interferes with conventional life-support equipment. FONAR faces competition within the MRI industry from such firms as General Electric Company; Picker International, which is a Division of General Electric Company PLC, of England; Elscint Ltd; Philips N.V.; Toshiba Corporation, Hitachi Corporation, Shimadzu Corporation and Siemens A.G. Most competitors have marketing and financial resources more substantial than those available to the Company and have in the past, and may in the future, heavily discount the sales price of their scanners. OTHER IMAGING MODALITIES FONAR's MRI scanners also compete with other diagnostic imaging systems, all of which are based upon the ability of energy waves to penetrate human tissue and to be detected by either photographic film or electronic devices for presentation of an image on a television monitor. Three different kinds of energy waves - X-ray, gamma and sound - are used in medical imaging techniques which compete with MRI medical scanning, the first two of which involve exposing the patient to potentially harmful radiation. X-rays are the most common energy source used in imaging the body and are employed in three imaging modalities: 1. Conventional X-ray systems, the oldest method of imaging, are typically used to image bones and teeth. The image resolution of adjacent structures that have high contrast, such as bone adjacent to soft tissue, is excellent, while the discrimination between soft tissue organs is poor because of the nearly equivalent penetration of x-rays. 2. Computerized Tomography ("CT") systems couple computers to x-ray instruments to produce cross-sectional images of particular large organs or areas of the body. The CT scanner addresses the need for images, not available by conventional radiography, that display anatomic relationships spatially. However, CT images are generally limited to the transverse plane and cannot readily be obtained in the two other planes (sagittal and coronal). Improved picture resolution is available at the expense of increased exposure to x-rays from multiple projections. Furthermore, the pictures obtained by this method are computer reconstructions of a series of projections and, once diseased tissue has been detected, CT scanning cannot be focused for more detailed pictorial analysis or obtain a chemical analysis. 3. Digital radiography systems add computer image processing capability to conventional x-ray systems. Digital radiography can be used in a number of diagnostic procedures which provide continuous imaging of a particular area with enhanced image quality and reduced patient exposure to radiation. Nuclear medicine systems, which are based upon the detection of gamma radiation generated by radioactive pharmaceuticals introduced into the body, are used to provide information concerning soft tissue and internal body organs and particularly to examine organ function over time. Ultrasound systems emit, detect and process high frequency sound waves reflected from organ boundaries and tissue interfaces to generate images of soft tissue and internal body organs. These systems have comprised one of the most rapidly growing modalities during recent years due to an increasing number of procedures for established applications, as well as the expansion of ultrasound into new applications. Although the images are substantially less detailed than those obtainable with x-ray methods, ultrasound is generally considered harmless and therefore has found particular use in imaging the pregnant uterus. X-ray machines, ultrasound machines, digital radiography systems and nuclear medicine compete with the MRI scanners by offering significantly lower price and space requirements. However, FONAR believes that the quality of the images produced by its MRI scanners is generally superior to the quality of the images produced by those other methodologies. GOVERNMENT REGULATION Under the Medical Device Amendments of 1976 to the Federal Food, Drug and Cosmetic Act, all medical devices are classified by the Food and Drug Administration (the "FDA") into one of three classes. A Class I device is subject only to certain controls, such as labeling requirements and manufacturing practices; a Class II device must comply with certain performance standards established by the FDA; and a Class III device must obtain pre-market approval from the FDA prior to commercial marketing. The Company received approval to market its Beta 3000 and Beta 3000M scanners as Class III devices on September 26, 1984. On July 28, 1988, the Magnetic Resonance Diagnostic Device which includes MR Imaging and MR Spectroscopy was reclassified by the FDA to Class II status. On June 25, 1992, the Company received FDA approval to market the Ultimate Magnetic Resonance Imaging Scanner as a Class II device. The Company received FDA approval to market the QUAD 7000 in April 1995 and for the QUAD 12000 in November 1995. The FDA has authority to conduct detailed inspections of manufacturing plants, to establish "good manufacturing practices" which must be followed in the manufacture of medical devices, to require periodic reporting of product defects and to prohibit the exportation of medical devices that do not comply with the law. Effective November 22, 1985, the Department of Health and Human Services authorized reimbursement of MRI scans under the Federal Medicare program. In addition, most private insurance companies have authorized reimbursement for MRI scans. Proposed and enacted legislation at the State and Federal levels has restricted referrals by physicians to medical and diagnostic centers in which they or their family members have an interest. In addition, regulations have been adopted by the Secretary of Health and Human Services which provide limited "safe harbors" under the Medicare Anti-Kickback Statute. These safe harbors describe payments and transactions which are permitted between an entity receiving reimbursement under the Medicare program and those having an interest in or dealings with the entity. Although the Company cannot predict the overall effect of the adoption of these regulations on the medical equipment industry, the use and continuation of limited partnerships (where investors may be referring physicians) to own and operate MRI scanners could be greatly diminished. EMPLOYEES As of July 1, 1996, the Company employed 171 persons on a full-time basis. Of such employees, 12 were engaged in marketing and sales, 28 in research and development, 46 in manufacturing, 43 in customer support services, and 42 in administration. ITEM 2. PROPERTIES The Company leases approximately 93,240 square feet of office and plant space at its principal office in Melville, New York and at one other location in Farmingdale, New York at a current aggregate rental rate of approximately $681,000, excluding utilities, taxes and other related expenses. The terms of the various leases extend through 1997. Management believes that these premises are adequate for its current needs. The Company presently is negotiating to extend the terms of existing leases and considering additional space in the same area. ITEM 3. LEGAL PROCEEDINGS On September 2, 1992, the Company filed an action against General Electric Company, ("General Electric"), Hitachi Ltd. ("Hitachi") and other defendants for patent infringement in the United States District Court for the Eastern District of New York seeking injunctive relief and damages. (FONAR Corporation and Dr. Raymond V. Damadian v. Hitachi Ltd. et. al. Civil Action No. 92-4196). The defendants contested the Company's claims, and Hitachi counterclaimed, alleging infringement by the Company of two of its patents. In April, 1995, after the opening statements by counsel at the commencement of trial, FONAR and Hitachi reached a settlement. On May 26, 1995, the jury rendered a verdict against General Electric Company awarding FONAR $110,575,000 for infringement of two of its patents: United States Patent Number 3,789,832 entitled "Apparatus and Method for Detecting Cancer in Tissue" and United States Patent Number 4,871,966 entitled "Apparatus and Method for Multiple Angle Oblique Magnetic Resonance Imaging." Subsequent to the verdict General Electric made motions to the Court to enter judgment as a matter of law in its favor and against FONAR with respect to both patents notwithstanding the jury's verdict. FONAR made a motion to the Court for an injunction restraining General Electric Company from using the multi-angle oblique imaging technology covered by U.S. Patent No. 4,871,966. On September 30, 1995 the Court announced its decision. In its decision, the Court awarded FONAR $61,950,000 in damages against General Electric for direct infringement of U.S. Patent No. 4,871,966 (Multiple Angle Oblique Magnetic Resonance Imaging) and granted an injunction against General Electric prohibiting future violations of the patent. (An additional $6,471,726 in pre-judgment interest was awarded to FONAR on November 17, 1995.) The injunction was stayed pending appeal, however, upon the posting of a bond by General Electric. With respect to U.S. Patent No. 3,789,832 (Cancer Detection Patent), the judge agreed with the jury's finding that the patent was valid, but disagreed with the jury finding of infringement and determined that General Electric's MRI scanners did not infringe the patent. The Court also rejected the jury's finding that General Electric had induced others to infringe U.S. Patent No. 4,871,966. General Electric has appealed the portion of the judgment upholding the jury's award of damages to FONAR for direct infringement of U.S. Patent No. 4,871,966 and the issuance of the injunction. FONAR has appealed the portion of the judgment overturning the jury's findings of infringement on U.S. Patent No. 3,789,832 and contributory infringement in respect of U.S. Patent No. 4,871,966. Oral argument was held on October 8, 1996. On June 16, 1995, the Company filed an action against Siemens Medical Systems, Inc., Philips Electronics North America Corporation, Philips Electronics, N.V. and other defendants for patent infringement in the United States District Court for the Eastern District of New York. FONAR sought injunctive relief and damages (FONAR Corporation and Dr. Raymond V. Damadian V. Siemens Medical Systems, Inc. et al. Civil Action No. CV 95-2469 (LJW). In its suit, FONAR alleged that four of its patents were infringed, including U.S. Patent Nos. 3,789,832 (Apparatus and Method for Detecting Cancer in Tissue) and 4,871,966 (Apparatus and Method for Multiple Angle Oblique Magnetic Resonance Imaging). (Subsequently, the action was transferred to the United States District Court for the District of Delaware.) Previously, in May 1995, Siemens Medical Systems, Inc. had filed a complaint against FONAR in the United States District Court for the District of Delaware seeking a declaratory judgment that the four patents were invalid and unenforceable, as well as an adjudication that Siemens was not infringing the four patents. On June 14, 1995, Siemens Medical Systems, Inc. amended the Complaint to add Siemens AG as a plaintiff, to add Raymond V. Damadian, M.D. MR Scanning Centers Management Company as a defendant and to include a claim against FONAR for infringement of one of Siemens' MRI patents. The complaint was further amended on December 14, 1995 to allege infringement of two additional patents. (Siemens Medical Systems, Inc. and Siemens AG, v. FONAR Corporation and Raymond V. Damadian, M.D. MR Scanning Centers Management Company, Civil Action No. 95-261. Thereafter, on June 30, 1995, Philips Electronics North America Corporation and Philips Electronics, N.V. filed a complaint against FONAR in the United States District Court for the District of Delaware seeking a declaratory judgment that FONAR's U.S. Patents Nos. 3,789,832 and 4,871,966 were invalid, unenforceable and not infringed (Philips Electronics North America Corporation and Philips Electronics, N.V. v. FONAR Corporation, Case No. 95-431). Separately, U.S. Philips Corporation, an affiliate of Philips Electronics North America Corporation and Philips Electronics, N.V., commenced an action in the United States Court for the District of Delaware alleging infringement by FONAR of two of its patents. (U.S. Philips Corporation v. Fonar Corporation and Raymond V. Damadian, M.D. MR Scanning Centers Management Company, Civil Action No. 95-448.) In April 1996, FONAR entered into an agreement with Philips Electronics N.V., Philips Electronics North America Corporation, Philips Medical Systems North America and U.S. Philips Corporation setting the lawsuits and claims between them. On March 4, 1996, the Company filed an action against Toshiba Corporation, Toshiba America Medical Systems, Inc., Toshiba American MRI, Inc. and others alleging infringement of four of its MRI patents. FONAR Corporation and Dr. Raymond V. Damadian v. Toshiba Corporation, Toshiba America Medical Systems, Inc., Toshiba America MRI, Inc. et al. (U.S. District Court, Eastern District of New York, Civil Action No. 96-0963.) On March 4, 1987, Philip B. Kivitz, M.D. and Rad-Sonic Diagnostic Medical Clinics, Inc., filed a complaint against AMD, FONAR, Raymond V. Damadian and others in the San Francisco County Superior Court (Case Action No. 870407) seeking $10,000,000 in compensatory damages and $10,000,000 in punitive damages. In January 1993, the case went to trial and the jury returned a verdict of $880,000 against AMD and $120,000 against FONAR. On June 17, 1993, the Court granted FONAR's and AMD's motion for judgment notwithstanding the verdict, thereby vacating the entire award against both FONAR and AMD. The plaintiffs appealed the Court's granting of judgment notwithstanding the verdict. On February 27, 1995, the appellate court affirmed the lower court's judgment notwithstanding the verdict as to FONAR, but reversed the judgment as to AMD. As a result, the trial court's determination that the plaintiffs could not recover against FONAR was upheld, but the jury verdict against AMD was reinstated. AMD filed a petition for review with the California Supreme Court. AMD's petition was denied on May 17, 1995. On April 3, 1990, Summit, Rovins and Feldesman commenced an action in the Supreme Court of the State of New York, County of New York against the Company and its President, Raymond V. Damadian. The complaint alleges unpaid fees for legal services and disbursements in the amount of $664,371.65. The Company is contesting the plaintiff's claims as excessive and improper charges for legal services, and has asserted various defenses and a counterclaim of $100,000 for a refund of fees. The plaintiff made a motion for summary judgment which was granted as to the existence of liability but denied as to the amount. Dr. Damadian's cross-motion to dismiss the action against him personally was granted. Both parties appealed the court's decisions. On March 9, 1995, the appellate court reversed the granting of summary judgment against FONAR. The appellate court also upheld the dismissal of the action against Dr. Damadian personally. The case is ready for trial. In January, 1991, Myheal Technologies and a former employee commenced an action against the Company in the United States District Court for the Eastern District of New York (Index No. 91 CIV 0204). The amount claimed was $5,000,000 in compensatory damages and $5,000,000 in punitive damages. The claim arose out of an alleged breach of an agreement between the Company and a former research and development employee of the Company. A jury verdict rendered in December, 1993 against the Company for $1,150,000 was set aside, and a second trial was ordered and held. On March 24, 1995 the jury rendered a verdict in favor of Myheal Technologies in the amount of $250,000 plus interest. On April 21, 1995, the Company made a motion requesting judgment as a matter of law dismissing the plaintiffs' claim or in the alternative a new trial or reduction of damages. The Company's motion was denied and judgment was entered against the Company in August, 1995. The District Court's decision was upheld by the Court of Appeals on appeal. The judgment has been paid. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock is traded in the over-the-counter market under the National Association of Securities Dealers Automated Quotation System ("NASDAQ") symbol FONR. The following table sets forth the high and low bid and asked prices reported in NASDAQ System for the periods shown. The prices represent quotations between dealers and do not include certain mark-ups, mark-downs or commissions, and do not necessarily represent actual transactions. FISCAL QUARTER Bid Ask High Low High Low July - September 1993 3.28 1.13 3.38 1.16 October - December 1993 3.53 1.81 3.59 1.84 January - March 1994 2.63 1.59 2.66 1.66 April - June 1994 1.72 1.22 2.00 1.25 July - September 1994 1.91 1.22 2.00 1.25 October - December 1994 2.50 1.28 2.53 1.31 January - March 1995 2.50 1.53 2.53 1.63 April - June 1995 4.50 2.38 4.56 2.41 July - September 1995 3.84 2.56 4.00 2.63 October - December 1995 3.91 2.50 3.97 2.56 January - March 1996 2.78 2.09 2.81 2.13 April - June 1996 3.00 2.19 3.03 2.25 July - September 3 1996 2.63 2.13 2.72 2.19 On September 3, 1996, the Company had approximately 4,653 stockholders of record of the Company's Common Stock, 14 stockholders of record of the Company's Class B Common Stock, four stockholders of record of the Company's Class C Common Stock and 4,694 stockholders of record of the Company's Class A Non-voting Preferred Stock. At the present time, the only class of the Company's securities for which there is a market is the Common Stock. The Company has paid no dividends to date. The Company anticipates, however, paying certain dividends on monies it receives from the enforcement of its patents. Except for these dividends, it is expected that the Company will continue to retain earnings to finance the development and expansion of its business. Item 6. SELECTED FINANCIAL DATA The following selected consolidated financial data has been extracted from the Company's consolidated financial statements for the five years ended June 30, 1996. This consolidated selected financial data should be read in conjunction with the consolidated financial statements of the Company and the related notes included in Item 8 of this form. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of the Company's business plan.
As of, or For the Period Ended June 30, STATEMENT OF OPERATIONS 1996 1995 1994 1993 1992 ----------- ----------- ----------- ------------ ----------- Revenues $13,130,000 $14,090,000 $15,387,000 $ 16,802,000 $19,697,000 Cost of $ 8,956,000 $ 9,003,000 $ 7,814,000 $ 9,608,000 $10,620,000 revenues Research and $ 3,356,000 $ 3,356,000 $ 2,803,000 $ 2,181,000 $ 2,135,000 Development Expenses Net Income (loss) $(3,376,000) $(1,763,000) $ (335,000) $ 238,000 $ 635,000 Net income (loss) (0.07) (0.04) (0.01) 0.01 0.02 per common share Weighted average 50,822,000 45,055,000 36,774,000 30,870,000 27,888,000 number of shares outstanding * BALANCE SHEET DATA Working capital $(2,355,000 $(5,077,000) $(7,749,000) $(12,239,000) $(7,231,000) (deficit) Total $63,096,000 $54,944,000 $48,418,000 $ 42,811,000 $40,410,000 assets Long-term debt and $ 3,872,000 $ 3,780,000 $ 5,884,000 $ 9,483,000 $11,789,000 obligations under capital leases Stockholders' $48,138,000 $39,388,000 $28,333,000 $ 18,022,000 $12,797,000 equity * Adjusted for stock dividend of Class A Non-voting Preferred Stock declared in October, 1995.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS. FISCAL 1996 COMPARED TO FISCAL 1995 In fiscal 1996, the Company experienced a net loss of $3.4 million on revenues of $13.1 million as compared to a net loss of $1.8 million on revenues of $14.1 million for fiscal 1995. The Company's QUAD 7000 and QUAD 12000 MRI scanners, together with other research and development projects, are intended to significantly improve the Company's competitive position. Having received FDA approval for its QUAD 7000 scanner in the fourth quarter of fiscal 1995 and for its QUAD 12000 scanner in the first quarter of fiscal 1996, the Company believes it is in a position to aggressively seek new sales. The QUAD scanners are highly competitive and totally new non-claustrophobic scanners not previously available in the MRI market. At .6 Tesla field strength, the QUAD 12000 magnet is the highest field "Open MRI" in the industry, offering non-claustrophobic MRI together with high-field image quality for the first time. The Company expects vigorous sales from its new products. As the Company has expanded its operations and productive capacity to meet and anticipate new orders, costs and expenses increased in fiscal 1996. Although cost of revenues remained at approximately $9.0 million in 1996, research and development, selling, general and administrative expenses increased to approximately $11.5 million for fiscal 1996 from approximately $10.0 million for fiscal 1995. The Company has continued its program for upgrading previously installed scanners. The versatility and productivity of MRI technology creates the impetus for new uses. As a result, new features are developed and sold to the Company's customer base thereby extending the useful life of their equipment, avoiding obsolescence and minimizing capital expenditures. Upgrades consist of hardware, software and pulse sequences designed to maximize throughput while maintaining image quality and patient comfort. As part of its marketing program, the Company attended the industry's annual trade show, RSNA (Radiological Society of North America) in November 1995, and plans to do so again in November 1996. At the RSNA show in 1995, the Company exhibited its new QUAD 12000 and QUAD 7000 scanners. The Company believes that it is uniquely positioned to take advantage of the rapidly expanding "Open MRI" market, as the manufacturer of the only high-field "Open MRI" in the industry. The Company expects marked demand for this product since image quality increases as a direct proportion to magnetic field strength. In addition, the Company's new scanners provide improved image quality and high speed imaging at costs that are significantly less than the competition and more in keeping with the medical cost reduction demands being made by our national leaders on behalf of the public. The Company also believes that efforts to reduce infringement of its intellectual property rights by competitors have begun to produce material benefits, as reflected in the $62 million judgment rendered in its favor against General Electric Company. During the 1995 fiscal year the Company commenced similar patent infringement suits against other major competitors (See "Litigation"). As at September 1, 1996, the Company's backlog of unfilled orders was approximately $6.8 million, as compared to approximately $4.0 million at September 1, 1995. The Company continued to benefit as a result of programs set in motion in fiscal 1989; namely strict cost containment initiatives and expanding the corporate business into other profitable enterprises within the MRI industry. As a result of this expansion, the percentage of the Company's revenue derived from sources other than scanner sales (customer service and upgrades) was approximately 49% for fiscal 1996 as compared to 33% for fiscal 1990. The Company believes, however, that this trend may have peaked in fiscal 1991 and 1992 when the percentage was approximately 61%. (The percentages for fiscal 1995, 1994 and 1993 were 48%, 51% and 60%, respectively.) Management expects that the percentage of revenue derived from scanner sales will continue to expand as a result of the introduction into the market of its new QUAD scanner products. Customer service and upgrades, however, are and will continue to be priorities for the Company. The Company derived approximately $1.7 million in upgrades income in 1992, $1.3 million in 1993, $61,000 in 1994, $338,000 in 1995 and $112,000 in 1996. Significant research and development of new programs have been undertaken, which emphasize the development of new features for the Company's scanner upgrade program. Continuing its tradition as the originator of MRI the Company remained committed to maintaining its position as the leading innovator of the industry through aggressive investing in research and development. In fiscal 1996 the Company continued its investment in the development of its new MRI scanners together with software and upgrades, with an investment of $3,607,703 in research and development ($251,659 of which was capitalized) as compared to $3,508,101 ($151,981 of which was capitalized) in fiscal 1995. The research and development expenditure was approximately 27.5% of revenues in 1996 and $23.8% of revenues in 1995. The Company has continued its efforts to increase scanner sales in foreign countries as well as domestically. Based on sales to date, further indications of interest, meetings, sales trips abroad and negotiations, the Company is cautiously optimistic that foreign sales will prove a significant source of revenue. FISCAL 1995 COMPARED TO FISCAL 1994 In fiscal 1995 the Company experienced a loss of $1.8 million on gross revenues of $14.1 million, while in fiscal 1994 a loss of $334,574 was reported on gross revenues of $15.4 million. Contributing to the Company's net loss were the recognition in the fourth quarter of unfavorable judgments in excess of $1.5 million in the aggregate. The most significant of these actions were the $880,000 judgment against Fonar's subsidiary AMD in the Kivitz et ano v. AMD et al. action (approximately $1.1 million with accrued interest) and the $250,000 judgment rendered against the Company in Myheal Technologies et ano. v. Fonar (approximately $369,000 with accrued interest). (See "Litigation"). Also significantly contributing to the Company's net loss for the year were the continuing losses of its Israeli subsidiary, Medical SNI (formerly Vonar Ltd.). These losses were in the amount of $867,100 for fiscal 1995 and $558,892 for fiscal 1994 (after giving effect to the minority interest). Lower revenues experienced in fiscal 1995, as in fiscal 1994, were the principal reason for the operating losses experienced in both fiscal years ($6.4 million in fiscal 1995 and $2.5 million in fiscal 1994). Lower revenues reflected strong competition and a continued weak domestic demand for MRI scanners in a marketplace eager to see new products that would address both the heightened cost pressures on MRI and the patient demand for non-claustrophobic scanners. As at September 1, 1996, the Company's backlog of unfilled orders was approximately $4.0 million, as compared to $1.5 million at September 1, 1994. Lower service and repair fees in fiscal 1995, as in fiscal 1994 (approximately $6.6 million in fiscal 1995 as compared to approximately $7.7 million in fiscal 1994) indirectly resulted from reduced sales, as well as from competition, as older scanners were retired. Overall, expenses increased from approximately $10.0 million in fiscal 1994 to $11.5 million in fiscal 1995. General and administrative expenses decreased from approximately $5.8 million in fiscal 1994 to approximately $5.3 million in fiscal 1995, but research and development expenses increased from approximately $2.8 million in fiscal 1994 to $3.4 million in fiscal 1995 (exclusive of the portion of such expenses capitalized), and selling and marketing expenses increased from approximately $1.3 million in fiscal 1994 to $1.5 million in fiscal 1995. The greatest part of the overall increase in expenses resulted from an increase in the compensatory element of stock issuances from $193,527 in fiscal 1994 to $1,363,194 in fiscal 1995. This increase resulted mostly from non-recurring bonuses granted to a large number of employees. The Company notes that maintaining or increasing expenses are necessary for the Company to realize its objective to develop and market new scanner products. In fiscal 1995 the Company invested $3,508,101 in research and development ($151,981 of which was capitalized) as compared to $3,604,785 in research and development ($687,551 of which was capitalized in fiscal 1994. The research and development expenditure was approximately 25% of revenues in 1995 and 23% of revenues in 1994. LIQUIDITY AND CAPITAL RESOURCES At June 30, 1996, the Company's liquidity and capital resources positions changed from the June 30, 1995 position as follows: June 30, June 30, 1996 1995 Change ____________ ____________ __________ Working capital (deficiency) ($2,355,000) ($5,077,000) $2,722,000 The improvement in the Company's working capital position resulted primarily from an increase in current assets (to $11.5 million at June 30, 1996 from $9.6 million at June 30, 1995) and a decrease in current liabilities (from $14.6 million in fiscal 1995 to $13.8 million in fiscal 1996). The increase in current assets principally reflected an expansion of inventory, resulting from the Company's increased manufacturing activity and an increase in cash. The decrease in current liabilities resulted from the payment of various taxes and other obligations. Total liabilities were reduced since June 30, 1995 by approximately $600,000 to approximately $14.8 million at June 30, 1996. Since June 1989, a principal objective of the Company has been to reduce and ultimately eliminate its debt. Since the inception of the plan, interest bearing debt was reduced from $23.1 million in fiscal 1989 to $18.5 million in fiscal 1990. From June 30, 1990 through June 30, 1991, interest bearing debt was reduced by an additional $3.3 million to $15.2 million and from June 30, 1991 through June 30, 1992 interest bearing debt was reduced by an additional $3.1 million to $12.1 million. From June 30, 1992 through June 30, 1993, interest bearing debt was reduced by $2.3 million to $9.8 million, and from June 30, 1993 to June 30, 1994 by $3.8 million to $6.0 million. Through June 30, 1995, interest bearing debt was reduced by an additional $2.1 million to approximately $3.9 million. At June 30, 1996 interest bearing debt was approximately $4.0 million. As of June 30, 1996, the Company had no unused credit facilities with banks or financial institutions. While continuing to focus on new sources of income and cost containment, the Company's business plan currently includes an aggressive program for manufacturing and selling its new line of QUAD scanners which are achieving success in the marketplace and which the Company has had under development for four years. The Company expects to reduce its working capital deficiency during the current fiscal year by internally generated cash from operating profits and the refinancing and/or restructuring of maturity terms of certain loans. The Company will also pursue equity financing alternatives. The Company believes that the above mentioned programs will provide the cash flows needed to achieve the sales, service and production levels necessary to support its operations. The Company offers its products for sale or lease to customers. Cash flows from leasing transactions are derived under the terms of the underlying agreements. Over the long term, the Company expects enhanced cash flows and increased revenues from such transactions while in the short term, such transactions impair cash flow. In order to mitigate the short term effect on cash flow, the Company previously had borrowed money secured by the leases and the underlying equipment. Such debt comprises substantially all of the remaining long-term debt in the accompanying financial statements. Since 1990 the Company has restructured various long-term loans and notes. The significant changes included extended maturity dates, and the addition of unpaid interest to the note and loan balances. Capital expenditures for each of fiscal 1996 and 1995 approximated $1.8 million, and substantially consisted of capitalized computer software costs in connection with the development of scanner products, patent costs and copyright costs and production equipment. The Company's business plan initiated in September 1989, had as its objective the enhancement and stabilization of revenue streams through the generation of additional income from its installed base of scanners and leasing programs. In addition, the Company instituted strict cost containment programs. While continuing to focus on new sources of income, the Company now has commenced aggressive sales and manufacturing of its new generation of Open MRI scanners, the QUAD scanners and is reemphasizing MRI Scanner sales. Cost containment programs continue in force notwithstanding an increase in costs and expenses resulting from increased manufacturing activity and marketing of its MRI scanners. These programs, which include increasing the portion of manufacturing conducted on the Company's premises, have enabled the Company to achieve significantly lower manufacturing costs than would have otherwise been experienced in the production of its QUAD scanners. This has enabled the Company to pass on to customers a much needed reduction in the sales price of MRI scanners. The Company's plan calls for a continuing emphasis on providing its customers with enhanced equipment service and maintenance capabilities and delivering state-of-the-art, innovative and high quality equipment upgrades at competitive prices. Fees for on-going service and maintenance from the 7Company's installed base of scanners were $6.6 million for the year ended June 30, 1995 and $6.1 million for the year ended June 30, 1996. The Company will continue to aggressively develop and market upgrades and enhancements for previously installed scanners. The Company's working capital deficiency as of June 30, 1996 approximates $2.4 million, down from $5.1 million as of June 30, 1995 and $7.7 million as of June 30, 1994. The Company expects to reduce this deficiency further. This is to be accomplished by internally generated cash from operating profits and the refinancing and/or restructuring of maturity terms of certain loans now classified as short term obligations. The Company also will pursue equity financing alternatives. The Company believes that the above mentioned financing arrangements and programs will provide the cash flows needed to achieve the sales, service and production levels necessary to support its operations. In addition, the Company is exploring other more permanent financing alternatives which may become available as the success of the previously described programs accelerates. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA FONAR CORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES Page No. INDEPENDENT AUDITORS' REPORT F-2 CONSOLIDATED BALANCE SHEETS F-3; F-4 At June 30, 1996 AND 1995 CONSOLIDATED STATEMENTS OF OPERATIONS F-5 For the Three Years Ended June 30, 1996, 1995 and 1994 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY F-6 to F-14 For the Three Years Ended June 30, 1996, 1995 and 1994 CONSOLIDATED STATEMENTS OF CASH FLOWS F-15; F-16 For the Three Years Ended June 30, 1996, 1995 and 1994 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-17 to F-80 SUPPLEMENTARY SCHEDULES: INDEPENDENT AUDITORS' REPORT ON SCHEDULES S-1 SCHEDULE II - Amounts Receivable from Related Parties and Underwriters, Promoters and Employees Other than Related Parties S-2 For the Years Ended June 30, 1996, 1995 and 1994 SCHEDULE VIII - Valuation and Qualifying Accounts S-3 For the Three Years Ended June 30, 1996, 1995 and 1994 SELECTED FINANCIAL DATA For the Five Years Ended June 30, 1996 (*) (*) Included in Part II, Item 6 of the Form. Information required by other schedules called for under Regulation S-X is either not applicable or is included in the consolidated financial statements or notes thereto. F-1 INDEPENDENT AUDITORS' REPORT ---------------------------- To the Board of Directors FONAR Corporation and Subsidiaries We have audited the accompanying consolidated balance sheets of FONAR Corporation and Subsidiaries as at June 30, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended June 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FONAR Corporation and Subsidiaries at June 30, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three- year period ended June 30, 1996, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company suffered a loss from operations, has a working capital deficiency, is in arrears with certain debts, accounts payable and various taxes. These factors and others, discussed in Note 1, raised substantial doubt about the Company's ability to continue as a going concern. Realization of a major portion of the assets in the accompanying balance sheet is dependent upon continuing operations of the Company. Management's plans in regard to these matters are described in Note 1 and include, among other things, the exploitation of a new product line of MRI scanners. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. As more fully described in Note 15, the Company is a defendant in various lawsuits alleging breach of contract. It is not possible to predict at this time whether the ultimate awards or settlements will exceed the amount currently provided by the Company. During each of the years in the three-year period ended June 30, 1996, a significant portion of the Company's revenues was from related parties and a significant portion of the Company's assets was due from related parties (see Note 3). /s/ Tabb, Conigliaro & McGann, P.C. TABB, CONIGLIARO & McGANN, P.C. New York, New York October 7, 1996 F-2 FONAR CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS ______ June 30, --------------------------- 1996 1995 ----------- ----------- CURRENT ASSETS Cash $ 3,712,393 $ 3,266,728 Accounts receivable, net of allowance for doubtful accounts of $712,082 and $603,719 at June 30, 1996 and 1995, respectively 1,796,716 1,796,929 Notes receivable from related parties (Note 3) 400,000 400,000 Costs and estimated earnings in excess of billings on uncompleted contracts (Notes 2 and 4) 336,455 323,918 Inventories (Notes 2 and 5) 3,623,572 2,295,327 Net investment in sales-type leases with related parties (Notes 2, 3, 6, and 11) 779,096 1,368,988 Prepaid expenses and other current assets 815,857 113,955 ----------- ----------- TOTAL CURRENT ASSETS 11,464,089 9,565,845 ASSETS HELD FOR RESALE (Note 2) 450,000 598,062 PROPERTY AND EQUIPMENT - Net (Notes 2, 7 and 13) 2,500,594 2,786,402 INVESTMENTS, ADVANCES AND NOTES TO AFFILIATES AND RELATED PARTIES, Net of discounts and allowance for doubtful accounts of $1,250,000 at June 30, 1996 and 1995 (Notes 2, 3, 4 and 6) 28,352,568 23,940,345 LONG-TERM ACCOUNTS RECEIVABLE, Net of allowance for doubtful accounts of $1,990,018 and $1,837,348 at June 30, 1996 and 1995, respectively 624,174 1,039,079 NOTES RECEIVABLE, Net of allowance for doubtful accounts of $708,411 at June 30, 1996 and 1995 157,553 179,337 CAPITALIZED SOFTWARE DEVELOPMENT COSTS, Net of accumulated amortization of $6,872,193 and $5,858,578 at June 30, 1996 and 1995, respectively (Notes 2 and 8) 1,255,924 1,763,549 OTHER INTANGIBLE ASSETS, Net (Notes 8 and 15) 3,204,155 3,320,053 NET INVESTMENT IN SALES-TYPE LEASES WITH RELATED PARTIES, Net of allowance for possible losses of $115,000 in 1996 and 1995 (Notes 2, 3, 6 and 11) 5,518,873 4,961,979 COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED CONTRACTS WITH RELATED PARTIES (Notes 2, 3 and 4) 9,460,469 6,681,296 OTHER ASSETS 107,863 107,630 TOTAL ASSETS ----------- ----------- $63,096,262 $54,943,577 =========== =========== See accompanying notes to consolidated financial statements. F-3 FONAR CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ June 30, -------------------------- 1996 1995 ----------- ----------- CURRENT LIABILITIES Notes payable (Note 11) $ 100,000 $ 100,000 Current maturities of long-term debt and capital lease obligations (Notes 11 and 15) 2,909,071 3,251,863 Accounts payable 1,747,730 1,595,452 Other current liabilities (Note 14) 7,883,452 9,248,727 Customer advances (Notes 2 and 4) 933,604 293,487 Billings in excess of costs and estimated earnings on uncompleted contracts (Notes 2 and 4) 170,008 11,102 Income taxes payable (Note 12) 75,000 142,691 ----------- ----------- TOTAL CURRENT LIABILITIES 13,818,865 14,643,322 ----------- ----------- LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, Less current maturities (Notes 2, 11 and 15) 963,019 528,543 OTHER LIABILITIES 59,023 99,021 ----------- ----------- 1,022,042 627,564 ----------- ----------- MINORITY INTEREST 117,498 285,131 ----------- ----------- COMMITMENTS AND CONTINGENCIES (Notes 3, 9,11 and 15) STOCKHOLDERS' EQUITY (Notes 2 and 10) Common stock - $.0001 par value; issued - 42,871,751 and 38,229,448 shares at June 30, 1996 and 1995, respectively 4,287 3,822 Class B common stock (10 votes per share) - $.0001 par value; issued and outstanding - 5,411 and 3,193,456 shares at June 30, 1996 and 1995, respectively - 319 Class C common stock (25 votes per share) - $.0001 par value; 9,562,824 and -0- issued and outstanding at June 30, 1996 and 1995, respectively 956 - Class A non-voting preferred stock - $.0001 par value; issued and outstanding - 7,855,627 and 7,624,117 shares at June 30, 1996 and 1995, respectively 785 762 Preferred stock - $.001 par value; issued and outstanding - none - - Paid-in capital in excess of par value 75,985,245 63,779,202 Accumulated deficit (25,697,690) (22,104,053) Notes receivable from stockholders (1,760,281) (1,897,047) Treasury stock - 108,864 shares of common stock at June 30, 1996 and 1995 (395,445) (395,445) ----------- ----------- 48,137,857 39,387,560 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $63,096,262 $54,943,577 =========== =========== See accompanying notes to consolidated financial statements. F-4 FONAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended June 30, -------------------------------------- 1996 1995 1994 ----------- ----------- ---------- REVENUES (Notes 1, 2, 3, 4, 6 and 9) Product sales - net $ 2,060,888 $ 2,383,309 $3,236,330 Service and repair fees - net 3,725,613 4,444,913 6,028,417 Scanning and management fees - net 201,770 88,740 32,172 Related parties -product sales -net 4,583,578 4,866,548 4,274,547 Related parties -service and repair fees - net 2,407,944 2,174,076 1,690,500 Related parties - scanning and management fees - net 150,210 133,374 124,649 ----------- ----------- ---------- TOTAL REVENUES - Net 13,130,003 14,090,960 15,386,615 ----------- ----------- ---------- COST OF REVENUES Product sales 1,983,873 2,283,665 2,065,548 Service and repair fees 2,305,664 2,254,251 2,578,952 Scanning and management fees 146,044 1,785 1,196 Related parties - product sales 2,975,079 3,345,482 2,410,756 Related parties-service and repair fees 1,490,292 1,102,589 723,194 Related parties -scanning and management fees 55,175 15,338 34,192 ----------- ----------- ----------- TOTAL COST OF REVENUES 8,956,127 9,003,110 7,813,838 ----------- ----------- ----------- GROSS PROFIT 4,173,876 5,087,850 7,572,777 ----------- ----------- ----------- EXPENSES Research and development expenses 3,607,703 3,356,120 2,803,221 Selling and marketing expenses 2,069,045 1,497,825 1,282,328 General and administrative expenses 5,785,973 5,187,588 5,478,288 Provision for bad debt 1,226,014 116,514 287,310 Compensatory element of stock issuances (Note 10) 355,327 1,363,194 193,527 ----------- ----------- ----------- 13,044,062 11,521,241 10,044,674 ----------- ----------- ----------- LOSS FROM OPERATIONS (8,870,186) (6,433,391) (2,471,897) INTEREST EXPENSE (626,297) (1,122,159) (1,235,523) INTEREST INCOME - RELATED PARTIES 1,964,828 1,969,204 1,865,963 GAIN ON SALE OF INVESTMENTS AND SUB- SIDIARY TO RELATED PARTIES (Note 3) - - 1,273,629 OTHER INCOME (Note 16) 4,007,576 3,621,607 140,483 ----------- ----------- ---------- LOSS BEFORE PROVISION FOR TAXES AND MINORITY INTEREST (3,524,079) (1,964,739) (427,345) PROVISION FOR INCOME TAXES (Notes 2 19,965 145,558 47,905 and 12) ----------- ----------- ----------- LOSS BEFORE MINORITY INTEREST (3,544,044) (2,110,297) (475,250) MINORITY INTEREST IN NET LOSS OF SUBSIDIARY AND PARTNERSHIP (Note 2) 167,633 347,326 140,676 ----------- ----------- ----------- NET LOSS $(3,376,411) $(1,762,971) $(334,574) =========== =========== =========== NET LOSS PER SHARE (Note 2) $(.07) $(.04) $(.01) ===== ===== ===== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (Note 2) 51,516,470 45,055,334 36,773,623 =========== =========== =========== See accompanying notes to consolidated financial statements. F-5 FONAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEAR ENDED JUNE 30, 1996 Class A Common Stock Per Share ---------------------- Amount Shares Amount --------- ---------- -------- Balance - June 30, 1995 $ - 38,229,448 $ 3,822 Shares issued as follows: Stock bonus to employees (measured at the average quoted market price on the award dates) 2.67 157,341 16 Under incentive stock option plan 2.66 82,125 8 Shares issued under non-statutory plans 2.69 3,100,000 310 Issuance of stock in settlememt of liabilities 2.73 802,400 80 Issuance of stock 2.08 500,000 50 Conversion from class B to class C - - - Conversion from class B to class A 437 1 Net charge in notes receivable from stockholder - - - Stock dividend adjustment - Class A non-voting preferred - - - Dividend - preferred stock - - - NET LOSS - - - ---------- -------- Balance - JUNE 30, 1996 42,871,751 $ 4,287 ========== ======== Class B Common Stock ---------------------- Shares Amount ----------- -------- Balance - June 30, 1995 3,193,456 $ 319 Shares issued as follows: Stock bonus to employees (measured at the average quoted market price on the award dates) - - Under incentive stock option plan - - Shares issued under non-statutory plans - - Issuance of stock in settlememt of liabilities - - Issuance of stock - - Conversion from class B to class C (3,187,608) (318) Conversion from class B to class A (437) (1) Net charge in notes receivable from stockholder - - Stock dividend adjustment - Class A non-voting preferred - - Dividend - preferred stock - - NET LOSS - - ----------- -------- Balance - JUNE 30, 1996 5,411 $ - =========== ======== See accompanying notes to consolidated financial statements F-6 FONAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEAR ENDED JUNE 30, 1996 (continued) Class C Common Stock ---------------------- Shares Amount --------- ---------- Balance - June 30, 1995 - $ - Shares issued as follows: Stock bonus to employees (measured at the average quoted market price on the award dates) - - Under incentive stock option plan - - Shares issued under non-statutory plans - - Issuance of stock in settlememt of liabilities - - Issuance of stock - - Conversion from class B to class C 9,562,824 956 Conversion from class B to class A - - Net charge in notes receivable from stockholder - - Stock dividend adjustment - Class A non-voting preferred - - Dividend - preferred stock - - NET LOSS - - ---------- ---------- Balance - JUNE 30, 1996 9,562,824 $ 956 ========== ========== Class A Non-Voting Paid-in Preferred Stock Capital in ------------------- Excess of Shares Amount Par Value --------- ------ ----------- Balance - June 30, 1995 7,624,117 762 $63,779,202 Shares issued as follows: Stock bonus to employees (measured at the average quoted market price on the award dates) - - 420,187 Under incentive stock option plan - - 218,780 Shares issued under non-statutory plans - - 8,337,190 Issuance of stock in settlememt of liabilities - - 2,190,892 Issuance of stock - - 1,039,655 Conversion from class B to class C - - (638) Conversion from class B to class A - - - Net charge in notes receivable from stockholder - - - Stock dividend adjustment - Class A non-voting preferred 231,510 23 (23) Dividend - preferred stock - - - NET LOSS - - - ---------- -------- ----------- Balance - JUNE 30, 1996 7,855,627 $ 785 $75,985,245 ========== ======== =========== See accompanying notes to consolidated financial statements F-7 FONAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEAR ENDED JUNE 30, 1996 (Continued) Treasury Stock ----------------------- Shares Amount --------- ----------- Balance - June 30, 1995 108,864 $ (395,445) Shares issued as follows: Stock bonus to employees (measured at the average quoted market price on the award dates) - - Under incentive stock option plan - - Shares issued under non-statutory plans - - Issuance of stock in settlememt of liabilities - - Issuance of stock - - Conversion from class B to class C - - Conversion from class B to class A - - Net charge in notes receivable from stockholder - - Stock dividend adjustment - Class A non-voting preferred - - Dividend - preferred stock - - NET LOSS - - --------- ----------- Balance - JUNE 30, 1996 108,864 $ (395,445) ========= =========== Notes Receivable from Accumulated Stockholders Deficit ------------ ------------- Balance - June 30, 1995 $(1,897,047) $(22,104,053) Shares issued as follows: Stock bonus to employees (measured at the average quoted market price on the award dates) - - Under incentive stock option plan - - Shares issued under non-statutory plans - - Issuance of stock in settlememt of liabilities - - Issuance of stock - - Conversion from class B to class C - - Conversion from class B to class A - - Net charge in notes receivable from stockholder 136,766 - Stock dividend adjustment - Class A non-voting preferred - - Dividend - preferred stock - (217,226) NET LOSS - (3,376,411) ------------ ------------- Balance - JUNE 30, 1996 $(1,760,281) $(25,697,690) ============ ============= See accompanying notes to consolidated financial statements F-8 FONAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEAR ENDED JUNE 30, 1995 Class A Common Stock Per Share ----------------------- Amount Shares Amount --------- ---------- ---------- Balance - June 30, 1994 $ - 31,235,773 $ 3,123 Shares issued as follows: Stock bonus to employees and directors (measured at the average quoted market price on the award dates) 2.89 480,650 48 Under incentive stock option plan 2.43 413,375 41 Shares issued under non-statutory plans 1.42 1,752,695 175 Issuance of stock in settlement of liabilities 2.00 1,398,550 138 Issuance of stock 2.13 2,947,305 296 Net change in notes receivable from stockholders - - - Conversion from Class B to Class A - 1,100 1 Stock dividend - Class A non-voting preferred - - NET LOSS - - ----------- ---------- Balance - JUNE 30, 1995 38,229,448 $ 3,822 =========== ========== Class B Common Stock ------------------------ Shares Amount ------------ ---------- Balance - June 30, 1994 3,194,556 $ 320 Shares issued as follows: Stock bonus to employees and directors (measured at the average quoted market price on the award dates) - - Under incentive stock option plan - - Shares issued under non-statutory plans - - Issuance of stock in settlement of liabilities - - Issuance of stock - - Net change in notes receivable from stockholders - - Conversion from Class B to Class A (1,100) (1) Stock dividend - Class A non-voting preferred - - NET LOSS - - ------------ ---------- Balance - JUNE 30, 1995 3,193,456 $ 319 ============ ========== See accompanying notes to consolidated financial statements F-9 FONAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEAR ENDED JUNE 30, 1995 (Continued) Class C Common Stock ------------------------- Shares Amount ---------- ----------- Balance - June 30, 1994 - $ - Shares issued as follows: Stock bonus to employees and directors (measured at the average quoted market price on the award dates) - - Under incentive stock option plan - - Shares issued under non-statutory plans - - Issuance of stock in settlement of liabilities - - Issuance of stock - - Net change in notes receivable from stockholders - - Conversion from Class B to Class A - - Stock dividend - Class A non-voting preferred - - NET LOSS - - ---------- ----------- Balance - JUNE 30, 1995 - $ - ========== =========== Class A Non-Voting Paid-in Preferred Stock Capital in ----------------------- Excess of Shares Amount Par Value --------- ---------- ----------- Balance - June 30, 1994 - $ - $49,817,538 Shares issued as follows: Stock bonus to employees (measured at the average quoted market price on the award dates) - - 1,387,052 Under incentive stock option plan - - 1,004,224 Shares issued under non-statutory plans - - 2,490,667 Issuance of stock in settlement of liabilities - - 2,794,953 Issuance of stock - - 6,285,530 Net change in notes receivable from stockholders - - - Conversion from Class B to Class A - - - Stock dividend - Class A non-voting preferred 7,624,117 762 (762) NET LOSS - - - --------- ---------- ----------- Balance - JUNE 30, 1995 7,624,117 $ 762 $63,779,202 ========= ========== =========== See accompanying notes to consolidated financial statements F-10 FONAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEAR ENDED JUNE 30, 1995 (Continued) Treasury Stock ------------------------ Shares Amount ---------- ----------- Balance - June 30, 1994 108,864 $ (395,445) Shares issued as follows: Stock bonus to employees (measured at the average quoted market price on the award dates) - - Under incentive stock option plan - - Shares issued under non-statutory plans - - Issuance of stock in settlement of liabilities - - Issuance of stock - - Net change in notes receivable from stockholders - - Conversion from Class B to Class A - - Stock dividend - Class A non-voting preferred - - NET LOSS - - ---------- ----------- Balance - JUNE 30, 1995 108,864 $ (395,445) ========== =========== Notes Receivable from Accumulated Stockholders Deficit ------------ ------------- Balance - June 30, 1994 $ (751,561) $(20,341,082) Shares issued as follows: Stock bonus to employees (measured at the average quoted market price on the award dates) - - Under incentive stock option plan (994,469) - Shares issued under non-statutory plans Issuance of stock in settlement of - - liabilities - - Issuance of stock - - Net change in notes receivable from stockholders (151,017) - Conversion from Class B to Class A - - Stock dividend - Class A non-voting preferred - - NET LOSS - (1,762,971) ------------ ------------- Balance - JUNE 30, 1995 $(1,897,047) $(22,104,053) ============ ============= See accompanying notes to consolidated financial statements F-11 FONAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEAR ENDED JUNE 30, 1994 Class A Common Stock Per Share ----------------------- Amount Shares Amount --------- ---------- ---------- Balance - June 30, 1993 $ - 25,165,219 $ 2,516 Shares issued as follows: Stock bonus to employees (measured at the average quoted market price on the award dates) 1.79 116,796 12 Under incentive stock option plan 1.01 40,125 4 Shares issued under non-statutory plans 1.78 4,771,291 477 Issuance of stock in settlement of liabilities 1.80 1,011,000 101 Issuance of stock 1.52 123,709 13 Net change in notes receivable from stockholders - - - Conversion from Class B to Class A - 7,633 - NET LOSS - - ---------- ---------- Balance - JUNE 30, 1994 31,235,773 $ 3,123 ========== ========== Class B Common Stock ---------------------- Shares Amount ----------- ---------- Balance - June 30, 1993 3,202,189 $ 320 Shares issued as follows: Stock bonus to employees (measured at the average quoted market price on the award dates) - - Under incentive stock option plan - - Shares issued under non-statutory plans - - Issuance of stock in settlement of liabilities - - Issuance of stock - - Net change in notes receivable from stockholders - - Conversion from Class B to Class A (7,633) - NET LOSS - - ----------- ---------- Balance - JUNE 30, 1994 3,194,556 $ 320 =========== ========== See accompanying notes to consolidated financial statements F-12 FONAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEAR ENDED JUNE 30, 1994 (continued) Class C Common Stock ----------------------- Shares Amount ---------- --------- Balance - June 30, 1993 - $ - Shares issued as follows: Stock bonus to employees (measured at the average quoted market price on the award dates) - - Under incentive stock option plan - - Shares issued under non-statutory plans - - Issuance of stock in settlement of liabilities - - Issuance of stock - - Net change in notes receivable from stockholders - - Conversion from Class B to Class A - - NET LOSS - - ---------- --------- Balance - JUNE 30, 1994 - $ - ========== ========= Class A Non-Voting Paid-in Preferred Stock Capital in ----------------------- Excess of Shares Amount Par Value ---------- ---------- ----------- Balance - June 30, 1993 - $ - $39,083,508 Shares issued as follows: Stock bonus to employees (measured at the average quoted market price on the award dates) - - 209,140 Under incentive stock option plan - - 40,718 Shares issued under non-statutory plans - - 8,474,532 Issuance of stock in settlement of liabilities - - 1,821,919 Issuance of stock - - 187,721 Net change in notes receivable from stockholders - - - Conversion from Class B to Class A - - - NET LOSS - - - ---------- ---------- ----------- Balance - JUNE 30, 1994 - $ - $49,817,538 ========== ========== =========== See accompanying notes to consolidated financial statements F-13 FONAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEAR ENDED JUNE 30, 1994 Treasury Stock -------------------------- Shares Amount ----------- ----------- Balance - June 30, 1993 108,864 $ (395,445) Shares issued as follows: Stock bonus to employees (measured at the average quoted market price on the award dates) - - Under incentive stock option plan - - Shares issued under non-statutory plans - - Issuance of stock in settlement of liabilities - - Issuance of stock - - Net change in notes receivable from stockholders - - Conversion from Class B to Class A - - NET LOSS - - ----------- ----------- Balance - JUNE 30, 1994 108,864 $ (395,445) =========== =========== Notes Receivable from Accumulated Stockholders Deficit ------------- ------------- Balance - June 30, 1993 $ (662,011) $(20,006,508) Shares issued as follows: Stock bonus to employees (measured at the average quoted market price on the award dates) - - Under incentive stock option plan - - Shares issued under non-statutory plans - - Issuance of stock in settlement of liabilities - - Issuance of stock - - Net change in notes receivable from stockholders (89,550) - Conversion from Class B to Class A - - NET LOSS - (334,574) ------------- ------------ Balance - JUNE 30, 1995 $ (751,561) $(20,341,082) ============= ============= See accompanying notes to consolidated financial statements. F-14 FONAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended June 30, ---------------------------------------- 1996 1995 1994 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(3,376,411) $(1,762,971) $(334,574) Adjustments to reconcile net loss to net cash used in operating activities: Minority interest in net loss of subsidiary and partnership (167,633) (347,327) (140,676) Depreciation and amortization 2,259,183 2,426,982 2,558,189 Writedown of assets held for resale 148,062 - - Provision for losses on accounts and notes receivable and accounts receivable from affiliates 1,226,014 116,514 395,721 Compensatory element of stock issuances 355,327 1,363,194 193,527 Stock issued in settlement of current liabilities 1,257,909 2,424,587 1,822,021 Loss (gain) on settlement of various legal disputes and other claims - 15,724 (104,061) Gain on sale of investments and subsidiary to related parties - - (1,273,629) Loss on disposal of fixed assets - 184,883 - (Increase) decrease in operating assets, net: Accounts and notes receivable (35,424) 1,167,618 (520,699) Costs and estimated earnings in excess of billings on uncompleted contracts (2,791,710) (3,749,367) 124,603 Inventories (916,898) 731,342 145,898 Sales-type lease receivables - - (922,338) Collection of principal on sales-type leases 383,998 92,204 480,968 Assets held for resale - 10,000 (10,000) Prepaid expenses and other current assets (226,902) 1,163,034 160,751 Other assets (233) 199 11,299 Receivables and advances to affiliates and related parties (4,993,973) (4,642,270) (5,022,066) Increase (decrease) in operating liabilities, net: Accounts payable and income taxes 84,588 (1,305,728) 970,128 Other current liabilities (1,582,501) (164,736) (2,263,388) Customer advances 640,117 (371,150) 14,368 Billings in excess of costs and estimated earnings on uncompleted contracts 158,906 11,102 (51,294) Other liabilities (39,998) (102,257) 910 ----------- ----------- ----------- NET CASH USED IN OPERATING ACTIVITIES (7,617,579) (2,738,423) (3,764,342) ----------- ----------- ----------- See accompanying notes to consolidated financial statements. F-15 FONAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended June 30, --------------------------------------- 1996 1995 1994 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment, net of capital lease obligations of $965,442, $-0- and $340,895 for the years ended June 30, 1996, 1995 and 1994, respectively $ (186,188) $ (80,870) $ (998,308) Cost of capitalized software development (505,990) (281,052) (373,256) Cost of patents and copyright (103,579) (1,365,273) (1,799,126) ----------- ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES (795,757) (1,727,195) (3,170,690) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from borrowings, net of capital lease obligation - 282,346 - Repayment of borrowings and capital lease obligations (873,758) (1,762,145) (2,074,771) Proceeds from exercise of stock options 5,859 9,797 117,602 Repayments of notes receivable in connection with shares issued under stock option and bonus plans 9,726,900 8,625,641 8,469,820 Proceeds from issuance of partnership units to minority interests - - 773,134 ----------- ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES 8,859,001 7,155,639 7,285,785 ----------- ----------- ----------- INCREASE IN CASH 445,665 2,690,021 350,753 CASH - BEGINNING OF YEAR 3,266,728 576,707 225,954 ----------- ----------- ----------- CASH - END OF YEAR $ 3,712,393 $ 3,266,728 $ 576,707 =========== =========== =========== See accompanying notes to consolidated financial statements. F-16 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 1 - BUSINESS, RISKS AND CONTINUED OPERATIONS Since its incorporation in 1978, FONAR Corporation and Subsidiaries ("the Company") has 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. The patented technology underlying the Company's principal and planned products is either owned by the Company or has been exclusively licensed to the Company by its Chairman of the Board, President and principal stockholder. The license provides for termination at the option of the grantor, upon occurrence of certain events. Such events include, among other things, the removal of the grantor from his position as Chairman of the Board or President of the Company; and/or a dilution of the grantor's voting control such that another stockholder or group of stockholders acquire voting rights equal to or greater than that of the grantor. The Company operates in a high technology marketplace, in competition with other manufacturers and service providers having far greater financial resources than its own. The past success of the Company related substantially to the early development and exploitation of the MRI machine. FONAR's sales advantage over its larger and financially stronger competitors, is aided substantially by the various proprietary patents and copyrights covering such products and technologies. Since inception FONAR has vigorously litigated any suspected infringements of its patents and copyright. During the year ended June 30, 1994, FONAR settled one such action and received in the aggregate $1.1 million. On September 2, 1992, the Company filed a patent infringement suit against two of its largest competitors, General Electric and Hitachi. During April 1995, the Company reached a settlement with Hitachi. In October 1995, the court awarded FONAR a judgement of $62 million, plus interest, and issued an injunction (stayed pending appeal) prohibiting General Electric from future violations. Further, FONAR has commenced additional lawsuits against other competitors claiming infringement on various patents related to the MRI machine and upgrades. During 1996, the Company reached a settlement with Philips Electronics, N.V. (see note 15 for a more detailed discussion of these lawsuits). F-17 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 1 - BUSINESS, RISKS AND CONTINUED OPERATIONS (Continued) As discussed below, during October 1993 and March 1994, the Company developed the "Quad 12000" and the "Quad 7000", respectively. FONAR received FDA approval to market the Quad 7000 in April 1995 and in November 1995, received FDA approval to market the Quad 12000. These new products have numerous patents filed by FONAR covering various features and designs. The Company strongly believes that these new products will substantially increase its revenue. The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern. However, the Company has sustained operating losses of $8,870,186 and $6,433,391 for the years ended June 30, 1996 and 1995, respectively, and has a working capital deficiency of $2,354,776 at June 30, 1996. The working capital deficiency at June 30, 1996 includes the reclassification of long-term debt and capital lease obligations of approximately $827,000 to current maturities. Notwithstanding that the Company has continued to make regular payments on these obligations, that reclassification considers the fact that the Company was in arrears on those obligations. Further, much of the Company's accounts payable is overdue and the Company was in arrears on various taxes. The success of the Company's future operations is dependent, therefore, on the Company's ability to overcome the financial difficulties that exist, restructure and/or maintain its existing credit privileges and, if necessary, obtain additional financing when needed. In view of these matters, realization of a major portion of the assets in the accompanying balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon the Company's ability to meet its financing requirements, and the success of its future operations. Management believes that actions presently being taken, as discussed below, to revise the Company's operating and financial requirements provide the opportunity for the Company to continue as a going concern. F-18 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 1 - BUSINESS, RISKS AND CONTINUED OPERATIONS (Continued) The Company's business plan addresses its financial difficulties. The plan is based to a substantial extent, on the successful implementation of several new programs designed to position the Company for long-term growth and expansion. The plan has, as its objective, exploitation of a new line of MRI products and the enhancement and stabilization of revenue streams through the generation of additional income from its installed base of over 100 scanners. In addition, the Company utilizes strict cost-containment programs, while continuing to maintain an aggressive investment in research and development. Recently, the Company has developed new scanner products and various software enhancements, including the "Quad 12000" and the "Quad 7000" MRI scanners. These products will enhance the quality of the image at greater efficiency, while reducing the cost of scan prices. In April of 1995, FONAR received FDA approval to market its Quad 7000 MRI scanner in the United States, and in November 1995, the Company received FDA approval to market the Quad 12000. FONAR introduced these new MRI products at the annual meeting of the Radiological Society of North America ("RSNA") in Chicago, Illinois in November 1995. The RSNA show is noted to be the largest medical meeting in the world. The Company's sales and marketing activities for the Quad 7000 and Quad 12000 commenced during the fiscal year ended June 30, 1996. FONAR has outstanding, confirmed orders aggregating $6.8 million for these new products. Because of the Quad's non-claustrophobic patient environment, its high quality of diagnostic images, its low price, and its suitability for meeting the continuing demands for low cost medical care, the Company expects vigorous sales activities in fiscal 1997. As a result of these new products and other research and development, the Company is positioning itself to increase sales and improve its competitive position in the industry. F-19 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 1 - BUSINESS, RISKS AND CONTINUED OPERATIONS (Continued) The Company will continue to aggressively develop and market upgrades and enhancements to its previously installed base of more than 100 scanners. The Company expects to realize the benefits of its research and development activities as the new products are released and marketed to existing and potential new customers. Also, the Company's plan calls for a continuing emphasis on providing its customers with enhanced equipment service and maintenance capabilities and delivering state-of-the-art, innovative and high quality equipment upgrades at competitive prices. The Company expects to reduce its working capital deficiency during fiscal 1997. This is to be accomplished by internally generated cash from operating profit and the refinancing and/or restructuring of maturity terms of certain loans now classified as short-term obligations. The Company is currently negotiating to refinance and/or restructure these obligations. In addition, the Company plans to pursue equity financing alternatives. The Company believes that the above mentioned financing arrangements and increased revenue from its new products and its sizable installed base will provide the cash flows needed to achieve the sales, service and production levels necessary to support its operations. In addition, the Company is exploring other more permanent financing alternatives which may become available during fiscal 1997 as the anticipated success of the previously described programs become evident. 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/ partnership and its proportionate share in the accounts of all joint ventures. All significant intercompany accounts and transactions have been eliminated in consolidation. F-20 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Inventories ----------- Inventories consist of purchased parts, components and supplies, as well as work-in-process, and are stated at the lower of cost (materials, labor and overhead determined on the first-in, first- out method) or market. Reclassifications ----------------- Certain reclassifications were made to prior year balances to conform to current year presentation. Property and Equipment/Assets Held for Resale --------------------------------------------- Property and equipment are stated at cost. Depreciation of property and equipment is calculated on a straight-line basis using the estimated useful lives of the assets. Years ----- Offsite research scanner 7 Research, development and demonstration equipment 2-7 Machinery and equipment 5-8 Furniture and fixtures 5-10 Property under lease 5-7 Property held for lease 7 Maintenance and repairs are charged to expense as incurred; renewals or betterments are capitalized. The Company leases a portion of its property and equipment under leases, pursuant to which the Company retains all the benefits and risks inherent in ownership of the related property. Such leases are accounted for as capital leases. The related assets and liabilities are recorded at amounts equal to the lesser of the present value of the minimum lease payments, or the fair F-21 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) market value of the leased equipment, at the inception of the lease. Such assets are amortized using the straight-line method over their economic useful lives, generally 5 to 7 years. Interest expense relating to the lease liability is recorded to effect constant rates of interest over the terms of the leases. Assets held for resale are restated at the lower of the carrying amount or fair value less costs to sell. Assets held for resale as of June 30, 1996 and 1995 represent one MRI scanner. Intangible Assets ----------------- 1) Capitalized Software Development Costs Certain software development costs incurred subsequent to the establishment of the software's technological feasibility and completion of the research and development on the product hardware, in which it is to be used, are required to be capitalized. Capitalization ceases when the product is available for general release to customers, at which time amortization of capitalized costs begins. The amortization period ranges from 3 to 5 years using the straight-line method. 2) Other Intangible Assets Amortization is calculated on the straight-line basis over periods ranging from 5 to 17 years. 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. F-22 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Contract costs include material, direct labor and overhead. Provisions for estimated losses on uncompleted contracts, if any, are made in the period in which such losses are determined. The asset, "Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts", represents revenues recognized in excess of amounts billed. The liability, "Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts", represents billings in excess of revenues recognized. Revenue on service and management contracts are recognized on the straight-line method over the related contract period. Revenue from sales of other items are recognized upon shipment. 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. Certain software development costs are capitalized. See property and equipment and intangible assets (capitalized software development costs) sections of this note. Income Taxes ------------ The Company has adopted the Financial Accounting Standards Board Statement No. 109, "Accounting for Income Taxes" (SFAS 109) effective July 1, 1993. SFAS 109 requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in the financial statements or tax returns. Under this method, deferred tax liabilities and assets 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. Adoption of the statement did not have a material effect on the accompanying financial statements. F-23 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Product Warranty ---------------- The Company provides currently for the estimated cost to repair or replace products under warranty provisions in effect at the time of installation (generally for one year). Customer Advances ----------------- Cash advances and progress payments received on sales orders are reflected as customer advances until such time as revenue recognition begins. Per Share Data -------------- Net loss per common and common equivalent share has been computed based on the weighted average number of common shares and common stock equivalents outstanding during the year. No effect has been given to options outstanding under the Company's Stock Option Plans as no material dilutive effect would result from the exercise of these items. During fiscal 1995, a stock dividend of Class A non-voting preferred stock was declared (Note 10). Earnings per share and weighted average shares have been restated to reflect the stock dividend. 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 ---------------------------- Financial instruments, which potentially subject the Company to concentrations of credit risk, are primarily cash, trade accounts receivable, notes receivable, investment in sales-type leases and investments, advances and notes to affiliates and related parties. Ongoing credit evaluations of customers' financial condition are performed. The Company generally retains F-24 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) title to the MRI scanners that it sells until the scanners have been paid in full. The Company's customers are concentrated in the industry of providing MRI scanning services. Various related parties (Note 3), accounted for approximately 54%, 51%, and 39% of revenues for the years ended June 30, 1996, 1995 and 1994, respectively, and 70% and 68% of total assets at June 30, 1996 and 1995, respectively. At June 30, 1996, the Company had cash deposits totalling $3,634,718 in excess of federally insured limits. Impairment of Assets -------------------- The Financial Accounting Standards Board (FASB) has issued Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-lived Assets and for Long- lived Assets to be Disposed of". This statement requires long- lived assets to be held and be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Measurement of an impairment loss for long-lived assets and identifiable intangibles to be held and used should be based on the fair value of the asset. It also requires that those long-lived assets and identifiable intangibles to be disposed of should be reported at the lower of carrying amount or fair value less cost to sell. This standard is required to be adopted in 1996. Management estimates that the adoption of this standard will not have a material effect on the Company's financial statements. Fair Value of Financial Instruments ----------------------------------- The financial statements include various estimated fair value information at June 30, 1996, 1995 and 1994, as required by Statement of Financial Accounting Standards 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. F-25 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and cash equivalents: The carrying amount approximates fair value because of the short-term maturity of those instruments. Receivables and payables: The carrying amounts approximates fair value because of the short maturity of those instruments. Investment in sales-type leases and investments, advances and notes to affiliates and related parties: The carrying amount approximates fair value because the discounted present value of the cash flow generated by the related parties approximates the carrying value of the amounts due to the Company. Long-term debt and loans payable: The carrying amounts of debt and loans payable approximate fair value due to the length of the maturities, the interest rates being tied to market indices and/or due to the interest rates not being significantly different from the current market rates available to the Company. All of the Company's financial instruments are held for purposes other than trading. Stock-Based Compensation ------------------------ In June 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation". The statement allows companies to measure compensation cost in connection with employee stock compensation plans by using a fair value based method or to continue to use an intrinsic value based method, which generally does not result in compensating cost to the Company. It is the Company's plan to continue using the intrinsic value based method. F-26 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Risk and Uncertainties ---------------------- The preparation of financial statements in conformity with 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 at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE 3 - INVESTMENTS, ADVANCES AND NOTES TO AFFILIATES AND RELATED PARTIES Limited Partnerships -------------------- The Company's majority-owned subsidiary, Advanced Medical Diagnostics Corporation (AMD) was a general partner in four limited partnerships. During the year ended June 30, 1994, AMD's partnership interests in these partnerships were sold to certain related parties as discussed below. For acting as the Managing General Partner, AMD was entitled to receive a fee for providing management and administrative services to the partnerships. AMD's investment in the limited partnerships was accounted for under the equity method. Allocation of partnership profits and losses to the general partners was based on 1% of partnership net income with potential increases to as high as 50%, depending on partnership operating results reaching certain levels as defined in the partnership agreements. FONAR was entitled to receive annual consulting fees from one of the limited partnerships of $75,000, plus annual escalations (which totalled $67,710, $58,374 and $49,649 for fiscal years 1996, 1995 and 1994, respectively), and pursuant to a service and maintenance contract for the partnership's scanner unit, an annual service fee of $105,000. FONAR also has service and maintenance contracts on each unit owned by the two other partnerships and is entitled to receive service fees thereunder (which approximated $249,000, $259,000 and $263,000 for fiscal years 1996, 1995 and 1994, F-27 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 3 - INVESTMENTS, ADVANCES AND NOTES TO AFFILIATES AND RELATED PARTIES (Continued) respectively). Income from upgrades, repairs and maintenance, supplies and other services approximated $3,800, $22,000 and $-0-for fiscal years 1996, 1995, and 1994 respectively. Operating results for fiscal 1996, 1995 and 1994 include $249,000, $390,000 and $493,000, respectively, of such fees. Additionally, AMD has advanced funds from time to time to the partnerships for their respective working capital requirements. During the year ended June 30, 1994, AMD sold its interests in a partnership operating an MRI scanning center in Southfield Michigan to Raymond V. Damadian, M.D. MRI Scanning Centers Management Co., Inc. ("RVDC"), a Delaware Corporation of which Dr. Raymond V. Damadian, Chairman and President of the Company, is sole shareholder, Director and Officer for $600,000. The purchase price is payable with interest at 10% per annum, over a period of 48 months commencing October 1, 1993 as follows: $2,000 per month for the first year, $8,333 per month for the second year, $16,666 per month for the third year and $20,909 for the fourth and fifth years. During the year ended June 30, 1994, AMD sold its interests in a partnership operating an MRI scanning center in Melbourne, Florida to Melbourne Magnetic Resonance Imaging, P.A. (the "Melbourne Center"), for a purchase price of $150,000. The purchase price is payable, with interest at 10% per annum, over a period of 15 months commencing September 1, 1995 as follows: $13,500 per month for the first fourteen months and $1,185 for the fifteenth month. The Melbourne Center is a Florida professional corporation of which Raymond V. Damadian is the sole stockholder, Director and President. F-28 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 3 - INVESTMENTS, ADVANCES AND NOTES TO AFFILIATES AND RELATED PARTIES (Continued) During the year ending June 30, 1994, AMD sold to Dade County MRI, P.A. (the "Dade County Center") its interests in a partnership which had formerly operated an MRI scanning center in Miami, Florida, but is now inactive. The purchase price of $100,000 is payable, with interest at 10% per annum, at the rate of $2,124 per month over a period of 60 months commencing 90 days after the scanner is placed in service. The Dade County Center is a Florida professional association of which Raymond V. Damadian is the sole stockholder, Director and President. During the year ended June 30, 1994, AMD sold its interests in a partnership operating an MRI scanning center in San Francisco to RVDC. The purchase price of $265,000 is payable, with interest at 10% per annum, at the rate of $9,405 per month over a period of 36 months commencing January 1, 1995. As of June 30, 1996 and 1995 the Company was due $1,423,272 and $1,900,819 respectively, from the Limited Partnerships for service contracts, upgrades, fees and expenses. Joint Ventures -------------- Pursuant to an agreement dated April 6, 1993, a professional association, of which Dr. Raymond V. Damadian, Chairman and President of the Company, is sole shareholder, Director and Officer, agreed to purchase the Company's partnership/joint venture interest in two MRI scanning centers for a purchase price of $3,200,000. The agreement provides for the payment of the purchase price as follows: $200,000 no later than June 30, 1993 and the balance in 36 equal monthly installments of principal and interest (8% per annum) in the amount of $46,759 and one final installment of principal in the amount of $1,915,324. F-29 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 3 - INVESTMENTS, ADVANCES AND NOTES TO AFFILIATES AND RELATED PARTIES (Continued) During the year ended June 30, 1994, AMD sold its interest in a joint venture operating an MRI scanning center in Philadelphia, Pennsylvania to Liberty MRI, P.C. (the "Liberty Center"). The purchase price of $400,000 is payable, with interest at 10% per annum, at a rate of $9,349 per month over a period of 60 months commencing July 1, 1995. The Liberty Center is a Pennsylvania professional corporation of which Raymond V. Damadian is the sole stockholder, Director and President. Revenues and income from operations recorded by FONAR related to these joint ventures for the years ended June 30, 1996, 1995 and 1994 were as follows: 1996 1995 1994 ------- -------- -------- Revenues $ - $ - $179,302 ======= ======== ======== Income from operations $ - $ - $ 17,304 ======= ======== ======== Advances to and Notes Due from Related Parties ---------------------------------------------- On April 7, 1989, Donna Damadian, the spouse of Dr. Raymond V. Damadian, Chairman and President of the Company, purchased from the Company a scanner for a purchase price of $1,508,000, representing an arms-length transaction consistent with what unrelated third parties have paid for similar equipment. Of such purchase price, $1.2 million was paid in cash and the balance was evidenced by a promissory note of even date. At June 30, 1991, the note, including accrued interest thereon, was paid in full. Donna Damadian leased such scanner to the Macon MRI, P.C. ("Macon Center"), a corporation wholly owned by and of which Dr. Damadian is the President. Since May 1990, RVDC has been party to a standard service agreement with the Company for the servicing of the scanner at the Macon Center. The annual price is $120,000, which is the standard price charged to the Company's other customers for like equipment. F-30 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 3 - INVESTMENTS, ADVANCES AND NOTES TO AFFILIATES AND RELATED PARTIES (Continued) During the year ended June 30, 1990, RVDC assumed from the original lessees the obligations under two separate lease agreements for MRI scanners with the Company. Each lease was originally classified by the Company and continues to qualify as a sales-type lease. Effective June 30, 1991, the lease agreements were restructured to provide for new five- year terms, commencing June 30, 1991, and the aggregate monthly payments were fixed at $73,760 eliminating the previous per scan fee. RVDC can purchase the machines at their then outstanding lease value at any time, without penalty. In addition, since service and maintenance for the scanner is not included under the new leases, RVDC has been a party to two standard service agreements since June 30, 1991. The annual price is currently $120,000 per contract and the term of the current one-year service contracts runs from June 30, 1995 to June 29, 1996. During the year ended June 30, 1990, RVDC agreed to assume the financial and other obligations of the original lessee under a lease for mobile scanner dated June 29, 1988, on the same terms and conditions as the original lessee. The lease was originally classified by the Company as a sales-type lease. Effective June 30, 1991, the lease arrangements were restructured to provide for a five year term, commencing June 30, 1991 and the monthly payment was fixed at $35,167, eliminating the previous per scan fee (with a minimum monthly payment of $40,000). Effective December 1, 1993, RVDC assigned its purchase option under the lease to Albany Magnetic Imaging Center, P.C., a Georgia professional corporation of which Raymond V. Damadian is the sole stockholder, Director and President ("Albany Center") and the Albany Center concurrently exercised the option and purchased the scanner from the Company for a purchase price of $1,128,844. Of the purchase price, $574,077 is to be paid by the assumption and payment of the Company's indebtedness to the lender secured by the scanner. Such indebtedness to the lender is to be retired pursuant to a new equipment finance lease between the lender and the Albany Center, guaranteed by the Company providing for 18 monthly payments of $35,000 each. Following payment of the lease, the remaining $554,767 of the purchase price due to the Company will be paid pursuant to a promissory note, with interest at 10% per annum, over an 18 month term (17 payments of $35,000 each and one final payment of $2,454). F-31 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 3 - INVESTMENTS, ADVANCES AND NOTES TO AFFILIATES AND RELATED PARTIES (Continued) By agreement dated June 27, 1990, Tallahassee Magnetic Resonance Imaging, Inc., a Florida corporation, of which Raymond V. Damadian is the sole shareholder, Director and Officer ("TMRI"), leased from the Company one mobile scanner for a period of five years. The Company classified this lease as a sales-type lease and, accordingly, recorded revenue of $1,700,000 during the year ended June 30, 1990. This transaction represents an arms length transaction consistent with what unrelated third parties have paid under similar lease agreements. Effective June 30, 1991, the lease agreement was restructured to provide for a new five-year term, commencing June 30, 1991, and the monthly payment was fixed at $43,217, eliminating the previous per scan fee. TMRI can purchase the machine at its then outstanding lease value at any time, without penalty. In addition, since service and maintenance for the scanner are not included under the new lease, TMRI has been a party to a standard service agreement for the scanner since June 30, 1991. The annual price is currently $120,000 and the term of the current one-year service contract runs from June 30, 1996 to June 29, 1997. As of June 30, 1991, $1,996,100 of additional indebtedness of RVDC due to FONAR was incorporated into a note, payable over a five-year period with interest at the rate of 10% per annum. During the year ended June 30, 1992, the note was amended to incorporate additional indebtedness incurred during the year. The amended note is for $4,284,692 and is payable over a five-year period with interest at the rate of 10% per annum. The RVDC note is collateralized by the assets of RVDC, and guaranteed by the various RVDC scanning centers. During the year ended June 30, 1991, the Company sold upgrades to TMRI aggregating $69,000. As part of the restructuring, the net investment in sales-type lease was increased by $500,000, which represents $69,000 in upgrades, and a refinancing of past due lease payments of $431,000. F-32 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 3 - INVESTMENTS, ADVANCES AND NOTES TO AFFILIATES AND RELATED PARTIES (Continued) In addition to the above restructuring, $169,200 of indebtedness of TMRI to FONAR was incorporated into a note payable over a five-year period with interest at the rate of 10% per annum. During the year ended June 30, 1992, the note was amended to incorporate additional indebtedness incurred during the year. The amended note is for $803,272 and is payable over a five-year period, with interest at the rate of 10% per annum. During the year ended June 30, 1992, RVDC agreed to assume the financial and other obligations of the original lessee under a lease for a mobile scanner dated June 30, 1989 and restructured the terms to provide for a monthly payment of $24,421 commencing April 1, 1992 and extended the term of the lease seven years from that date. The lease was originally classified by the Company as a sales-type lease. Effective December 1, 1993, RVDC assigned its purchase option under the lease to Daytona Beach Magnetic Resonance Imaging, P.A., a Florida professional association of which Raymond V. Damadian is the sole shareholder, Director and President ("Daytona Beach Center") and the Daytona Beach Center exercised the option and purchased the scanner from the Company for a purchase price of $1,416,717. Of the purchase price, $328,044 is to be paid by the assumption and payment of the Company's indebtedness to the lender secured by the scanner. Such indebtedness to the lender is to be retired pursuant to a new equipment finance lease between the lender and the Daytona Beach Center, guaranteed by the Company, providing for 18 monthly payments of $20,000 each. The remaining $1,088,673 of the purchase price due to the Company will be paid pursuant to a promissory note, with interest at 10% per annum, over a 45 month term commencing July 1, 1994 as follows: eleven installments of $15,000 each, thirty-three installments of $35,000 each and one installment of $19,097. F-33 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 3 - INVESTMENTS, ADVANCES AND NOTES TO AFFILIATES AND RELATED PARTIES (Continued) During the year ended June 30, 1992, RVDC agreed to lease one of the Company's mobile scanners for a term of five years at a monthly lease payment of $36,119 commencing January 1, 1992. The lease was originally classified by the Company as a sales-type lease. Effective June 30, 1994, RVDC assigned its purchase option under the lease to Melville MRI, P.C., a New York professional corporation of which Raymond V. Damadian is the sole shareholder, Director and President ("Melville Center") and the Melville Center concurrently exercised the option and purchased the scanner from the Company for a purchase price of $1,011,431. 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 is to be paid concurrently with the payments to the lender pursuant to a note, with interest at 10% per annum, providing for 60 monthly payments of $2,367 each. During the year ended June 30, 1992, RVDC agreed to lease one of the Company's scanners for a monthly lease payment of $18,081 for a period of seven years commencing April 1, 1992. The Company classified this lease as a sales-type lease. RVDC in turn provided the use of the scanner to Damadian MRI at Astoria, P.C. (the "Astoria Center"), a New York professional corporation of which Raymond V. Damadian is the sole shareholder, Director and President. Effective November 13, 1993, the lease between the Company and RVDC was restructured with the terms to provide for monthly payments of $16,978 each commencing February 1, 1994. During the year ended June 30, 1992, FONAR entered into contracts to sell four MRI scanners to RVDC for a purchase price of $1,000,000 per machine, recognizing, on a percentage of completion basis, revenue of $3,249,825 (see Note 4). RVDC will utilize the scanners at sites located in Bayside, Elmhurst, Islandia and Forest Hills, New York. Each of the four sales agreements provide for a 10% down payment within 30 days of signing, 10% within 30 days of delivery of the magnet and shielded room and 80% pursuant to a promissory note to be given upon acceptance of the scanner, said note providing for 84 monthly payments of $12,469 each, including interest at 8% per annum. Each note is secured by the scanner to which F-34 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 3 - INVESTMENTS, ADVANCES AND NOTES TO AFFILIATES AND RELATED PARTIES (Continued) it relates. During November 1993, one of the sales agreements with RVDC was terminated and the Company then leased the scanner to Damadian MRI at Islandia, P.C. ("Islandia") for a period of seven years. The Company classified this lease as a sales-type lease for $1,000,000. This transaction represents an arm's length transaction consistent with what unrelated third parties have paid under similar lease agreements. The lease provides for monthly payments aggregating $15,586. During March 1995, $224,657 of the note related to the Elmhurst scanner was reduced by the assumption of the Company's indebtedness. During the year ended June 30, 1993, RVDC leased from the Company one scanner for a period of seven years. The Company classified this lease as a sales-type lease and, accordingly, recorded revenue of $1,000,000. This transaction represents an arm's length transaction consistent with what unrelated third parties have paid under similar lease agreements. The lease provides for monthly payments aggregating $15,586. In addition, since service and maintenance for the scanner are not included under the new leases, RVDC has been a party to an additional standard service agreement. The annual price is currently $105,000 and the term is for one year. Pursuant to an agreement dated March 31, 1993, RVDC agreed to purchase the Company's general partnership interest (approximately 92% of the partnership) in a partnership owning and operating an MRI scanning center in Bensonhurst (Brooklyn), New York ("the Bensonhurst Center"). The purchase price of $923,000 is payable in 84 equal monthly installments of $14,386 each commencing May 1, 1993, which amount includes principal and interest at the rate of 8% per annum amortized over the term. Pursuant to a sales agreement dated June 30, 1993, RVDC agreed to purchase an MRI scanner from the Company which RVDC is planning to utilize at a site located in Coral Gables, Florida (the "Coral Gables Center"). The sales agreement provides for a purchase price of $1,000,000 payable in installments as follows: (1) 10% down payment within 30 days of execution; (2) 10% within 30 days of delivery of the magnet and shielded room, and F-35 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 3 - INVESTMENTS, ADVANCES AND NOTES TO AFFILIATES AND RELATED PARTIES (Continued) (3) 80% in 84 monthly installments of $12,468 each (inclusive of interest at 8% per annum) pursuant to a promissory note to be executed by RVDC upon acceptance of the scanner. The Scanner is expected to be completed during fiscal 1997. During the year ended June 30, 1994, the Company entered into a contract to sell an MRI scanner to RVDC which RVDC is planning to utilize at a site located in Manhattan, New York, recognizing revenue of $800,000. The sales agreement provides for a purchase price of $800,000 payable in installments as follows: (1) $100,000 down payment within 30 days of execution, (2) $700,000 in 84 monthly installments of $11,347 (inclusive of interest at 8% per annum commencing January 1, 1995) pursuant to a promissory note executed by RVDC upon acceptance of the scanner. During the year ended June 30, 1994, the Company entered into a contract to sell an MRI scanner to RVDC which RVDC is planning to utilize at a site located in Israel, recognizing revenue of $1,000,000. The sales agreement provides for a purchase price of $1,000,000 payable in 84 monthly installments of $16,210 each (inclusive of interest at 8% per annum commencing January 1, 1995) pursuant to a promissory note executed by RVDC upon acceptance of the scanner. During the year ending June 30, 1994 the Company entered into an agreement to sell an MRI scanner to RVDC which RVDC is planning to utilize at a site in Cape Coral, Florida recognizing, on a percentage of completion basis, revenue of $950,000. The agreement provides for a purchase price of $1,000,000 payable in installments as follows: (1) $100,000 down payment within 30 days of execution, and (2) $900,000 in 84 monthly installments of $14,028 each (inclusive of interest at 8% per annum) pursuant to a promissory note to be executed by RVDC upon acceptance of the scanner. During the year ended June 30, 1994 the Company entered into an agreement to sell an MRI scanner to RVDC which RVDC is planning to utilize at a site located in Orlando, Florida recognizing on a percentage of completion basis, revenue of $950,000. The agreement provides for a purchase price of $1,000,000 payable in installments as follows: (1) $100,000 down payment F-36 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 3 - INVESTMENTS, ADVANCES AND NOTES TO AFFILIATES AND RELATED PARTIES (Continued) within 30 days of execution, and (2) $900,000 in 84 monthly installments of $14,028 each (inclusive of interest at 8% per annum) pursuant to a promissory note to be executed by RVDC upon acceptance of the scanner. Pursuant to an agreement dated March 31, 1994, the Company sold an MRI scanner to Ellwood City MRI Center Limited Partnership, a Pennsylvania limited partnership of which RVDC is the general partner. The sales agreement provided for a purchase price of $400,000, of which the first $200,000 was paid subsequent to the fiscal year end and the second $200,000 will be paid by the transfer of RVDC's distributions until the sum of $200,000 is reached. The partnership is utilizing the scanner to set up an MRI scanning center in Ellwood City, Pennsylvania. Effective July 1994, RVDC assigned its purchase option under the lease to Deerfield Magnetic Resonance Imaging P.A., a Florida professional association of which Raymond V. Damadian is the sole shareholder, Director and President ("Deerfield Center") and the Deerfield Center exercised the option and purchased the scanner from the Company for a purchase price of $962,185. Of the purchase price, $311,934 is to be paid by the assumption and payment of the Company's indebtedness to the lender secured by the scanner. Such indebtedness is to be retired pursuant to a new equipment finance lease between the lender and the Deerfield Center, guaranteed by the Company, providing for 17 monthly payments of $30,520 and a final payment of the remaining principal balance plus unpaid interest. The remaining $454,005 of the purchase price due to the Company will be paid pursuant to a promissory note with interest at 10% per annum, over a 17- month term commencing January 1, 1996 as follows: sixteen installments of $30,000 each and one installment of $7,275. During the year ended June 30, 1995, the Company entered into a contract to sell an MRI scanner to RVDC, which RVDC is planning to utilize at a site in Fort Lauderdale, Florida recognizing on a percentage of completion basis, revenue of $549,032. The agreement provides for a purchase price of $800,000 payable in installments as follows: (1) $80,000 down payment within 90 days of execution, and (2) $720,000 in 84 monthly installments of $11,222 each (inclusive of interest at 8% per annum) pursuant to a promissory note to be executed by RVDC upon acceptance of the scanner. F-37 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 3 - INVESTMENTS, ADVANCES AND NOTES TO AFFILIATES AND RELATED PARTIES (Continued) During the year ended June 30, 1995, the Company entered into a contract to sell an MRI scanner to RVDC, which RVDC is planning to utilize at a site in Leeds, England recognizing on a percentage of completion basis, revenue of $707,862. The agreement provides for a purchase price of $800,000 payable in installments as follows: (1) $80,000 down payment within 90 days of execution, and (2) $720,000 in 84 monthly installments of $11,222 each (inclusive of interest at 8% per annum) pursuant to a promissory note to be executed by RVDC upon acceptance of the scanner. During the year ended June 30, 1995, the Company entered into a contract to sell an MRI scanner to RVDC, which RVDC is planning to utilize at a site in Birmingham, England recognizing on a percentage of completion basis, revenue of $760,000. The agreement provides for a purchase price of $800,000 payable in installments as follows: (1) $80,000 down payment within 90 days of execution, and (2) $720,000 in 84 monthly installments of $11,222 each (inclusive of interest at 8% per annum) pursuant to a promissory note to be executed by RVDC upon acceptance of the scanner. During the year ended June 30, 1995, the Company entered into a contract to sell an MRI scanner to RVDC, which RVDC is planning to utilize at a site in Boca Raton, Florida recognizing on a percentage of completion basis, revenue of $524,042. The agreement provides for a purchase price of $800,000 payable in installments as follows: (1) $80,000 down payment within 90 days of execution and (2) $720,000 in 84 monthly installments of $11,222 each (inclusive of interest at 8% per annum) pursuant to a promissory note to be executed by RVDC upon acceptance of the scanner. During the year ended June 30, 1995, the Company entered into a contract to sell an MRI scanner to RVDC, which RVDC is planning to utilize at a site in St. Petersburg, Florida recognizing on a percentage of completion basis, revenue of $699,667. The agreement provides for a purchase price of $800,000 payable in installments as follows: (1) $80,000 down payment within 90 days of execution and (2) $720,000 in 84 monthly installments of $11,222 each (inclusive of interest at 8% per annum) pursuant to a promissory note to be executed by RVDC upon acceptance of the scanner. F-38 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 3 - INVESTMENTS, ADVANCES AND NOTES TO AFFILIATES AND RELATED PARTIES (Continued) During the year ended June 30, 1995, the Company entered into a contract to sell an MRI scanner to RVDC, which RVDC is planning to utilize at a site in Sarasota, Florida recognizing on a percentage of completion basis, revenue of $405,240. The agreement provides for a purchase price of $800,000 payable in installments as follows: (1) $80,000 down payment within 90 days of execution and (2) $720,000 in 84 monthly installments of $11,222 each (inclusive of interest at 8% per annum) pursuant to a promissory note to be executed by RVDC upon acceptance of the scanner. During the year ended June 30, 1995, the Company entered into a contract to sell an MRI scanner to RVDC, which RVDC is planning to utilize at a site in Largo, Florida recognizing on a percentage of completion basis, revenue of $707,860. The agreement provides for a purchase price of $800,000 payable in installments as follows: (1) $80,000 down payment within 90 days of execution and (2) $720,000 in 84 monthly installments of $11,222 each (inclusive of interest at 8% per annum) pursuant to a promissory note to be executed by RVDC upon acceptance of the scanner. Pursuant to a sales agreement dated July 6, 1995, the Company entered into a contract to sell an MRI scanner to RVDC, which RVDC is planning to utilize at a site located in Panama City, Florida, recognizing on a percentage of completion basis, revenue of $531,000. The sales agreement provides for a purchase price of $590,000 payable in installments as follows: (1) $59,000 down payment within 30 days of execution and (2) $531,000 in 84 monthly installments of $8,276.28 each (inclusive of interest at 8% per annum) pursuant to a promissory note to be executed by RVDC upon acceptance of the scanner. Pursuant to a sales agreement dated August 4, 1995, the Company entered into a contract to sell an MRI scanner to RVDC, which RVDC is planning to utilize at a site located in Gainsville, Florida, recognizing on a percentage of completion basis, revenue of $405,000. The sales agreement provides for a purchase price of $450,000 payable in installments as follows: (1) $45,000 down payment within 30 days of execution and (2) $405,000 in 84 monthly installments of $6,312.42 each (inclusive of interest at 8% per annum) pursuant to a promissory note to be executed by RVDC upon acceptance of the scanner. F-39 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 3 - INVESTMENTS, ADVANCES AND NOTES TO AFFILIATES AND RELATED PARTIES (Continued) Pursuant to a sales agreement dated August 4, 1995, the Company entered into a contract to sell an MRI scanner to RVDC, which RVDC is planning to utilize at a site located in Newark, New Jersey, recognizing on a percentage of completion basis, revenue of $531,000. The sales agreement provides for a purchase price of $590,000 payable in installments as follows: (1) $59,000 down payment within 30 days of execution and (2) $531,000 in 84 monthly installments of $8,276.28 each (inclusive of interest at 8% per annum) pursuant to a promissory note to be executed by RVDC upon acceptance of the scanner. Pursuant to a sales agreement dated September 20, 1995, the Company entered into a contract to sell an MRI scanner to RVDC, which RVDC is planning to utilize at a site located in Patterson, New Jersey, recognizing on a percentage of completion basis, revenue of $405,000. The sales agreement provides for a purchase of $450,000 payable in installments as follows: (1) $45,000 down payment within 30 days of execution and (2) $405,000 in 84 monthly installments of $6,312.42 each (inclusive of interest at 8% per annum) pursuant to a promissory note to be executed by RVDC upon acceptance of the scanner. Pursuant to a sales agreement dated October 4, 1995, the Company entered into a contract to sell an MRI scanner to RVDC, which RVDC is planning to utilize at a site located in Atlanta, Georgia, recognizing on a percentage of completion basis, revenue of $405,000. The sales agreement provides for a purchase price of $450,000 payable in installments as follows: (1) $45,000 down payment within 30 days of execution and (2) $405,000 in 84 monthly installments of $6,312.42 each (inclusive of interest at 8% per annum) pursuant to a promissory note to be executed by RVDC upon acceptance of the scanner. Pursuant to a sales agreement dated October 4, 1995, the Company entered into a contract to sell an MRI scanner to RVDC, which RVDC is planning to utilize at a site located in Trenton, New Jersey, recognizing on a percentage of completion basis, revenue of $405,000. The sales agreement provides for a purchase price of $450,000 payable in installments as follows: (1) $45,000 down payment within 30 days of execution and (2) $405,000 in 84 monthly installments of $6,312.42 each (inclusive of interest at 8% per annum) pursuant to a promissory note to be executed by RVDC upon acceptance of the scanner. F-40 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 3 - INVESTMENTS, ADVANCES AND NOTES TO AFFILIATES AND RELATED PARTIES (Continued) Pursuant to a sales agreement dated October 24, 1995, the Company entered into a contract to sell an MRI scanner to RVDC, which RVDC is planning to utilize at a site located in Naples, Florida, recognizing on a percentage of completion basis, revenue of $405,000. The sales agreement provides for a purchase price of $450,000 payable in installments as follows: (1) $45,000 down payment within 30 days of execution and (2) $405,000 in 84 monthly installments of $6,312.42 each (inclusive of interest at 8% per annum) pursuant to a promissory note to be executed by RVDC upon acceptance of the scanner. Pursuant to a sales agreement dated January 19, 1996, the Company entered into a contract to sell an MRI scanner to RVDC, which RVDC is planning to utilize at a site located in Savannah, Georgia, recognizing on a percentage of completion basis, revenue of $405,000. The sales agreement provides for a purchase of $450,000 payable in installments as follows: (1) $45,000 down payment within 30 days of execution and (2) $405,000 in 84 monthly installments of $6,312.42 each (inclusive of interest at 8% per annum) pursuant to a promissory note to be executed by RVDC upon acceptance of the scanner. Pursuant to a sales agreement dated February 7, 1996, the Company entered into a contract to sell an MRI scanner to RVDC, which RVDC is planning to utilize at a site located in Buffalo, New York, recognizing on a percentage of completion basis, revenue of $405,000. The sales agreement provides for a purchase of $450,000 payable in installments as follows: (1) $45,000 down payment within 30 days of execution and (2) $405,000 in 84 monthly installments of $6,312.42 each (inclusive of interest at 8% per annum) pursuant to a promissory note to be executed by RVDC upon acceptance of the scanner. Pursuant to a sales agreement dated April 1, 1996, the Company entered into a contract to sell an MRI scanner with certain upgrades to RVDC, which RVDC has contributed to Orlando MRI Associates, Limited Partnership (the "Orlando Partnership"), a limited partnership in which RVDC is the general partner. The Orlando Partnership is utilizing the scanner at a site located in Orlando, Florida. The sales agreement provides for a purchase price of $400,000 payable in F-41 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 3 - INVESTMENTS, ADVANCES AND NOTES TO AFFILIATES AND RELATED PARTIES (Continued) installments as follows: (1) $40,000 down payment within thirty (30) days of execution and (2) $360,000 in 84 monthly installments of $5,611.04 each (inclusive of interest at 8% per annum) pursuant to a promissory note executed by RVDC upon acceptance of the scanner. Commencing October 8, 1996, the Orlando Partnership will enter into a service agreement for the scanner with the Company at an annual fee of $70,000, which fee will remain in effect for five years. As at June 30, 1996, the Orlando Partnership was indebted to the Company in the amount of $21,063. Timothy Damadian, a Vice-President of the Company, is a limited partner in Orlando. As of June 30, 1996 the Company had entered into various service contracts with RVDC and other related entities as described above. The service contracts aggregating $2,213,425, are for one year terms and expire at various dates. During the years ended June 30, 1996, 1995 and 1994, the Company sold (at standard prices) various upgrades to RVDC aggregating $11,000, $338,000 and $126,000, respectively. During the years ended June 30, 1996, 1995 and 1994, the Company received a fee and reimbursed expenses for the use of its computer system and personnel. Pursuant to an agreement dated March 3, 1994, Network MRI, Inc. ("Network") engaged the Company to disassemble, transport and reinstall an MRI scanner purchased by Network from a third party. Luciano Bonanni, the Executive Vice President of the Company, is the President, Director and shareholder of Network. The agreement provides for a price of $120,000 payable as follows: (1) $5,000 upon the giving of notice by Network to commence the deinstallation; (2) $15,000 upon the completion of the installation of the magnet and shielded room, and (3) $100,000 in 36 monthly installments of $3,133 each (inclusive of interest at 8% per annum) pursuant to a note executed upon completion of the reinstallation. F-42 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 3 - INVESTMENTS, ADVANCES AND NOTES TO AFFILIATES AND RELATED PARTIES (Continued) Pursuant to an agreement dated June 20, 1994, MRI Enterprises, Inc. ("Enterprises"), a New York corporation of which Luciano Bonanni is the stockholder, Director and President, engaged the Company to disassemble, transport and reinstall an MRI scanner purchased by Enterprises from a third party. The agreement provided for a price of $120,000 payable as follows: (1) $5,000 upon the giving of notice by Enterprises to commence the deinstallation; (2) $15,000 upon the completion of the installation of the magnet and shielded room, and (3) $100,000 with interest at 8% per annum pursuant to a note executed upon completion of the reinstallation. In addition, as of June 30, 1995, Enterprises assumed the liability of a third party to FONAR which had defaulted in its obligation to pay for service for an MRI scanner being provided by Enterprises to the third party. The liability, in the amount of $50,604 was assumed by Enterprises in exchange for FONAR assigning the accounts receivable to Enterprises. The liability is payable by Enterprises to FONAR amortized over a period of thirty-six months with interest at 8% per annum commencing on January 1, 1996. Enterprises was indebted to the Company as at June 30, 1996 in the amount of $204,539 pursuant to a promissory note due January 15, 1995 in the original principal amount of $324,235 with interest at the rate of 10% per annum. The original principal amount of this note represents the liability of a third party to the Company for service and other items which was assumed by Enterprises in connection with Enterprises' acquisition of an MRI scanner and assumption of said party's finance lease covering the scanner. The aggregate indebtedness of Enterprises and Network to the Company as at June 30, 1996 was $419,068. Pursuant to an agreement dated August 3, 1993, MRI Specialties, Inc. ("Specialties") engaged the Company to deinstall, transport and reinstall an MRI scanner purchased from a third party. Timothy Damadian, a Vice-President of the Company, is the stockholder, Director and President of Specialties. The agreement provides for a price of $120,000 payable in 36 monthly F-43 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 3 - INVESTMENTS, ADVANCES AND NOTES TO AFFILIATES AND RELATED PARTIES (Continued) installments of $3,760 each (inclusive of interest at 8% per annum) pursuant to a note executed and delivered by Specialties upon the completion of the reinstallation. The scanner is owned by Canarsie MRI Associates ("Canarsie"), a joint venture partnership of which Specialties is an owner, and Canarsie is party to a service agreement for the scanner with the Company at an annual fee of $70,000 for the period September 1, 1994 through August 31, 1995 and $73,500 for the period September 1, 1995 through August 31, 1996. The annual fee for the following two annual periods will not exceed $77,000 and $80,500, respectively. Pursuant to an agreement dated January 2, 1996, Guardian MRI, Inc. ("Guardian") engaged the Company to deinstall, transport and reinstall an MRI scanner purchased for Pompano MRI Associates ("Pompano") from a third party. Timothy Damadian, a Vice-President of the Company, is a stockholder, director and officer of Guardian. Pompano is a joint venture partnership of which Guardian is an owner. The agreement provides for a price of $120,000 payable in 36 monthly installments of $3,760.36 each (inclusive of interest at 8% per annum) pursuant to a note executed and delivered by Guardian upon the completion of the reinstallation. The agreement also provides that the Company will provide a six-month warranty for the scanner and a service agreement thereafter at an annual price of $70,000. In addition, the agreement provides that the Company will provide updated software, Signal Plus Surface Coils, Whisper Gradients and a Four Post Canopy and Steel upgrade for the scanner. The aggregate indebtedness of Specialties and Canarsie to the Company as at June 30, 1996 was $95,807 and the aggregate indebtedness of Guardian and Pompano to the Company was $124,929. As of June 30, 1996, notes receivable as described above include amounts in arrears aggregating $5,201,004. Income and expenses charged by the Company to RVDC, and related entities are approximately as follows: 1996 1995 1994 ---------- ---------- ---------- Revenues recognized from product sales $4,583,000 $4,866,000 $4,400,000 Interest income $1,965,000 $1,851,000 $1,829,000 Service fees $2,144,000 $2,174,000 $1,323,000 Fees and reimbursable expenses $2,110,000 $3,284,000 $2,197,000 F-44 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 4 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND CUSTOMER ADVANCES 1) Information relating to uncompleted contracts as of June 30, 1996 and 1995 is as follows: As of June 30, ----------------------- 1996 1995 ---------- ---------- Costs incurred on uncompleted contracts $5,147,175 $4,373,423 Estimated earnings 7,202,741 5,053,189 ---------- ---------- 12,349,916 9,426,612 Less: Billings to date 2,723,000 2,432,500 ---------- ---------- $9,626,916 $6,994,112 ========== ========== Included in the accompanying consolidated balance sheets under the following captions: As of June 30, ----------------------- 1996 1995 ---------- ---------- Costs and estimated earnings in excess of billings on uncompleted contracts - short-term $ 336,455 $ 323,918 Costs and estimated earnings in excess of billings on uncompleted contracts - long-term with related parties 9,460,469 6,681,296 Billings in excess of costs and estimated earnings on uncompleted contracts (170,008) (11,102) ---------- ---------- $9,626,916 $6,994,112 ========== ========== F-45 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 4 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND CUSTOMER ADVANCES (Continued) 2) Customer advances consist of the following: As of June 30, ----------------------- 1996 1995 ---------- ---------- Total advances from customers $3,656,604 $2,725,987 Less: Advances from customers on contracts under construction (includes $1,393,000 and $1,160,000 for 1996 and 1995, respectively, with related parties) 2,723,000 2,432,500 ---------- ---------- $ 933,604 $ 293,487 ========== ========== NOTE 5 - INVENTORIES Inventories included in the accompanying consolidated balance sheets consist of: June 30, ----------------------- 1996 1995 ---------- ---------- Purchased parts, components and supplies $3,316,190 $2,204,888 Work-in-process 307,382 90,439 ---------- ---------- $3,623,572 $2,295,327 ========== ========== F-46 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 6 - LEASING OPERATIONS Net Investment in Sales-Type Leases with Related Parties ------------------------------------------------------------ The Company has entered into several lease agreements for its MRI scanners which are considered sales-type leases (see Note 3). Revenues for fiscal 1996, 1995 and 1994 include approximately $-0-, $-0- and $1,000,000, respectively, from these sales-type leases. The Company's net investment in sales-type leases as at June 30, 1996 and 1995 is as follows: June 30, ------------------------ 1996 1995 ---------- ---------- Total minimum lease payments receivable $6,794,026 $7,063,068 Less: Allowance for possible losses 115,000 115,000 ---------- ---------- Net minimum lease payments receivable 6,679,026 6,948,068 Less: Unearned income (381,057) (617,101) ---------- ---------- Net investment in sales-type leases $6,297,969 $6,330,967 ========== ========== Current portion $ 779,096 $1,368,988 Non-current portion 5,518,873 4,961,979 ---------- ---------- $6,297,969 $6,330,967 ========== ========== At June 30, 1996 and 1995, net investment in sales-type leases include amounts in arrears aggregating $3,522,730 and $2,537,739, respectively. a) During the year ended June 30, 1996, 117,000 shares of stock were issued to a finance company in consideration for the purchase of all receivables due under a lease of an MRI scanning machine with a related party. The value assigned to such lease approximated $351,000 as of June 30, 1996. F-47 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 6 - LEASING OPERATIONS (Continued) b) During the year ended June 30, 1995, one purchase option was exercised by a related party for property and equipment under a sales-type lease with a remaining lease value of $962,185. In consideration for the property and equipment, the related party assumed $311,934 of the Company's debt. Minimum lease payments to be received as at June 30, 1996 for each of the next five years and thereafter are as follows: Years Ended June 30, ----------- 1997 $2,780,340 1998 694,786 1999 694,786 2000 1,008,630 2001 1,615,484 2002 and thereafter - ---------- $6,794,026 Total ========== NOTE 7 - PROPERTY AND EQUIPMENT Property and equipment, at cost, less accumulated depreciation and amortization, at June 30, 1996 and 1995, is comprised of: June 30, ------------------------ 1996 1995 ---------- ---------- Offsite research scanner (see Note 13) $1,154,217 $1,154,217 Research, development and demonstration equipment (Note 11) 5,460,928 6,177,043 Machinery and equipment 3,485,573 3,386,353 Furniture and fixtures 2,206,848 2,142,867 Property under lease 1,512,282 555,645 ---------- ---------- 13,819,848 13,416,125 Less: Accumulated depreciation and amortization 11,319,254 10,629,723 ---------- ---------- $2,500,594 $2,786,402 ========== ========== F-48 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 7 - PROPERTY AND EQUIPMENT (Continued) Depreciation and amortization of property and equipment for the years ended June 30, 1996, 1995 and 1994 was $1,026,091, $987,752 and $1,019,815, respectively. The property under lease has a net book value of $1,195,603 and $357,200 at June 30, 1996 and 1995, respectively. NOTE 8 - INTANGIBLE ASSETS 1) Capitalized Software Development Costs The following is a summary of software development costs capitalized and the amortization charged to operations for the three years ended June 30, 1996: For the Years Ended June 30, ------------------------------- 1996 1995 1994 ---------- ---------- ---------- Amount capitalized $ 505,990 $ 281,052 $ 373,256 ========== ========== ========== Amortization $1,013,615 $1,255,012 $1,318,337 ========== ========== ========== Capitalized computer software costs for the years ended June 30, 1996, 1995 and 1994 primarily relate to the costs of developing upgrades for the Company's existing scanner product lines and a new line of scanner products. F-49 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 8 - INTANGIBLE ASSETS (Continued) 2) Other Intangible Assets Other intangible assets, net of accumulated amortization, at June 30, 1996 and 1995 are comprised of: June 30, ----------------------- 1996 1995 ---------- ---------- Cost of acquiring technology and license $3,422,231 $3,422,231 Patents and copyrights 6,033,543 5,929,963 ---------- ---------- 9,455,774 9,352,194 Less: Accumulated amortization (6,251,619) 6,032,141 ---------- ---------- $3,204,155 $3,320,053 ========== ========== In January 1987, the Company acquired the technology for adapting trailers for use in its mobile scanner units. The purchase price of $422,231 was capitalized and was amortized over five years. On May 7, 1987, the Company acquired certain technology and, accordingly, capitalized $3,000,000 of such purchase price, which was amortized over five years. These assets are fully amortized at June 30, 1994. Patents, acquired at various dates are being amortized over 17 years. Patent and deferred legal costs related to various patent and copyright infringement actions of approximately $120,473 and $1,365,275 were capitalized during the years ended June 30, 1996 and 1995, respectively. During August 1994 one such action was settled with the Company receiving a monetary award of $1,150,000 (see Note 15). As of June 30, 1994, the net accumulated costs associated with this case, which approximated the monetary award were reclassified to prepaid expenses and other current assets. F-50 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 8 - INTANGIBLE ASSETS (Continued) Approximately $103,000 and $1,365,000 of the legal costs capitalized during fiscal 1996 and 1995, respectively, related to the separate suits, whereby, the Company is suing General Electric and Hitachi for infringement of various patents related to the Company's MRI machines. During fiscal years 1996 and 1995, two cases against Philips and Hitachi were settled and approximately $17,000 and $332,000 of legal costs relating to these cases were written-off, respectively (see Note 15 for a more detailed discussion of these lawsuits). Amortization of other intangible assets for the years ended June 30, 1996, 1995 and 1994 was $219,478, $176,276 and $203,266, respectively. NOTE 9 - SIGNIFICANT CUSTOMERS AND DISTRIBUTION AGREEMENTS The Company's machine sale revenues for the three years ended June 30, 1996 were derived as follows: Percent of Customers Foreign Years Ended ------------------------ Revenues to June 30, Domestic Foreign Total Total Revenues ----------- -------- ------- ----- -------------- 1996 9 5 14 17% 1995 5 5 10 17% 1994 5 3 8 9% During the years ended June 30, 1996, 1995 and 1994, revenues from related parties were 54%, 51% and 39%, respectively, of total revenues. In addition, interest income recognized from related parties totalled $1,964,828, $1,969,204 and $1,865,963, respectively, for the years ended June 30, 1996, 1995 and 1994. No one unrelated customer accounted for more than 10% of total revenues during fiscal years 1996, 1995 and 1994. F-51 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 9 - SIGNIFICANT CUSTOMERS AND DISTRIBUTION AGREEMENTS (Continued) Distributorship Agreements -------------------------- In order to facilitate the marketing of its products, the Company has entered into agreements granting exclusive and non-exclusive rights to distribute the Company's existing and certain future products in Europe, Asia and Latin America. NOTE 10 - CAPITAL STOCK The total number of shares of stock which the Company is authorized to issue is 92,000,000 shares. The classes and the aggregate number of shares of stock of each class are as follows: 1) 60,000,000 shares of common stock with a par value of $.0001 per share. On April 3, 1995, shareholders approved an increase in the authorized common shares from 50,000,000 to 60,000,000. 2) 4,000,000 shares of Class B common stock, having a par value of $.0001 per share. 3) 10,000,000 shares of Class C common stock, having a par value of $.0001 per share (see below). 4) 8,000,000 shares of Class A non-voting preferred stock, having a par value of $.0001 per share (see below). 5) 10,000,000 shares of preferred stock, having a par value of $.001 per share. 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, a special cash dividend shall be payable in an amount equal to three percent (3%) 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). F-52 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 10 - CAPITAL STOCK (Continued) Class B Common Stock -------------------- Class B common stock is convertible into shares of common stock on a one-for-one basis. Class B common stock has 10 votes per share. During the year ended June 30, 1996, 437 shares of Class B common stock were converted to common stock leaving 5,411 of such shares outstanding as of June 30, 1996. Class C Common Stock -------------------- On April 3, 1995, the shareholders 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. During the year ended June 30, 1996, approximately 3.2 million shares of Class B common stock were converted to Class C common stock. Class A Non-Voting Preferred Stock ---------------------------------- On April 3, 1995, the shareholders 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. F-53 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 10 - CAPITAL STOCK (Continued) The Class A non-voting preferred stock is entitled to a special dividend equal to three percent (3%) 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 lawsuit, discussed in Note 15, less the special dividend payable on the common stock with respect to one of the Company's patents. Pursuant to such dividend entitlement, the Company recorded an obligation of $217,226 during fiscal 1996. 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). The above described features essentially enable the holders of the Class A non-voting preferred stock to share in the earnings potential of the Company on substantially the same basis as the common stock. Accordingly, the Company has classified the Class A non-voting preferred stock as a common stock equivalent. Earnings per share and weighted average shares outstanding have been restated to reflect the Class A non-voting preferred stock dividend. As of June 30, 1996, the financial statements reflect authorized Class A non-voting preferred shares of 8,000,000 and deemed issued and outstanding shares of 7,855,627. F-54 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 10 - CAPITAL STOCK (Continued) Stock Options ------------- The Company has granted options to purchase shares of the Company's common stock to officers and key employees as follows: 1) Incentive Stock Option Plans The Board of Directors adopted Incentive Stock Option Plans on March 26, 1993 and on January 17, 1986, under which 1,500,000 and 1,250,000 shares of common stock were reserved for issuance, respectively. Under the terms of the Plans, options may be granted at prices not less than the fair market value of the common stock at the date of grant. The options must be exercised within ten years from the date of grant and may be granted no later than March 25, 2003 for the 1993 Plan and January 16, 1996 for the 1986 Plan. During fiscal 1996 and 1995, 4,000 and 388,000 options were exercised at prices averaging $2.56 per share. These shares were paid by issuing notes payable to the Company aggregating $994,469. The notes are payable over 5 years and carry interest at a rate of 7% per annum. Included in the options exercised in fiscal 1996 and 1995 are options for -0- and 145,000 shares, respectively, exercised by three officers of the Company at prices ranging from $1.4375 to $3.00 per share. These officers paid for such shares by issuing notes payable to the Company aggregating $-0- and $263,125, respectively. The notes bear interest at 7% per annum and are included in the accompanying financial statements as a reduction of stockholders' equity. F-55 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 10 - CAPITAL STOCK (Continued) 2) Nonstatutory Stock Option Plans On April 1, 1995, December 1, 1993, March 26, 1993 and January 17, 1986, the Board of Directors approved Nonstatutory Stock Option Plans under which 5,000,000, 5,000,000, 2,500,000 and 1,250,000 shares of common stock were reserved for issuance, respectively. Under the terms of the Plan, options expire no later than ten years from the date of grant and may be granted under each Plan no later than March 31, 2005 for the 1995 Plan, November 30, 2003 for the 1994 Plan, March 25, 2003 for the 1993 Plan and January 16, 1996 for the 1986 Plan. When options are exercised, the par value per share is credited to common stock and the excess of the proceeds over the par value is credited to paid-in capital in excess of par value. Under the Nonstatutory Stock Option Plan, compensation expense is recorded on the date of grant and is measured by the amount per share that the fair market value of the underlying shares on the date of grant exceeds the grant price. No compensation expense was recognized for the years ended June 30, 1996 and 1995 because the grant price approximated the fair market value at the grant date. Included in the options exercised in fiscal 1996 and 1995 are options for 1,400,000 and 1,050,000 shares, respectively, exercised by one company owned by an officer of the Company at prices ranging from $2.25 to $3.65 per share. This company paid for such shares by issuing notes payable to the Company aggregating $3,806,110 in 1996 and $1,529,600 in 1995. The balances due under such notes at June 30, 1996 and 1995, respectively, were $251,112 and $417,491. These notes bear interest at 10% per annum and are included in the accompanying financial statements as a reduction of stockholders' equity. F-56 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 10 - CAPITAL STOCK (Continued) 3) Shares Under Option The following is a summary of activity and information relating to shares (rounded to whole shares) subject to option under the Incentives Stock Option Plans and the Nonstatutory Stock Option Plans for the two years ended June 30, 1996: June 30, ------------------------- 1996 1995 ---------- ---------- Beginning of Year: 1984 Plan ($5.00/share) 25,354 25,354 1986 Plan ($.375- $4.25/share) 97,875 141,250 1993 Plan - - Nonstatutory Plans ($5.00/share) under 1986 Plan 100,131 100,131 ---------- ---------- 223,360 266,735 ---------- ---------- Options Granted: 1984 Plan - - 1986 Plan ($1.34/share) 50,000 - 1993 Plan ($1.4375- $3.00/share) 4,000 388,000 Nonstatutory Plans ($1.00-$3.50/share) 3,100,000 1,752,695 ---------- ---------- 3,154,000 2,140,695 ---------- ---------- Options Exercised: 1984 Plan - - 1986 Plan ($.375- $1.34/share) (78,125) (25,375) 1993 Plan ($1.4375- $3.00/share) (4,000) (388,000) Nonstatutory Plans ($1.00-$3.50/share) (3,100,000) (1,752,695) ---------- ---------- (3,182,125) (2,166,070) ---------- ---------- F-57 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 10 - CAPITAL STOCK (Continued) 3) Shares Under Option (Continued) June 30, ------------------------- 1996 1995 ---------- ---------- Options Cancelled/Expired: 1984 Plan - - 1986 Plan ($.375- $2.375/share) - (18,000) 1993 Plan - - Nonstatutory Plans - - ---------- ---------- - (18,000) ---------- ---------- Balance - End of Year: 1984 Plan ($5.00/share) 25,354 25,354 1986 Plan $.375- $4.25/share) 69,750 97,875 1993 Plan - - Nonstatutory Plans ($5.00/share) 100,131 100,131 ---------- ---------- 195,235 223,360 ========== ========== Total Value at Option Price $ 843,003 $ 853,550 ========== ========== Options Exercisable: End of Year: 1984 Plan ($5.00/share) 25,354 25,354 1986 Plan ($.375- $4.25/share) 55,750 58,000 1993 Plan - - Nonstatutory Plans ($5.00/share) 100,131 100,131 ---------- ---------- 181,235 183,485 ========== ========== Total Value at Option Price $ 836,940 $ 822,284 ========== ========== F-58 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 10 - CAPITAL STOCK (Continued) 3) Shares Under Option (Continued) June 30, ------------------------- 1996 1995 ---------- ---------- Shares Available for Future Grant: 1984 Plan - - 1986 Plan - 157,302 1993 Plan 1,108,000 1,112,000 Nonstatutory Plans 1,900,000 5,000,000 ---------- ---------- 3,008,000 6,269,302 ========== ========== 4) Stock Bonus Plans On April 1, 1995, December 1, 1993, March 26, 1993 and January 17, 1986, the Board of Directors adopted Stock Bonus Plans. Under the terms of the Plans, 5,000,000, 5,000,000, 2,500,000 and 1,250,000 shares, respectively, of common stock were reserved for issuance and stock bonuses may be awarded no later than March 31, 2005 for the 1995 Plan, November 30, 2003 for the 1994 Plan, March 25, 2003 for the 1993 Plan and January 16, 1996 for the 1986 Plan. An amendment to the 1986 Plan was approved by the Board of Directors on August 26, 1986, whereby an additional 1,250,000 shares were reserved for issuance. During fiscal 1996, 1995 and 1994, 1,463,741, 4,826,505 and 1,251,505 shares, respectively, were issued under the stock bonus plans, of which 161,341, 480,650 and 116,796 shares, respectively, were charged to operations as compensation expense, 802,400, 1,398,550 and 1,011,000 shares, respectively, were issued in settlement of liabilities and 500,000, 1,947,305 and 123,709 shares, respectively, were issued in exchange for notes. The balance due under these notes was paid in full. F-59 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 11 - FINANCING ACTIVITIES The following represents the Company's major financing activities during fiscal 1996 and 1995, and data related to outstanding indebtedness and encumbrances at June 30, 1996 and 1995: Notes Payable: ------------- June 30, ------------------------- 1996 1995 ---------- ---------- Short-term bank credit and loans, with interest at 10.8%, secured by certain assets of the Company. $ 100,000 $ 100,000 ========== ========== Long-term Debt: -------------- June 30, ------------------------- 1996 1995 ---------- ---------- Term note converted on November 20, 1992 from demand notes payable with interest at a prime rate, plus 2%, collateralized by certain research equipment in the accompanying financial statements. Repayment terms were modified on March 1, 1993 requiring monthly payments of $20,000 for 36 months and a balloon payment of $350,000 at the end of the term. On March 21, 1996, repayment terms were modified again requiring monthly payments of $20,000 until the loan is satisfied. The loan is required F-60 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 11 - FINANCING ACTIVITIES (Continued) Long-term Debt: (Continued) -------------- June 30, ------------------------- 1996 1995 ---------- ---------- to be paid in full if the Company collects monies awarded under the G.E. judgement. $ 249,779 $ 490,000 Note payable dated February 1991 - $3,114,379, with various payment amounts ranging from $33,500 to $105,000 through October 1, 1993, including interest at 8.725%. Repayment terms were modified on November 18, 1992 requiring monthly payment amounts ranging from $57,750 to $124,750 through December 1993 including interest at 16.29%. This represented consolidation of four previously existing notes. Effective December 1993, $902,121 of this obligation was assumed by related parties in connection with the exercise of purchase options under two of the sales-type lease agreements. Repayment terms for the balance of the obligations were modified through two notes in the amounts of $208,468 and $258,064 requiring monthly payments of $9,810 and $16,699, respectively, through November 1995 including interest at 11.97%. Such notes are secured by a scanning machine which is the subject of a sales-type lease F-61 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 11 - FINANCING ACTIVITIES (Continued) Long-term Debt: (Continued) -------------- June 30, ------------------------ 1996 1995 ---------- ---------- agreement (Note 6) and a scanning machine included in assets held for resale (Note 2). $ - $ 10,000 Note payable dated December 1988 - $1,648,000, due $30,884 per month, including interest at 11.1%, through November 1993, secured by equipment, which has been classified as assets held for lease (Note 7). Repayment terms were modified during October 1991 requiring payments of $34,481, which include interest at 16.3%, payable through October 1996. During March 1995, $224,657 of the obligation was assumed by a related party in consideration for the reduction of a note receivable (Note 3). 701,201 774,293 Note payable dated January 1989 - $1,200,000 and $1,265,000 requiring monthly payments of $29,000 and $30,800, respectively, including interest at 18.0% and 19.4%, respectively. Repayment terms were modified in August 1993 requiring monthly payments of $20,000 for 47 months and a balloon payment of $104,752 at the end of the term. This represents the consolidation of two previously existing notes. F-62 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 11 - FINANCING ACTIVITIES (Continued) Long-term Debt: (Continued) -------------- June 30, ------------------------ 1996 1995 ---------- ---------- Such note is secured by scanning machines which are the subject of sales-type lease agreements (Note 6). $ 332,367 $ 501,564 Note payable dated June 1990 - $765,063, payable interest only at 12%, through July 1991 when the entire balance is due. Repayment terms were modified during November 1992 requiring 62 monthly payments of $16,601 with the balance due on December 12, 1997. Payments include interest at a rate of 12% and is secured by scanning equipment. 465,664 578,470 Note payable dated March 1989 - $750,000, due $18,045 per month, commencing July 1989, including interest at 15.5%, through June 1994. Such note is secured by service agreements of the end users of the equipment. Repayment terms were restructured during November 1993 requiring monthly payment amounts ranging from $14,566 to $41,059 through March 1995, including interest at 14%. - 55,974 Capital lease dated March 5, 1993 - $340,895, due $11,162 per month, commencing April 1993, including interest at 11% for 36 months. Such F-63 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 11 - FINANCING ACTIVITIES (Continued) Long-term Debt: (Continued) -------------- June 30, ------------------------ 1996 1995 ---------- ---------- lease is collateralized by equipment, which has been classified as property under lease in the accompanying financial statements. Repayment terms were modified in May 1995 requiring 36 monthly payments of $5,117. $ 105,425 $ 148,386 Capital lease dated October 13, 1995 - $513,692, due $11,173 per month, commencing October 1995, including interest of 11% for 60 months. Such lease is collateralized by equipment, which has been classified as property under lease in the accompanying financial statements. 460,461 - Capital lease dated June 4, 1996 - $412,550, due $8,972 per month, commencing July 1996, including interest of 11% for 60 months. Such lease is collateralized by equipment, which has been classified as property under lease in the accompanying financial statements. 402,225 - Other (including capital leases for property and equipment) 1,154,968 1,221,719 ---------- ---------- 3,872,090 3,780,406 Less: Current maturities 2,909,071 3,251,863 ---------- ---------- $ 963,019 $ 528,543 ========== ========== F-64 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 11 - FINANCING ACTIVITIES (Continued) The maturities of long-term debt over the next five years and thereafter are as follows: Years Ended June 30, ----------- 1997 $2,909,071 1998 412,696 1999 201,665 2000 225,665 2001 122,993 ---------- $3,872,090 ========== NOTE 12 - INCOME TAXES The provisions for income taxes for the years ended June 30, 1996, 1995 and 1994 consist of the following: For the Year Ended June 30, -------------------------------- 1996 1995 1994 Federal: --------- --------- -------- Current $ - $ 22,867 $(10,000) Deferred - - - -------- -------- -------- - 22,867 (10,000) -------- -------- -------- State: Current 19,965 122,691 57,905 Deferred - - - -------- -------- -------- 19,965 122,691 57,905 -------- -------- -------- Total Provision for Income Taxes $ 19,965 $145,558 $ 47,905 ======== ======== ======== F-65 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 12 - INCOME TAXES (Continued) The components of deferred tax assets and liabilities at June 30, 1996 and 1995 are as follows: 1996 1995 ---------- ---------- Deferred Tax Assets: Nondeductible accruals $ 87,445 $ 105,085 Additional costs capitalized for inventory-tax 69,622 108,521 Allowance for doubtful accounts 876,466 787,470 Net operating loss carryforwards 6,868,902 7,011,093 Tax credit carryforwards 2,280,720 1,642,000 ---------- ---------- Total Gross Deferred Tax Assets 10,183,155 9,654,169 Less: Valuation allowance (8,830,257) (8,321,364) ---------- ---------- Net Deferred Tax Assets 1,352,898 1,332,805 ---------- ---------- Deferred Tax Liabilities: Accelerated tax depreciation (460,398) (436,258) Amortization of capitalized software and patents (892,500) (896,547) ---------- ---------- Total Gross Deferred Tax Liabilities (1,352,898) (1,332,805) ---------- ---------- Net $ - $ - ========== ========== F-66 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 12 - INCOME TAXES (Continued) The net change in the valuation allowance for deferred tax assets was a increase of $508,893. At June 30, 1996, the Company has net operating loss carryforwards of approximately $ 20,202,652 that will be available to offset future taxable income, if any. Additionally, at June 30, 1996, the Company has investment and research and development ("R&D") tax credit carryforwards of approximately $ 1,545,000 available to offset future taxes payable, if any. These carryforwards expire in the following approximate amounts: Tax Carryforward ------------------------------ Year of Net Operating Investment and Expiration Loss R&D Tax Credit ---------- ------------- -------------- 1997 $ - $ 33,000 1998 - 12,000 1999 783,000 16,000 2000 7,978,000 48,000 2003 23,000 - 2004 11,418,000 - 2006 - 1,436,000 ----------- ----------- $20,202,000 $ 1,545,000 =========== =========== F-67 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 12 - INCOME TAXES (Continued) A reconciliation of income tax expense at the statutory rate to income tax expense at the Company's effective rate is as follows: 1996 1995 1994 ----------- ---------- ---------- Computed tax at the statutory rate $(1,147,980) $ (549,920) $ (97,467) State and local income taxes, net of federal income tax benefit 19,965 122,691 57,905 Unutilized net operating 1,147,980 549,920 97,467 loss Other - - (10,000) Alternative minimum tax - 22,867 - ----------- ---------- ---------- Income Tax Expense $ 19,965 $ 145,558 $ 47,905 =========== ========== ========== NOTE 13 - OFFSITE RESEARCH SCANNER In connection with an agreement dated July 1983, the Company agreed to lend a prominent U.S. medical school an MRI scanner for research purposes, for a period of two years commencing in June 1984, at no charge. Upon expiration of the agreement, the unit was to have been purchased by the user or returned to the Company. During the fiscal year ended June 30, 1991, the Company and the school mutually decided to cancel the agreement, without purchase of the scanner by the school, and the scanner was returned to the Company. Costs of $1,154,217 have been incurred by the Company for equipment and site preparation and are included in property and equipment under the caption "Offsite Research Scanner" in the accompanying consolidated balance sheets (net of accumulated depreciation). As of June 30, 1996, this asset has been fully depreciated. F-68 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 14 - OTHER CURRENT LIABILITIES Included in other current liabilities are the following: 1996 1995 ---------- ----------- Unearned revenue on service contracts $1,538,802 $2,263,918 Accrued payroll taxes 679,400 1,079,040 Accrued interest 270,484 310,144 Accrued royalties 377,307 387,307 Warranty and costs 170,474 149,363 Accrued salaries and commissions 283,722 259,176 Litigation judgement 1,255,872 1,169,375 Excise and sales taxes 1,461,255 1,492,609 Other 1,846,136 2,137,795 ---------- ---------- $7,883,452 $9,248,727 ========== ========== As of June 30, 1996, the Company was in arrears on its federal and state payroll taxes aggregating $192,000 and $340,661, respectively. The Company reached a settlement agreement with the Internal Revenue Service permitting the Company to retire the balance in monthly installments of $100,000. The Company has repaid all federal taxes. The remaining balance represents penalties and interest. In February 1994, the Company reached a settlement agreement with the New York State Department of Taxation and Finance permitting the Company to retire the balance in monthly installments. NOTE 15 - COMMITMENTS AND CONTINGENCIES Leases ------ The Company rents its operating facilities under long-term lease agreements expiring at various dates through July 1997. These leases contain escalation clauses relating to increases in real property taxes as well as certain maintenance costs. F-69 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 15 - COMMITMENTS AND CONTINGENCIES (Continued) Future minimum payments for the noncancellable facilities and capital leases (principally milling machines) are as follows: Year Ended June 30, Facilities Capital ---------- ---------- ----------- 1997 $ 716,965 $ 525,449 1998 59,963 355,712 1999 - 253,584 2000 - 253,584 2001 - 128,174 ---------- ---------- Total minimum obligations $ 776,928 1,516,503 ========== Less: Amount representing interest 282,367 ---------- Present value of net minimum lease obligations $1,234,136 ========== Rent expense for operating leases totalled approximately $681,000 $618,000 and $628,000 for the three years ended June 30, 1996, 1995 and 1994, respectively. Rent expense for the years ended June 30, 1996, 1995 and 1994 is as follows: 1996 1995 1994 ---------- ---------- ---------- Minimum rent $ 609,000 $ 559,000 $ 573,000 Contingent rent 72,000 59,000 55,000 ---------- ---------- ---------- Total $ 681,000 $ 618,000 $ 628,000 =========== ========== ========== F-70 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 15 - COMMITMENTS AND CONTINGENCIES (Continued) Litigation ---------- On September 2, 1992, the Company filed an action against General Electric Company ("General Electric"), Hitachi Ltd. ("Hitachi") and other defendants for patent infringement in the United States District Court for the Eastern District of New York seeking injunctive relief and damages. The defendants contested the Company's claims, and Hitachi counterclaimed, alleging infringement by the Company of two of its patents. In April 1995, prior to the commencement of trial, FONAR and Hitachi settled. On May 26, 1995, the jury rendered a verdict against General Electric awarding FONAR $110,575,000 for infringement of two of its patents. Subsequent to the verdict, General Electric made motions to the court to enter judgement as a matter of law in its favor and against FONAR with respect to both patents notwithstanding the jury's verdict. FONAR made a motion to the court for an injunction restraining General Electric from using the multi-angle oblique imaging technology covered by one of its patents. On October 6, 1995, the court awarded FONAR $62 million in damages against General Electric for direct infringement on one of its patents and granted an injunction against General Electric prohibiting future violations of the patent. The injunction was stayed pending appeal, however, subject to the posting of a bond. With respect to the other patent, the judge agreed with the jury's finding that the patent was valid, but disagreed with the jury's finding of infringement and determined that General Electric's MRI scanners did not infringe the patent. General Electric has appealed the portion of the judgement upholding the jury's award to damages to FONAR for direct infringement and the issuance of the injunction. FONAR has appealed the portion of the judgement overturning the jury's findings. Oral arguments have been scheduled for October 1996. F-71 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 15 - COMMITMENTS AND CONTINGENCIES (Continued) Litigation (Continued) ---------- On June 16, 1995, the Company filed an action against Siemens Medical Systems, Inc. ("Siemens"), Philips Electronics North America Corporation, Philips Electronics, N.V. and other defendants for patent infringement in the United States District Court for the Eastern District of New York. FONAR is seeking injunctive relief and damages. In its suit, FONAR has alleged that four of its patents were infringed. Previously, in May 1995, Siemens had filed a complaint against FONAR in the United States District Court for the District of Delaware seeking a declaratory judgement that the four patents were invalid and unenforceable, as well as an adjudication that Siemens was not infringing on the four patents. On June 14, 1995, Siemens amended the complaint to add Siemens AG as a plaintiff, to add Raymond V. Damadian, M.D. MR Scanning Centers Management Company as a defendant and to include a claim against FONAR for infringement of one of Siemens' MRI patents. Thereafter, on June 30, 1995, Philips Electronics North America Corporation and Philips Electronics, N.V. filed a complaint against FONAR in the United States District Court for the District of Delaware seeking a declaratory judgement that FONAR's U.S. Patents Nos. 3,789,832 and 4,871,966 are invalid, unenforceable and not infringed. Motions have been made by the Siemens affiliates and Philips affiliates to transfer the action commenced by FONAR in District Court for the Eastern District of New York to the Delaware District Court and FONAR has moved to transfer the actions commenced against it in the Delaware District Court to the Eastern District of New York. Subsequently, the action was transferred to U.S. District Court for the District of Delaware. The respective parties are expected to vigorously contest the claims against them. Separately, U.S. Philips Corporation, an affiliate of Philips Electronics North America Corporation and Philips Electronics, N.V., commenced an action in the United States Court for the District of Delaware alleging infringement by FONAR of two of its patents. In April 1996, the Company entered into an agreement with Philips Electronics N.V., F-72 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 15 - COMMITMENTS AND CONTINGENCIES (Continued) Litigation (Continued) ---------- Philips Electronics North America Corp., Philips Medical Systems North American and U.S. Philips Corp. settling the lawsuits and claims between them. On March 4, 1996, the Company filed an action against Toshiba Corporation, Toshiba America Medical Systems, Inc., Toshiba American MRI, Inc. and others alleging infringement of four of its MRI patents. In September of 1991, FONAR commenced an action against Deccaid Services, Inc., Medical Funding of America, Inc., EQUIMED Inc. and several individual defendants, for copyright infringement and misappropriation of trade secrets in connection with servicing of FONAR manufactured MRI equipment. The case was settled in July and August 1994, pursuant to agreements whereby the sum of $1,150,000 was paid to FONAR on behalf of the defendants, and all claims the parties had against each other were released. On March 4, 1987, Philip B. Kivitz, M.D. and Rad-Sonic Diagnostic Medical Clinics, Inc., filed a complaint against AMD, FONAR, Raymond V. Damadian and others in the San Francisco County Superior Court (Case Action No. 870407). In his complaint, Dr. Kivitz had claimed $10,000,000 in compensatory damages and $10,000,000 in punitive damages. In January 1993, the case went to trial and the jury returned a verdict of $880,000 against AMD and $120,000 against FONAR. On June 17, 1993, the Court granted FONAR's and AMD's motion for judgement notwithstanding the verdict, thereby vacating the entire award against both FONAR and AMD, and determining that Dr. Kivitz is entitled to no recovery whatsoever. The case was appealed by the plaintiff and on February 27, 1995, the Appellate Court affirmed the lower court's judgement notwithstanding the verdict as to FONAR, but reversed the judgement as to AMD. Subsequently, AMD filed a petition for review with the California Supreme Court and was denied on May 17, 1995. As of June 30, 1996, the verdict of $880,000, plus interest, was provided for. F-73 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 15 - COMMITMENTS AND CONTINGENCIES (Continued) Litigation (Continued) ---------- On April 3, 1990, Summit, Rovins and Feldesman commenced an action in the Supreme Court of the State of New York, County of New York against the Company. The complaint alleges unpaid fees for legal services and disbursements to the amount of $664,371. The Company has answered the complaint, asserting various defenses and a counter claim of $100,000 for a refund of fees. The plaintiff made a motion for summary judgement which was granted as to the liability but denied as to the amount of damages. The Company has appealed this motion and in March 1995, the Appellate Court reversed the granting of summary judgement against FONAR. The case is ready for trial. On October 4, 1993, the State of Texas and various municipalities thereof commenced an action against the Company in the District Court of Travis County, Texas to collect $345,973 in sales and use taxes, penalties and interest, together with attorneys fees of $25,000 and additional accruals of interest and penalties. The Company interposed an answer generally denying the claim. An agreement was reached for $323,870 plus interest, a rate of 10% per annum payable in installments of $10,000 per month until the full obligation has been satisfied. In January 1991, Myheal Technologies and a former employee commenced an action against the Company in the United States District Court for the Eastern District of New York (Index No. 91 CIV 0204). The amount claimed is $5,000,000 in damages and $5,000,000 in punitive damages. The claim arose out of an alleged breach of an agreement between the Company and a former research and development employee of the Company. In December 1993, a jury verdict was returned in favor of the plaintiffs for $1,150,000 in compensatory damages. The Company made a motion for judgement notwithstanding the verdict, or in the alternative, for a new trial. In July 1994, the court set aside the jury's verdict and granted the Company a new trial. On March 24, 1995, a jury rendered a verdict in favor of the plaintiff in the amount of $250,000. F-74 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 15 - COMMITMENTS AND CONTINGENCIES (Continued) Litigation (Continued) ---------- Subsequently, the Company made a motion requesting judgement as a matter of law dismissing the plaintiff's claims or in the alternative a new trial or reduction of damages. The Company's motion was denied and judgement was entered against the Company in August 1995. The District Court's decision was upheld by the Court of Appeals on appeal. During February 1994, a FONAR subsidiary, ("Medical SNI" formerly "Vonar Limited") issued shares to Long Investment, Ltd., an Israeli company, in consideration for $700,000. Long Investment, Ltd. claims the investment was made assuming Medical SNI would complete a private offering. The private offering was subsequently cancelled. Long Investment, Ltd. appealed to the District Court to appoint an arbitrator to decide if the Company should refund the investment. The case went to arbitration during the year and the parties are awaiting a decision. Based on its legal counselor's opinion, management is of the opinion that the claim will be dismissed. On June 28, 1995, Horace Rubenstein commenced an action in the Delaware Court of Chancery against the four directors of the Company and FONAR, as nominal defendant, challenging the recapitalization plan approved by the stockholders at the annual meeting on April 3, 1995 (see Note 10). The complaint alleges that the directors failed to act in the best interests of the Company and its common stockholders in adopting the plan, which permits Dr. Raymond V. Damadian, the founder, President and principal stockholder of the Company, and other holders of FONAR's Class B common stock, to exchange their shares of Class B common stock for shares of a new Class C common stock having greater voting power. The action was brought as a class action on behalf of the holders of the common stock and derivatively, for the benefit of the Company, and seeks an unspecified amount of damages and an order setting aside the recapitalization. F-75 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 15 - COMMITMENTS AND CONTINGENCIES (Continued) Litigation (Continued) ---------- The defendants and the Company strongly believe that the recapitalization, approved by the stockholders in tandem with a proposal to distribute shares of a new class of preferred stock to the holders of the common stock, is both fair and in the best interests of the Company and its stockholders. The defendant answered the complaint and the parties are currently engaged in settlement negotiation. The Company also is involved in a number of smaller litigations which aggregate approximately $1,416,000. The Company has interposed answers in all cases, except where an answer is not yet due. The Company has established provisions for most of the liabilities represented by these smaller claims, and where provisions have not been established, management believes it will prevail on the merits and intends to vigorously contest the claims. Based on its past experience dealing with such claims, the Company anticipates it will be able to settle most of these smaller litigations with provisions to pay over periods of time which are manageable for the Company. An entity has impliedly asserted that FONAR's equipment infringes on at least one of the entity's patents. The entity had sought royalties in the range of 2% or 3% of the net selling price of FONAR's equipment for licenses under their assertedly infringed patents. At July 1, 1995, the Company entered into an agreement with the entity, whereby the Company must pay 1.2% of the Company's future sales of certain MRI apparatus. License Agreement and Self-Insurance ------------------------------------ The Company entered into a license agreement during 1990 with an entity whereby the Company must pay a royalty of 1.35% on the Company's future sales of certain NMR imaging apparatus through January 31, 1995 in the United States and April 17, 1996 in Canada. Royalty expense charged to operations for the years ended June 30, 1996, 1995 and 1994 approximated $15,000, $147,000 and $12,500, respectively. F-76 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 15 - COMMITMENTS AND CONTINGENCIES (Continued) The Company is self-insured with respect to substantially all insurable business risks except for insurance on certain equipment pledged as collateral for long-term debt. During the fiscal years ended June 30, 1996, 1995 and 1994, no material claims arose. NOTE 16 - OTHER INCOME (EXPENSE) AND SUPPLEMENTARY PROFIT AND LOSS DATA Other income (expense) consists of: For the Years Ended June 30, ----------------------------------------- 1996 1995 1994 ---------- ---------- ---------- Interest income $ 89,330 $ 89,905 $ 158,539 Other income (expense) 158,704 561,346 (122,117) Gain on settlement of various legal disputes and other claims 3,759,542 2,970,356 104,061 ---------- ----------- ----------- $4,007,576 $3,621,607 $ 140,483 ========== ========== ========== Maintenance and repair expenses totalled approximately $68,000, $67,000 and $133,000 for the years ended June 30, 1996, 1995 and 1994, respectively. Royalty expenses approximated $15,000, $147,000 and $12,500 for the years ended June 30, 1996, 1995 and 1994, respectively. Amortization of intangible assets was approximately $1,233,000, $1,431,000 and $1,372,000 for the years ended June 30, 1996, 1995 and 1994, respectively. F-77 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 16 - OTHER INCOME (EXPENSE) AND SUPPLEMENTARY PROFIT AND LOSS DATA (Continued) Results of operations for the fourth quarter of fiscal years 1996, 1995 and 1994 include the following charges or (credits) which are related primarily to prior quarters: 1996 1995 1994 ---------- ---------- --------- Interest income - related parties $ (451,920) $ (428,758) $(851,891) Re-evaluation of allowance for doubtful accounts 761,314 - 221,791 Additional accruals - - 228,950 Re-evaluation of inventories - 816,637 - Capitalization of patent and copyright costs - - (408,940) Capitalization of software development costs (Note 2) - 76,511 - Capitalization of prototype scanners - - (636,943) Gain on sale of investments to related parties - - 549,824 ---------- ---------- --------- $ 309,394 $ 464,390 $ (897,209) ========== =========== ========== NOTE 17 - SUPPLEMENTAL CASH FLOW INFORMATION During the years ended June 30, 1996, 1995 and 1994, the Company paid $668,956, $1,378,432 and $1,185,453 for interest, respectively. During the years ended June 30, 1996, 1995 and 1994, the Company paid $68,552, $12,867 and $31,573 for income taxes, respectively. F-78 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 17 - SUPPLEMENTAL CASH FLOW INFORMATION (Continued) Non-Cash Transactions --------------------- During the year ended June 30, 1996: a) Property and equipment with a book value of $411,347 was reclassified to inventory. b) Receivables under a lease agreement for an MRI scanner were acquired in exchange for common stock valued at $351,000. c) Advances for future legal fees of $475,000 were paid by the issuance of common stock. d) Common stock issued and options exercised in exchange for notes receivable from stockholders totaled $9,590,134. e) An obligation of $217,226 was accrued pursuant to special dividend rights of Class A non-voting preferred stock. During the year ended June 30, 1995: a) Common stock issued and options exercised in exchange for notes receivable from stockholders totalled $9,771,127. b) The purchase option under a sales-type lease of $962,185 was exercised in consideration of a note receivable of $454,000 and the assumption of debt of $311,934 and accrued interest and penalties of $196,251. c) Property and equipment with a book value of $100,926 was reclassified to inventory. d) Notes payable and accrued interest totalling $446,959 were repaid by the issuance of common stock. e) Inventory purchased for resale of $149,813 was financed under a capital lease. f) Long-term debt of $224,657 and accrued interest of $125,343 were assumed by an affiliate. F-79 FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 17 - SUPPLEMENTAL CASH FLOW INFORMATION (Continued) During the year ended June 30, 1994: a) Common stock issued and options exercised in exchange for notes receivable from stockholders totalled $8,585,862. b) Net patent and deferred legal costs of $1,150,000 were reclassed to prepaid expenses and other current assets. c) Purchase options under three sales-type leases aggregating $3,556,941 were exercised in consideration of notes receivable aggregating $1,754,870 and assumption of debt aggregating $1,802,121. d) Accrued interest payable of $100,705 was converted to long-term debt. e) Income taxes approximating $188,000 were reclassified to "Other current liabilities". Such taxes were aggregated under a deferred payment agreement with certain payroll taxes that are in arrears. F-80 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 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. Officers serve at the discretion of the Board of Directors. The officers and directors of the Company are set forth below: Raymond V. Damadian, M.D. 60 President, Chairman of the Board and a Director Luciano B. Bonanni 41 Executive Vice President Timothy R. Damadian 32 Vice President of Operations David B. Terry 49 Secretary and Treasurer Claudette J.V. Chan 59 Director Robert J. Janoff 69 Director Herbert Maisel 52 Director Raymond V. Damadian, M.D. has been the Chairman of the Board and President of FONAR since its inception. Dr. Damadian was employed by the State University of New York, Downstate Medical Center, New York, as an Associate Professor of Biophysics from 1967 until September 1979. Dr. Damadian received an M.D. degree in 1960 from Albert Einstein College of Medicine, New York, and a B.S. degree in mathematics from the University of Wisconsin in 1956. In addition, Dr. Damadian conducted post-graduate work at Harvard University, where he studied extensively in the fields of physics, mathematics and electronics. Dr. Damadian is the author of numerous articles and books ON the nuclear magnetic resonance effect in human tissue, which is the theoretical basis for the FONAR MRI scanners. Dr. Damadian is a 1988 recipient of the National Medal of Technology and in 1989 was inducted into the National Inventors Hall of Fame, for his contributions in conceiving and developing the application of magnetic resonance technology to medical applications including whole body scanning and diagnostic imaging. Luciano B. Bonanni has been a Vice President of FONAR since 1981. Mr. Bonanni was an Electrical Engineer with the Aviation Systems Group of Cardion Electronics (a subsidiary of General Signal Corp.) for approximately two years before joining FONAR in April 1979. He received his bachelor of science degree in electrical engineering from Manhattan College in 1977. Timothy R. Damadian has been a Vice President of FONAR since July 1992. Mr. Damadian served as a field service technician for FONAR, after graduating from Suburban Technical School in 1982, where he studied digital computer technology. Mr. Damadian became Director of Manufacturing in October 1989 and was promoted to Vice President of Operations in July 1992. Timothy Damadian is the son of Raymond V. Damadian and nephew of David Terry and Claudette Chan. David B. Terry is the Secretary and Treasurer of the Company. Mr. Terry has been serving as Secretary and Treasurer since May 1990, and previously served as Secretary from July 1978 through June 1987 and as Treasurer from August 1981 through June 1987. From July 1978 through June 1987, he was also a Director of the Company. Between July 1987 and January 1990, Mr. Terry was a co-owner and actively engaged in the business of Carman-Terry Realty, a real estate broker age firm. In January 1990, Mr. Terry resumed his employment with the Company. Mr. Terry is the brother-in-law of Raymond V. Damadian and uncle of Timothy R. Damadian. Claudette J.V. Chan has been a Director of FONAR since October 1987. Mrs. Chan has been employed since 1992 by Raymond V. Damadian, M.D. MR Scanning Centers Management Company as "site inspector," in which capacity she is responsible for supervising and implementing standard procedures and policies for MRI scanning centers. From 1989 to 1994 Mrs. Chan was employed by St. Matthew's and St. Timothy's Neighborhood Center, Inc., as the director of volunteers in the "Meals on Wheels" program, a program which cares for the elderly. In approximately 1983, Mrs. Chan formed the Claudette Penot Collection, a retail mail-order business specializing in women's apparel and gifts, of which she was the President until she stopped operating the business in approximately 1989. Mrs. Chan practiced and taught in the field of nursing until 1973, when her son was born. She received a bachelor of science degree in nursing from Cornell University in 1960. Mrs. Chan is the sister of Raymond V. Damadian and aunt of Timothy R. Damadian. Robert J. Janoff has been a Director of FONAR since February, 1989. Mr. Janoff has been a self-employed New York State licensed private investigator for more than thirty-five years and has been a Senior Adjustor in Empire Insurance Group for more than 15 years. Mr. Janoff also served, from June 1985 to June 1991, as President of Action Data Management Strategies, Ltd., a supplier of computer pro grams 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. Herbert Maisel has been a Director of FONAR since February, 1989. Mr. Maisel has been the manager of Melville MRI, P.C., an MRI scanning center located in Melville, New York, since January, 1992, and of Damadian MRI in Garden City, P.C., an MRI scanning center located in Garden City, New York since April, 1995. Mr. Maisel was also manager of Damadian MRI in Islandia, P.C. from December, 1993 to March, 1995. Prior to that time Mr. Maisel had been the President and owner of Bagel World, Inc., a bagel bakery, from March 1984 to January 1992. Prior thereto, Mr. Maisel served as a supervisor of a commercial printing plant. ITEM 11. EXECUTIVE COMPENSATION. With the exception of the Chief Executive Officer, the compensation of the Company's executive officers is based on a combination of salary and bonuses based on performance. The Chief Executive Officer's compensation consists only of a salary which has remained constant for more than the past three fiscal years. The Board of Directors does not have a compensation committee. Dr. Raymond V. Damadian, President, Chief Executive Officer and Chairman of the Board, is the only executive officer who is a member of the Board of Directors. Dr. Damadian participates in the determination of executive compensation for the Company's officers. There is set forth in the following Summary Compensation Table the compensation provided by the Company during fiscal 1996 to its Chief Executive Officer and executive officer whose salary and bonus were equal to at least $100,000, and there is set forth in the following Option Grant Table and Option Exercise Table the stock options granted and exercised by those individuals during fiscal 1996. I. SUMMARY COMPENSATION TABLE
| | | Long Term Compensation | -------------------------------------- Annual Compensation | Awards | Payouts | - ----------------------------------------------------------------------------------------------- | | | (a) (b) (c) (d) (e) | (f) (g) | (h) | (i) Name Other | | | and Annual | Restricted | | All Other Principal Compen- | Stock Options | LTIP | Compen- Position Salary Bonus sation | Award(s) SARs | Payouts | sation 2 Year ($) ($) ($) | ($) (#) | ($) | ($) - --------------------------------------------------------------------------------------------------------------- | | | Raymond V. 1996 $86,799.95 - - | - - | - | - Damadian, 1995 $86,679.94 - - | - - | - | - President & 1994 $86,799.94 - - | - - | - | - CEO | | | | | | Luciano B. 1996 $99,999.64 $36,643.84 - | - - | - | - Bonanni, 1995 $99,999.59 $39,259.89 - | - 35,000 | - | - Executive 1994 $99,999.64 $11,827.75 - | - - | - | - Vice President | | | | | |
II. OPTION/SAR GRANTS IN LAST FISCAL YEAR
Potential Realizable Value at Assumed Annual Rates of Alternative Stock Price to (f) and Appreciation for (g): Grant Individual Grants Option Term Date Value _____________________________________________________________________________________________________________ (a) (b) (c) (d) (e) (f) (g) (f) % of Total Options/ SARs Options/ Granted to SARs Employees Excercise or Grant Date Granted in Fiscal Base Price Expiration Present Name (#) Year ($/Sh) Date 5% ($) 10% ($) Value $ _________ _________ _________ _________ _________ _________ _________ _________ Raymond V. Damadian, 0 - - - - - - President & CEO Luciano B. Bonanni, 0 - - - - - - Executive Vice President
III. OPTION/SAR EXERCISES AND YEAR-END VALUE TABLE Aggregated Options/SAR Exercises in Last Fiscal Year, amd 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 Luciano B. 12,500 $0 0 - Bonanni, Executive Vice President
EMPLOYEE COMPENSATION PLANS The Company's 1986 Nonstatutory Stock Option Plan, adopted on January 17, 1986, permitted the issuance of stock options covering an aggregate of 1,250,000 shares of Common Stock. The 1986 Nonstatutory Stock Option plan terminated on January 16, 1996. The Company's 1986 Incentive Stock Option Plan, adopted on January 17, 1986, permitted the issuance of stock options covering an aggregate of 1,250,000 shares of Common Stock. The Plan was intended to qualify as an incentive stock option plan under Section 422A of the Internal Revenue Code of 1954, as amended. The 1986 Incentive Stock Option Plan terminated on January 16, 1996. The Company's 1993 Incentive Stock Option Plan, adopted on March 26, 1993, is intended to qualify as an incentive stock option plan under Section 422A of the Internal Revenue Code of 1954, as amended. The 1993 Incentive Stock Option Plan permits the issuance of stock options covering an aggregate of 1,500,000 shares of Common Stock. The options have an exercise price equal to the fair market value of the underlying stock on the date the option is granted, are nontransferrable, are exercisable for a period not exceeding ten years and expire upon the voluntary termination of employment. The 1993 Stock Option Plan will terminate on March 25, 2003. As of June 30, 1996, options to purchase 1,108,000 shares of Common Stock were available for future grant under the plan. The 1994 Stock Bonus Plan, adopted on December 1, 1993, permitted the Company to issue an aggregate of 5,000,000 shares of Common Stock as a bonus or compensation. As of June 30, 1996, no shares of Common Stock were available for future grant. The Company's 1995 Nonstatutory Stock Option Plan, adopted on April 1, 1995, permits the issuance of stock options covering a aggregate of 5,000,000 shares of Common Stock. The options may be issued at such price and upon such terms and conditions as are determined by the Company. The 1995 Nonstatutory Stock Option Plan will terminate on March 31, 2005. As of June 30, 1996, options to purchase 1,900,000 shares of Common Stock were available for future grant. The Company's 1995 Stock Bonus Plan, adopted on April 1, 1995, permits the Company to issue an aggregate of 5,000,000 shares of Common Stock as a bonus or compensation. The Company selects the persons to whom bonus stock will be issued, the number of shares awarded and such other terms and conditions as it deems advisable. The 1995 Stock Bonus Plan will terminate on March 31, 2005. As of June 30, 1996, 3,823,004 shares of Common Stock were available for future grant. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth the number and percentage of shares of the Company's securities held by each director, by each person known by the Company to own in excess of five percent of the Company's voting securities and by all officers and directors as a group as of September 3, 1996. 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 2,381,638 5.45% Class C Stock 9,561,174 99.98% Class A Preferred 477,328 6.08% Claudette Chan Director Common Stock 4,000 * Class A Preferred 800 * Robert J. Janoff Director Common Stock (2) 25,000 * Class A Preferred 2,000 * Herbert Maisel Director Common Stock (3) 100 * Class A Preferred 20 * Luciano Bonanni Executive Vice President Common Stock 166,911 * Class A Preferred 32,132 * All Officers and Directors as a Group (7 persons) (2)(3) (4) Common Stock 2,629,983 6.02% Class C Stock 9,561,174 99.98% Class A Preferred 524,747 6.68% ___________________________ * Less than one percent 1. Address provided for each beneficial owner owning more than five percent of the voting securities of the Company. 2. Includes presently exercisable options to purchase 15,000 shares of the Company's Common Stock. 3. Includes 50 shares of the Company's Common Stock and 10 shares of the Company's Class A Non-voting Preferred Stock which are held in the name of Mr. Maisel as trustee for his minor daughter and 50 shares of the Company's Common Stock and 10 shares of the Company's Class A Non-voting Preferred Stock which are held by Mr. Maisel's wife. 4. Includes 96 shares of the Company's Common Stock and 19 shares of the Company's Class A Non-voting Preferred Stock held by an officer jointly with his wife and 188 shares of the Company's Common Stock and 38 shares of the Company's Class A Non-voting Preferred Stock held in trust by an officer for his children. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. On April 7, 1989, at a time when the Company lacked both the financing and working capital to establish its own centers, Donna Damadian, the wife of Raymond V. Damadian, M.D., Chairman of the Company, purchased from FONAR a scanner for a purchase price of $1,508,000 (the price paid by FONAR's customers for like equipment). $1.2 million was paid in cash, providing a much needed cash infusion for the Company, and the balance was paid over time with interest pursuant to a promissory note of even date. The scanner is being leased to Macon Magnetic Resonance Imaging, P.C. ("Macon Center"), a Georgia professional corporation wholly-owned by, and of which Dr. Damadian is, the President. Since May, 1990, Raymond V. Damadian M.D., MR Scanning Centers Management Company, a Delaware corporation of which Raymond V. Damadian is the sole shareholder, director and President ("RVDC"), has been party to a service agreement with the Company for the servicing of the scanner at the Macon Center. The term of the current one-year service agreement runs from April, 1996 to April, 1997 and the current annual price is $123,760. The current annual price was also in effect during the prior year from April, 1995 to April, 1996. By agreement dated June 27, 1990, Tallahassee Magnetic Resonance Imaging, P.A., a Florida corporation of which Raymond V. Damadian is the sole shareholder, director and President ("TMRI"), agreed to support the Company's financial obligations to one of its secured lenders by agreeing to be the lessee of one of its mobile scanners for a period of five years, subject to the superior rights of the Company's secured lender. Effective June 30, 1991, the lease arrangements were restructured to provide for a five year term, commencing June 30, 1991, and the monthly payment was fixed at $43,217, eliminating the previous per scan fee (with a minimum monthly payment of $43,200). In addition, since service and maintenance for the scanner is not included under the new lease, TMRI has been party to a standard service agreement with the Company for the scanner since June 30, 1991. The annual price is currently $120,000, and the term of the current one-year service agreement runs from June 30, 1996 to June 29, 1997. The current annual price was also in effect during the prior year from June 30, 1995 to June 29, 1996. In addition, in fiscal years 1990 and 1992, RVDC leased four MRI scanners previously leased by the Company to unrelated parties, where the original lessees had defaulted or were unwilling to continue to perform. RVDC thereby preserved the leases for the Company and prevented the Company from defaulting with the lender. The following is a description of these transactions. By agreement dated April 1, 1990, RVDC agreed to assume the financial and other obligations of the original lessee under a lease for a mobile scanner dated June 29, 1988, on the same terms and conditions as the original lessee. Effective June 30, 1991, the lease arrangements were restructured to provide for a five year term, commencing June 30, 1991. RVDC in turn provided the use of the scanner to Albany Magnetic Imaging Center, P.C., a Georgia professional corporation of which Raymond V. Damadian is the sole stockholder, director and President ("Albany Center"). Effective December 1, 1993, RVDC assigned its purchase option under the lease to the Albany Center, and the Albany Center concurrently exercised the option and purchased the scanner from the Company for a purchase price of $1,128,844. Of the purchase price, $574,077 was paid by the assumption and payment of the Company's indebtedness to the lender secured by the scanner. Such indebtedness to the lender was retired pursuant to a new equipment finance lease between the lender and the Albany Center, guaranteed by the Company, providing for 18 monthly payments of $35,000 each. Following payment of the lease, the remaining $554,767 of the purchase price due to the Company is required to be paid pursuant to a promissory note, with interest at 10% per annum, over an 18 month term (17 payments of $35,000 each and one final payment of $2,454.08). Effective December 1, 1993, the Albany Center also assumed RVDC's service agreement for the scanner for the balance of the contract year. The term of the current one-year service contract runs from June 30, 1996 to June 29, 1997 at the annual price of $120,522, compared to $122,256 for the prior year. Pursuant to an agreement dated March 7, 1990, RVDC agreed to assume the financial and other obligations of the original lessee under a lease for a mobile scanner dated December 13, 1988, on the same terms and conditions as the original lessee. Effective June 30, 1991, the lease arrangements were restructured to provide for a five year term commencing June 30, 1991, and the monthly payment was fixed at $42,387. In addition, RVDC has been party to a service agreement with the Company for the scanner since June 30, 1991. The annual price for the current one-year period, from June 30, 1996 to June 29, 1997, is $105,000, the same as in the prior year. RVDC in turn has provided the use of the scanner to Central Island MRI, P.C., a New York professional corporation of which Raymond V. Damadian is the sole shareholder, director and President ("Staten Island Center"). By agreement dated March 7, 1990, RVDC agreed to assume the financial and other obligations of the original lessee under a lease for a mobile scanner dated August 16, 1988, on the same terms and conditions as the original lessee. Effective June 30, 1991, the lease arrangements were restructured to provide for a five year term, commencing June 30, 1991. RVDC in turn provided the use of the scanner to Deerfield Magnetic Resonance Imaging P.A., a Florida professional association, of which Raymond V. Damadian is the sole shareholder, director and President ("Deerfield Center"). In July 1994, the lease between FONAR and RVDC was terminated, and the Deerfield Center concurrently purchased the scanner from the Company by assuming the Company's indebtedness to the lender secured by the scanner in the amount of $508,180.07, was paid pursuant to a note, guaranteed by the Company, with interest at 10% per annum over a period of 18 months. In connection with assuming the debt to the lender, the Deerfield Center assumed the remaining outstanding lease obligation of RVDC to the Company respecting the scanner in the amount of $454,005.11. This amount is to be paid pursuant to a promissory note, bearing interest at the rate of 10% per annum, in 17 monthly installments (16 installments of $30,000 each and one installment of $7,274.79) commencing January 1, 1996. The Deerfield Center is also party to a service agreement with the Company for the period from June 30, 1996 to June 29, 1997 at a price of $120,000, the same price as was in effect during the two prior years. During fiscal 1992, RVDC agreed to assume the financial and other obligations of the original lessee under a lease for a mobile scanner dated June 30, 1989. The terms were restructured to provide for a monthly payment of $24,421.44 commencing April 1, 1992 and to extend the term of the lease seven years from that date. RVDC in turn provided the use of the scanner to Daytona Beach Magnetic Resonance Imaging, P.A., a Florida professional association of which Raymond V. Damadian is the sole shareholder, director and President ("Daytona Beach Center"). Effective December 1, 1993, RVDC assigned its purchase option under the lease to the Daytona Beach Center, and the Daytona Beach Center exercised the option and purchased the scanner from the Company for a purchase price of $1,416,717. Of the purchase price, $328,044 was paid by the assumption and payment of the Company's indebtedness to the lender secured by the scanner. Such indebtedness to the lender was retired pursuant to a new equipment finance lease between the lender and the Daytona Beach Center, guaranteed by the Company, providing for 18 monthly payments of $20,000 each. The remaining $1,088,673 of the purchase price due to the Company is required to be paid pursuant to a promissory note, with interest at 10% per annum, over a 45 month term commencing July 1, 1994 as follows: eleven installments of $15,000 each, thirty-three installments of $35,000 each and one installment of $19,097.26. The Daytona Beach Center currently is party to a service agreement with the Company for the scanner at an annual price of $105,105.60, the same price as was in effect during the prior two years. The term of the current one-year service agreement runs from May 6, 1996 to May 5, 1997. RVDC supported the Company's business by leasing two and agreeing to purchase four MRI scanners from the Company in fiscal 1992. By agreement dated September 30, 1991, RVDC agreed to lease one of the Company's mobile scanners for a term of five years. RVDC in turn provided the use of the scanner to Melville MRI, P.C., a New York professional corporation of which Raymond V. Damadian is the sole shareholder, director and President ("Melville Center"). Effective June 30, 1994, RVDC assigned its purchase option under the lease to the Melville Center, and the Melville Center concurrently exercised the option and purchased the scanner from the Company for a purchase price of $1,011,431.12. Of the purchase price, $900,000 is to be paid by the assumption and payment of the Company's indebtedness to the lender secured by the scanner pursuant to a note bearing interest at 14% per annum and providing for 60 monthly payments of $20,700 each. The remaining $111,431.12 of the purchase price is to be paid concurrently with the payments to the lender pursuant to a note, with interest at 10% per annum, providing for 60 monthly payment of $2,367.58 each. In addition the Melville Center is party to a service contract with the Company for the scanner, the annual fee for which has been $125,000 since December 15, 1993. The term of the current one-year service agreement runs from December 15, 1995 to December 14, 1996. Pursuant to an agreement dated December 31, 1991, RVDC agreed to lease one of the Company's scanners for a monthly lease payment of $18,081.92 for a period of seven years commencing April 1, 1992. RVDC in turn provided the use of the scanner to Damadian MRI at Astoria, P.C. (the "Astoria Center"), a New York professional corporation of which Raymond V. Damadian is the sole shareholder, director and President. Effective November 13, 1993, the lease between the Company and RVDC was terminated, and the scanner was leased directly by the Company to the Astoria Center pursuant to a new lease providing for 84 monthly payments of $16,978.43 each commencing February 1, 1994. In addition, the Astoria Center is party to a service agreement with the Company for the scanner, the fee for which is $105,000 for the period from October 27, 1996 to October 26, 1997, the same price as was in effect during the prior year. RVDC agreed to purchase four MRI scanners from the Company pursuant to sales agreements dated April 29, 1992, May 26, 1992, June 3, 1992 and June 18, 1992, for sites in Bayside (Queens County), Islandia (Suffolk County), Elmhurst (Queens County) and Forest Hills (Queens County), New York. Each of the four sales agreements provided for a purchase price of $1,000,000 payable in installments as follows: (1) 10% down payment within 30 days of execution, (2) 10% within 30 days of delivery of the magnet and shielded room and (3) 80% in 84 monthly installments of $12,468.97 each (inclusive of interest at 8% per annum) pursuant to a promissory note to be executed by RVDC upon acceptance of the scanner. Effective November 13, 1993, the sales agreement for the scanner to be utilized in Islandia, New York was terminated, and the Company instead leased the scanner to Damadian MRI at Islandia, P.C. (the "Islandia Center"), a New York professional corporation of which Raymond V. Damadian is the sole shareholder, director and President. The lease provides for monthly payments of $15,586.21 for a term of 84 months commencing February 1, 1994. In addition, the Islandia Center is party to a service agreement with the Company for the scanner, the fee for which is $105,000 for the period from December 6, 1995 to December 5, 1996, the same as in the prior year. The scanner purchased by RVDC for Bayside (Queens County), New York, is being provided to Bayside MRI, P.C. (the "Bayside Center"), a New York professional corporation of which Raymond V. Damadian is the sole stockholder, director and President, and the scanner purchased by RVDC for Elmhurst (Queens County), New York, is being provided to Elmhurst MRI, P.C. (the "Elmhurst Center"), a New York professional corporation of which Raymond V. Damadian is the sole stockholder, director and President. RVDC is party to a service agreement with the Company for the scanner being provided to the Bayside Center for the period January 11, 1996 to January 10, 1997 at a price of $105,000 and the Elmhurst Center is party to a service agreement with the Company for the Scanner being provided to the Elmhurst Center for the period December 14, 1995 to December 13, 1996 at a price of $105,000. The current annual prices were also in effect during the prior year. The scanner purchased by RVDC for Forest Hills (Queens County) is being provided to Damadian MRI at Forest Hills, P.C. (the "Forest Hills Center"), a New York professional corporation of which Raymond V. Damadian is the sole stockholder, director and President. Commencing on October 11, 1996, upon the expiration of the warranty for the scanner, RVDC will enter into a one-year service agreement for the scanner at a price of $105,000. In fiscal 1993, RVDC and its affiliates supported the Company and its objectives by leasing one MRI scanner, purchasing one MRI scanner and purchasing the Company's interest in three MRI scanning centers. Pursuant to an agreement dated December 31, 1992, RVDC agreed to lease from the Company a mobile scanner, which is in turn being leased to a third party in Bethesda, Maryland. The term of the lease is for 84 months, and the monthly lease payment of $15,586.21 (commencing January 1, 1993) is based on a principal amount of $1,000,000 amortized over 84 months with an interest rate of 8% per annum. The lease includes an option to RVDC to purchase the scanner. RVDC is party to a service agreement with the Company for the scanner, the annual rate for which was $120,000 for the period from June 22, 1995 to June 21, 1996 and is $120,000 for the period from June 22, 1996 to June 21, 1997. Pursuant to an agreement dated March 31, 1993, RVDC agreed to purchase the Company's general partnership interest (approximately 92% of the partnership) in a partnership owning and operating an MRI scanning center in Bensonhurst (Brooklyn), New York ("the "Bensonhurst Center"). The purchase price of $923,000 is payable in 84 equal monthly installments of $14,386.07 each commencing May 1, 1993, which amount includes principal and interest at the rate of 8% per annum amortized over the term. The partnership is also party to a service agreement with the Company. The current annual rate is $105,000 for the one year service contract from May 18, 1996 to May 17, 1997. The current annual price was also in effect during the prior year from May 18, 1995 to May 17, 1996. Pursuant to a sales agreement dated June 30, 1993 RVDC agreed to purchase an MRI scanner from the Company which RVDC is planning to utilize at a site located in Coral Gables, Florida (the "Coral Gables Center"). The sales agreement provides for a purchase price of $1,000,000 payable in installments as follows: (1) 10% down payment within 30 days of execution, (2) 10% within 30 days of delivery of the magnet and shielded room, and (3) 80% in 84 monthly installments of $12,468.97 each (inclusive of interest at 8% per annum) pursuant to a promissory note to be executed by RVDC upon acceptance of the Scanner. Pursuant to an agreement dated April 6, 1993, First Coast Magnetic Resonance Imaging, P.A., ("First Coast") a professional association of which Dr. Damadian is the stockholder, director and President, purchased the Company's partnership/joint venture interests in two MRI scanning centers in Florida (one in Jacksonville and one in Fort Meyers) for a purchase price of $3,200,000. The agreement provided for payment of the purchase price as follows: $200,000 no later than June 30, 1993 and the balance in (a) 36 equal monthly installments of principal and interest (8% per annum) in the amount of $46,758.64 each and (b) one final 37th installment of principal in the amount of $1,915,323.60. The centers are parties to service agreements with the Company with prices as follows: Jacksonville: $105,416 for each of the periods from February 15, 1994 to February 14, 1995, May 18, 1995 to May 17, 1996 and May 18, 1996 to May 17, 1997; Fort Myers $100,000 for the period from August 10, 1994 to August 9, 1995 and $65,000 for each of the periods from July 19, 1995 to July 18, 1996 and July 19, 1996 to July 18, 1997. In fiscal 1994, RVDC and its affiliates supported the Company and its objectives by agreeing to purchase five MRI scanners and the interests of a subsidiary of the Company in four limited partnerships. Pursuant to a sales agreement dated February 3, 1994 and amended April 1, 1994, RVDC agreed to purchase an MRI scanner from the Company which RVDC is planning to utilize at a site located in Manhattan, New York (the "West Side Center"). The sales agreement provides for a purchase price of $800,000 payable in installments as follows: (1) $100,000 down payment within 30 days of execution, and (2) $700,000 in 84 monthly installments, commencing January 1, 1995, of $11,346.73 each (inclusive of interest at 8% per annum) pursuant to a promissory note. Pursuant to a sales agreement dated March 31, 1994, RVDC agreed to purchase an MRI scanner from the Company which RVDC is planning to utilize at a site located in Israel (the "Israel Center"). The sales agreement provides for a purchase price of $1,000,000 payable in 84 monthly installments, commencing January 1, 1995, of $16,209.66 each (inclusive of interest at 8% per annum) pursuant to a promissory note. Pursuant to a sales agreement dated April 1, 1994, RVDC agreed to purchase an MRI scanner from the Company which RVDC is planning to utilize at a site located in Cape Coral, Florida (the "Cape Coral Center"). The sales agreement provides for a purchase price of $1,000,000 payable in installments as follows: (1) $100,000 down payment within 30 days of execution, and (2) $900,000 in 84 monthly installments of $14,027.59 each (inclusive of interest at 8% per annum) pursuant to a promissory note to be executed by RVDC upon acceptance of the scanner. Pursuant to a sales agreement dated May 18, 1994, RVDC agreed to purchase an MRI scanner from the Company which RVDC is planning to utilize at a site located in Orlando, Florida (the "Orlando Center"). The sales agreement provides for a purchase price of $1,000,000 payable in installments as follows: (1) $100,000 within 30 days of execution, and (2) $900,000 in 84 monthly installments of $14,027.59 each (inclusive of interest at 8% per annum) pursuant to a promissory note to be executed by RVDC upon acceptance of the scanner. Pursuant to an agreement dated March 31, 1994, the Company sold an MRI scanner to Ellwood City MRI Center Limited Partnership, a Pennsylvania limited partnership of which RVDC is the general partner. The sales agreement provided for a purchase price of $400,000, the first $200,000 of which was paid subsequent to the fiscal year end and the second $200,000 of which will be paid by the transfer of RVDC's distributions until the sum of $200,000 is reached. The partnership is utilizing the scanner to set up an MRI scanning center in Ellwood City, Pennsylvania. Pursuant to an agreement dated September 30, 1993, Advanced Medical Diagnostics Corporation ("AMD"), a subsidiary of FONAR, sold its interests in a partnership operating an MRI scanning center in Southfield Michigan to RVDC for $600,000. The purchase price is pay able with interest at 10% per annum, over a period of 48 months commencing October 1, 1993 as follows: $2,000 per month for the first year, $8,333.33 per month for the second year, $16,666.67 per month for the third year and $20,909.91 for the fourth and fifth years. The partnership is party to a service agreement for the scanner at a cur rent annual fee of $144,000, for the period January 29, 1996 to January 28, 1997. For the two prior years, the fee also was $144,000. Pursuant to an agreement dated September 30, 1993, AMD sold its interests in a partnership operating an MRI scanning center in Melbourne, Florida to Melbourne Magnetic Resonance Imaging, P.A. (the "Melbourne Center"), for a purchase price of $150,000. The purchase price is payable, with interest at 10% per annum, over a period of fifteen months commencing September 1, 1995 as follows: $13,500 per month for the first fourteen months and $1,185.60 for the fifteenth month. The Melbourne Center is a Florida professional corporation of which Raymond V. Damadian is the sole stockholder, director and President. The partnership has been party to a service agreement for the scanner at an annual fee of $108,200 for the periods from May 19, 1994 to May 18, 1995 and May 19, 1995 to May 18, 1996. Pursuant to an agreement dated September 30, 1993, AMD sold to Dade County MRI, P.A. (the "Dade County Center") its interests in a partnership which had formerly operated an MRI scanning center in Miami, Florida. The purchase price of $100,000 is payable, with interest at 10% per annum, in sixty (60) equal consecutive monthly installments of principal and interest (including interest accrued from September 30, 1993), commencing 90 days after the scanner is placed in service. The Dade County Center is a Florida professional association of which Raymond V. Damadian is the sole stockholder, director and President. Pursuant to an agreement dated December 31, 1993, AMD sold its interests in a partnership operating an MRI scanning center in San Francisco to RVDC. The purchase price of $265,000 is payable, with interest at 10% per annum, at the rate of $9,405.88 per month over a period of 36 months commencing January 1, 1995. The partnership was party to a service agreement with the Company for the scanner at an annual fee of $110,384 from March 20, 1994 to March 19, 1996. The partnership is presently inactive. Pursuant to an agreement dated December 31, 1993, AMD sold its interest in a joint venture operating an MRI scanning center in Philadelphia, Pennsylvania to Liberty MRI, P.C. (the "Liberty Center"). The purchase price of $400,000 is payable, with interest at 10% per annum, at a rate of $9,348.70 per month over a period of 60 months commencing January 1, 1995. The Liberty Center is a Pennsylvania professional corporation of which Raymond V. Damadian is the sole stockholder, director and President. The Liberty Center was party to a service agreement with the Company for the scanner at an annual fee of $102,700 from November 2, 1993 to November 1, 1995. The current service agreement runs from November 2, 1995 to November 1, 1996 at an annual fee of $108,426. West Palm Beach MRI, P.A. (the "West Palm Beach Center"), a Florida professional association of which Raymond V. Damadian is the sole stockholder, director and President, has been party to a service agreement with the Company for its scanner at an annual fee of $105,000 since March 1, 1994. In fiscal 1995, RVDC supported the Company and its objectives by agreeing to purchase seven MRI scanners. Pursuant to a sales agreement dated July 12, 1994, RVDC agreed to purchase an MRI scanner from the Company which RVDC is planning to utilize at a site located in Ft. Lauderdale, Florida (the "Ft. Lauderdale Center"). The sales agreement provides for a purchase price of $800,000 payable in installments as follows: (1) $80,000 down payment within 30 days of execution and (2) $720,000 in 84 monthly installments of $11,222.07 each (inclusive of interest at 8% per annum) pursuant to a promissory note to be executed by RVDC upon acceptance of the scanner. Pursuant to a sales agreement dated July 12, 1994, RVDC agreed to purchase an MRI scanner from the Company which RVDC is planning to utilize at a site located in Leeds, England (the "Leeds Center"). The sales agreement provides for a purchase price of $800,000 payable in installments as follows: (1) $80,000 down payment within 30 days of execution and (2) $720,000 in 84 monthly installments of $11,222.07 each (inclusive of interest at 8% per annum) pursuant to a promissory note to be executed by RVDC upon acceptance of the scanner. Pursuant to a sales agreement dated October 1, 1994, RVDC agreed to purchase an MRI scanner from the Company which RVDC is planning to utilize at a site located in St. Petersburg, Florida (the "St. Petersburg Center"). The sales agreement provides for a purchase price of $800,000 payable in installments as follows: (1) $80,000 down payment within 30 days of execution and (2) $720,000 in 84 monthly installments of $11,222.07 each (inclusive of interest at 8% per annum) pursuant to a promissory note to be executed by RVDC upon acceptance of the scanner. Pursuant to a sales agreement dated October 4, 1994, RVDC agreed to purchase an MRI scanner from the Company which RVDC is planning to utilize at a site located in Boca Raton, Florida (the "Boca Raton Center"). The sales agreement provides for a purchase price of $800,000 payable in installments as follows: (1) $80,000 down payment within 30 days of execution and (2) $720,000 in 84 monthly installments of $11,222.07 each (inclusive of interest at 8% per annum) pursuant to a promissory note to be executed by RVDC upon acceptance of the scanner. Pursuant to a sales agreement dated November 25, 1994, RVDC agreed to purchase an MRI scanner from the Company which RVDC is planning to utilize at a site located in Birmingham, England (the "Birmingham Center"). The sales agreement provides for a purchase price of $800,000 payable in installments as follows: (1) $80,000 down payment within 30 days of execution and (2) $720,000 in 84 monthly installments of $11,222.07 each (inclusive of interest at 8% per annum) pursuant to a promissory note to be executed by RVDC upon acceptance of the scanner. Pursuant to a sales agreement dated January 4, 1995, RVDC agreed to purchase an MRI scanner from the Company which RVDC is planning to utilize at a site located in Sarasota, Florida (the "Sarasota Center"). The sales agreement provides for a purchase price of $800,000 payable in installments as follows: (1) $80,000 down payment within 30 days of execution and (2) $720,000 in 84 monthly installments of $11,222.07 each (inclusive of interest at 8% per annum) pursuant to a promissory note to be executed by RVDC upon acceptance of the scanner. Pursuant to a sales agreement dated January 16, 1995, RVDC agreed to purchase an MRI scanner from the Company which RVDC is planning to utilize at a site located in Largo, Florida (the "Largo II Center"). The sales agreement provides for a purchase price of $800,000 payable in installments as follows: (1) $80,000 down payment within 30 days of execution and (2) $720,000 in 84 monthly installments of $11,222.07 each (inclusive of interest at 8% per annum) pursuant to a promissory note to be executed by RVDC upon acceptance of the scanner. Pursuant to an agreement dated April 1, 1995, RVDC assigned its right to purchase an MRI scanner from a third party for $85,000 and FONAR assumed the obligations of RVDC under the agreement. RVDC also sold FONAR an MRI machine for $23,000 pursuant to an agreement dated April 1, 1995. Damadian MRI in Largo, P.A. (the "Largo I Center"), a Florida professional association of which Raymond V. Damadian is the sole stockholder, director and President, was party to a service agreement with the Company for its scanner at an annual fee of $120,000 for the period from October 15, 1994 to October 14, 1995. For the period from October 15, 1995 through May 23, 1996, the charge for service was $66,500. The Largo I Center closed on May 23, 1996. In fiscal 1996, RVDC supported the Company and its objectives by agreeing to purchase nine MRI scanners. Pursuant to a sales agreement dated July 6, 1995, RVDC agreed to purchase an MRI scanner from the Company which RVDC is planning to utilize at a site located in Panama City, Florida (the "Panama City Center"). The sales agreement provides for a purchase price of $590,000 payable in installments as follows: (1) $59,000 down payment within 30 days of execution and (2) $531,000 in 84 monthly installments of $8,276.28 each (inclusive of interest at 8% per annum) pursuant to a promissory note to be executed by RVDC upon acceptance of the scanner. Pursuant to a sales agreement dated August 4, 1995, RVDC agreed to purchase an MRI scanner from the Company which RVDC is planning to utilize at a site located in Gainesville, Florida (the "Gainesville Center"). The sales agreement provides for a purchase price of $450,000 payable in installments as follows: (1) $45,000 down payment within 30 days of execution and (2) $405,000 in 84 monthly installments of $6,312.42 each (inclusive of interest at 8% per annum) pursuant to a promissory note to be executed by RVDC upon acceptance of the scanner. Pursuant to a sales agreement dated August 4, 1995, RVDC agreed to purchase an MRI scanner from the Company which RVDC is planning to utilize at a site located in Newark, New Jersey (the "Newark Center"). The sales agreement provides for a purchase price of $590,000 payable in installments as follows: (1) $59,000 down payment within 30 days of execution and (2) $531,000 in 84 monthly installments of $8,276.28 each (inclusive of interest at 8% per annum) pursuant to a promissory note to be executed by RVDC upon acceptance of the scanner. Pursuant to a sales agreement dated September 20, 1995, RVDC agreed to purchase an MRI scanner from the Company which RVDC is planning to utilize at a site located in Patterson, New Jersey (the "Patterson Center"). The sales agreement provides for a purchase price of $450,000 payable in installments as follows: (1) $45,000 down payment within 30 days of execution and (2) $405,000 in 84 monthly installments of $6,312.42 each (inclusive of interest at 8% per annum) pursuant to a promissory note to be executed by RVDC upon acceptance of the scanner. Pursuant to a sales agreement dated October 4, 1995, RVDC agreed to purchase an MRI scanner from the Company which RVDC is planning to utilize at a site located in Atlanta, Georgia (the "Atlanta Center"). The sales agreement provides for a purchase price of $450,000 payable in installments as follows: (1) $45,000 down payment within 30 days of execution and (2) $405,000 in 84 monthly installments of $6,312.42 each (inclusive of interest at 8% per annum) pursuant to a promissory note to be executed by RVDC upon acceptance of the scanner. Pursuant to a sales agreement dated October 4, 1995, RVDC agreed to purchase an MRI scanner from the Company which RVDC is planning to utilize at a site located in Trenton, New Jersey (the "Trenton Center"). The sales agreement provides for a purchase price of $450,000 payable in installments as follows: (1) $45,000 down payment within 30 days of execution and (2) $405,000 in 84 monthly installments of $6,312.42 each (inclusive of interest at 8% per annum) pursuant to a promissory note to be executed by RVDC upon acceptance of the scanner. Pursuant to a sales agreement dated October 24, 1995, RVDC agreed to purchase an MRI scanner from the Company which RVDC is planning to utilize at a site located in Naples, Florida (the "Naples Center"). The sales agreement provides for a purchase price of $450,000 payable in installments as follows: (1) $45,000 down payment within 30 days of execution and (2) $405,000 in 84 monthly installments of $6,312.42 each (inclusive of interest at 8% per annum) pursuant to a promissory note to be executed by RVDC upon acceptance of the scanner. Pursuant to a sales agreement dated January 19, 1996, RVDC agreed to purchase an MRI scanner from the Company which RVDC is planning to utilize at a site located in Savannah, Georgia (the "Savannah Center"). The sales agreement provides for a purchase price of $450,000 payable in installments as follows: (1) $45,000 down payment within 30 days of execution and (2) $405,000 in 84 monthly installments of $6,312.42 each (inclusive of interest at 8% per annum) pursuant to a promissory note to be executed by RVDC upon acceptance of the scanner. Pursuant to a sales agreement dated February 7, 1996, RVDC agreed to purchase an MRI scanner from the Company which RVDC is planning to utilize at a site located in Buffalo, New York (the "Buffalo Center"). The sales agreement provides for a purchase price of $450,000 payable in installments as follows: (1) $45,000 down payment within 30 days of execution and (2) $405,000 in 84 monthly installments of $6,312.42 each (inclusive of interest at 8% per annum) pursuant to a promissory note to be executed by RVDC upon acceptance of the scanner. Pursuant to a sales agreement dated April 1, 1996, RVDC agreed to purchase an MRI scanner with certain upgrades from the Company which RVDC has contributed to Orlando MRI Associates, Limited Partnership (the "Orlando Partnership"), a limited partnership in which RVDC is the general partner. The Orlando Partnership is utilizing the scanner at a site located in Orlando, Florida. The sales agreement provides for a purchase price of $400,000 payable in installments as follows: (1) $40,000 down payment within thirty (30) days of execution and (2) $360,000 in 84 monthly installments of $5,611.04 each (inclusive of interest at 8% per annum) pursuant to a promissory note executed by RVDC upon acceptance of the scanner. Commencing October 8, 1996, the Orlando Partnership will enter into a service agreement for the scanner with the Company at an annual fee of $70,000, which fee will remain in effect for five years. As at June 30, 1996, the Orlando Partnership was indebted to the Company in the amount of $21,063. Timothy Damadian, a Vice President of the Company, is a limited partner in Orlando. For the year ended June 30, 1996 total receipts by the Company from RVDC and its affiliates were $4,287,067, as compared to receipts of $4,013,100 in fiscal 1995 and receipts of $4,913,968 in fiscal 1994. RVDC executed and delivered to the Company a promissory note, dated June 30, 1992 in the principal amount of $4,284,692 with interest thereon at the rate of 10% per annum, payable in quarterly installments of interest only during the first year and thereafter, amortized over a five-year period. The note represented the indebtedness of RVDC to the Company incurred during fiscal 1992 for lease payments, service contract fees, management fees and reimbursable expenses and incorporated and superseded the outstanding balance of the note to the Company from RVDC dated June 30, 1991 in the principal amount of $1,996,100 (which was amortized over five years with interest at 10%). The note is guaranteed by the Macon Center, Albany Center, Staten Island Center, Deerfield Center, Daytona Beach Center and Melville Center and is secured by certain assets of RVDC and the guarantors. These security interests are in certain cases subordinate to the security interests of unrelated lenders. TMRI executed and delivered to the Company a promissory note dated June 30, 1992 in the principal amount of $803,272, with interest thereon at the rate of 10% per annum, payable in quarterly installments of interest only during the first year and thereafter, amortized over a five year period. The note represents the indebtedness of TMRI to the Company during fiscal 1992 for lease payments, service contract fees and reimbursable expenses and incorporates and supersedes the outstanding balance of the note to the Company from TMRI dated June 30, 1991 in the principal amount of $169,200 (which was amortized over five years with interest at 10%). Pursuant to an agreement dated March 3, 1994, Network MRI, Inc. ("Network") engaged the Company to disassemble, transport and reinstall an MRI scanner purchased by Network from a third party. Luciano Bonanni, the Executive Vice President of the Company, is the President, director and shareholder of Network. The agreement provides for a price of $120,000 payable as follows: (1) $5,000 upon the giving of notice by Network to commence the deinstallation, (2) $15,000 upon the completion of the installation of the magnet and shielded room and (3) $100,000 in 36 monthly installments of $3,133.64 each (inclusive of interest at 8% per annum) pursuant to a note executed upon completion of the reinstallation. Pursuant to an agreement dated June 20, 1994, MRI Enterprises, Inc. ("Enterprises"), a New York corporation of which Luciano Bonanni is the stockholder, director and President, engaged the Company to disassemble, transport and reinstall an MRI scanner purchased by Enterprises from a third party. The agreement provided for a price of $120,000 payable as follows: (1) $5,000 upon the giving of notice by Enterprises to commence the deinstallation, (2) $15,000 upon the completion of the installation of the magnet and shielded room and (3) $100,000 with interest at 8% per annum pursuant to a note executed upon completion of the reinstallation. In addition, as of June 30, 1995, Enterprises assumed the liability of a third party to FONAR which had defaulted in its obligation to pay for service for an MRI scanner being provided by Enterprises to the third party. The liability, in the amount of $50,604.00 was assumed by Enterprises in exchange for FONAR assigning the account receivable to Enterprises. The liability is payable by Enterprises to FONAR amortized over a period of thirty-six months with interest at 8% per annum commencing on January 1, 1996. Enterprises was indebted to the Company as at June 30, 1996, in the amount of $204,539 pursuant to a promissory note in the original principal amount of $324,235 with interest at the rate of 10% per annum. The original principal amount of this note represents the liability of a third party to the Company for service and other items which was assumed by Enterprises in connection with Enterprises' acquisition of an MRI scanner and assumption of said party's finance lease covering the scanner. The aggregate indebtedness of Enterprises and Network to the Company as at June 30, 1996 was $419,068. Pursuant to an agreement dated August 3, 1993 MRI Special ties, Inc. ("Specialties") engaged the Company to deinstall, transport and reinstall an MRI scanner purchased from a third party. Timothy Damadian, a Vice President of the Company, is the stockholder, director and President of Specialities. The agreement provides for a price of $120,000 payable in 36 monthly installments of $3,760.36 each (inclusive of interest at 8% per annum) pursuant to a note executed and delivered by Specialties upon the completion of the reinstallation. The agreement also provides that the Company will provide a Four Post Canopy and Steel upgrade, Signal Plus Surface Coils and Whisper Gradients for the MRI scanner. The scanner is owned by Canarsie MRI Associates ("Canarsie"), a joint venture partnership of which Specialties is an owner, and Canarsie is party to a service agreement for the scanner with the Company at an annual fee of $70,000 for the period September 1, 1994 through August 31, 1995 and $73,500 for the period September 1, 1995 through August 31, 1996. The annual fee for the following two annual periods will not exceed $77,000 and $80,500, respectively. Pursuant to an agreement dated January 2, 1996, Guardian MRI, Inc. ("Guardian") engaged the Company to deinstall, transport and reinstall an MRI scanner purchased for Pompano MRI Associates ("Pompano") from a third party. Timothy Damadian, a Vice President of the Company, is a stockholder, director and officer of Guardian. Pompano is a joint venture partnership of which Guardian is an owner. The agreement provides for a price of $120,000 payable in 36 monthly installments of $3,760.36 each (inclusive of interest at 8% per annum) pursuant to a note executed and delivered by Guardian upon the completion of the reinstallation. The agreement also provides that the Company will provide a six month warranty for the scanner and a service agreement thereafter at an annual price of $70,000. In addition, the agreement provides that the Company will provide updated software, Signal Plus Surface Coils, Whisper Gradients and a Four Post Canopy and Steel upgrade for the scanner. As at June 30, 1996, the aggregate indebtedness of Specialties and Canarsie to the Company was $95,807 and the aggregate indebtedness of Guardian and Pompano to the Company was $124,929. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. a) FINANCIAL STATEMENTS AND SCHEDULES The following consolidated financial statements are included in Part II, Item 8. Report of Independent Certified Public Accountants. Consolidated Balance Sheets as at June 30, 1996 and 1995. Consolidated Statements of Operations for the Three Years Ended June 30, 1996, 1995 and 1994. Consolidated Statements of Stockholders' Equity for the Three Years Ended June 30, 1996, 1995 and 1994. Consolidated Statements of Cash Flows for the Three Years Ended June 30, 1996, 1995 and 1994. Notes to Consolidated Financial Statements. The following consolidated financial statement schedules are included in Item 14 (d). Supplementary Schedules Report of Independent Certified Public Accountants on Schedules. Information required by other schedules called for under Regulation S-X is either not applicable or is included in the consolidated financial statements or notes thereto. b) REPORTS ON FORM 8-K None. c) EXHIBITS 3.1 Certificate of Incorporation, as amended, of the Company incorporated herein by reference to Exhibit 3.1 to the Registrant's registration statement on Form S-1, Commission File No. 33-13365. 3.2 Article Fourth of the Certificate of Incorporation, as amended, of the Company incorporated by reference to Exhibit 4.1 to the Registrant's registration statement on Form S-8, Commission File No. 33-62099. 3.3 By-Laws, as amended, of the Company incorporated herein by reference to Exhibit 3.2 to the Registrant's registration statement on Form S-1, Commission File No. 33-13365. 4.1 Specimen Common Stock Certificate incorporated herein by reference to Exhibit 4.1 to the Registrant's registration statement on Form S-1, Commission File No. 33-13365. 4.2 Specimen Class B Common Stock Certificate incorporated herein by reference to Exhibit 4.2 to the Registrant's registration statement on Form S-1, Commission File No. 33-13365. 10.1 License Agreement between FONAR and Raymond V. Damadian incorporated herein by reference to Exhibit 10 (e) to Form 10-K for the fiscal year ended June 30, 1983, Commission File No. 0-10248. 10.2 1983 Nonstatutory Stock Option Plan incorporated herein by reference to Exhibit 10 (a) to Form 10-K for the fiscal year ended June 30, 1983, Commission File No. 0-10248, and amendments thereto dated as of March 7, 1984 and dated August 22, 1984, incorporated herein by referenced to Exhibit 28 (a) to Form 10-K for the year ended June 30, 1984, Commission File No. 0-10248. 10.3 1984 Incentive Stock Option Plan incorporated herein by reference to Exhibit 28 (c) to Form 10-K for the year ended June 30, 1984, Commission File No. 0-10248. 10.4 1986 Nonstatutory Stock Option Plan incorporated herein by reference to Exhibit 10.7 to Form 10-K for the fiscal year ended June 30, 1986, Commission File No. 0-10248. 10.5 1986 Stock Bonus Plan incorporated herein by reference to Exhibit 10.8 to Form 10-K for the fiscal year ended June 30, 1986, Commission File No. 0-10248. 10.6 1986 Incentive Stock Option Plan incorporated herein by reference to Exhibit 10.9 to Form 10-K for the fiscal year ended June 30, 1986, Commission File No. 0-10248. 10.7 Lease Agreement, dated as of August 18, 1987, between FONAR and Reckson Associates incorporated herein by reference to Exhibit 10.26 to Form 10-K for the fiscal year ended June 30, 1987, Commission File No. 0-10248. 10.8 1993 Incentive Stock Option Plan incorporated herein by reference to Exhibit 28.1 to the Registrant's registration statement on Form S-8, Commission File No. 33-60154. 10.9 1993 Non-Statutory Stock Option Plan incorporated herein by reference to Exhibit 28.2 to the Registrant's registration statement on Form S-8, Commission File No. 33-60154. 10.10 1993 Stock Bonus Plan incorporated herein by reference to Exhibit 28.3 to the Registrant's registration statement on Form S-8, Commission File No. 33-60154. 10.11 1994 Non-Statutory Stock Option Plan incorporated herein by reference to Exhibit 28.1 to the Registrant's registration statement on Form S-8, Commission File No. 33-81638. 10.12 1994 Stock Bonus Plan incorporated herein by reference to Exhibit 28.2 to the Registrant's registration statement on Form S-8, Commission File No. 33-81638. 10.13 1995 Non-Statutory Stock Option Plan incorporated herein by reference to Exhibit 28.1 to the Registrant's registration statement on Form S-8, Commission File No. 33-62099. 10.14 1995 Stock Bonus Plan incorporated herein by reference to Exhibit 28.2 to the Registrant's registration statement on Form S-8, Commission File No. 33-62099. 11. Statement Re Computation Of Per Share Earnings. See Exhibits. 22.1 Subsidiaries of the Registrant. Incorporated herein by reference to Exhibit 22.1 Form 10-K for the fiscal year ended June 30, 1989, Commission File No. 0-10248. d) FINANCIAL STATEMENT SCHEDULES [See pages S-1 through S-3] INDEPENDENT AUDITORS' REPORT ON SCHEDULES To the Board of Directors FONAR Corporation and Subsidiaries In connection with our audit of the consolidated financial statements of FONAR Corporation and Subsidiaries as at June 30, 1996 and 1995, and for the years in the three-year period ended June 30, 1996, we have also audited the supplemental schedules listed in the accompanying index to consolidated financial statements and schedules. Our audit was made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. These schedules are presented for purposes of complying with the Securities and Exchange Commission's rules and regulations under the Securities Exchange Act of 1934 and are not otherwise a required part of the basic consolidated financial statements. The supplemental schedules have been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. /s/ Tabb, Conigliaro & McGann, P.C. TABB, CONIGLIARO & McGANN, P.C. New York, New York October 7, 1996 S-1 FONAR CORPORATION AND SUBSIDIARIES SCHEDULE II - ACCOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS FOR THE THREE YEARS ENDED JUNE 30, 1996
Deductions Balance ------------------------------- At End of Period Balance At Amounts ------------------------------- Beginning Amounts Written Non- Name of Debtor of Period Additions Collected Off Current Current -------------- -------------- -------------- -------------- -------------- -------------- -------------- For the Year Ended June 30, 1994: Diagnostic Imaging Corp. $ 154,644 $5,271,621 (b) $5,175,878 $ - $ 250,387 $ - MRI Enterprises, Inc. 21,639 3,287,750 (c) 3,180,172 - 129,217 - L. Bonanni 120,468 - 18,768 - 101,700 (a) - For the Year Ended June 30, 1995: Diagnostic Imaging Corp. $ 250,387 $ 389,050 (d) $ 639,437 $ - $ - $ - MRI Enterprises, Inc. 129,217 4,026,488 (e) 3,738,214 - 417,491 - L. Bonanni 101,700 107,344 25,969 - 183,075 (a) - For the Year Ended June 30, 1996: MRI Enterprises, Inc. $ 417,491 $4,362,360 $4,528,739 $ - $ 251,112 $ - L. Bonanni 183,075 4,687 46,969 - 140,793 - (a) Remaining balances on note receivable (with interest at 10%) for exercise of options to purchase shares of common stock. These notes are included in the accompanying consolidated balance sheets under the caption "Notes receivable from stockholders". (b) Note receivable, with interest at 10% (which was paid in full in the first quarter of fiscal 1995) for exercise of options and purchase of 2,975,000 shares of common stock by a company in which an officer of the Company was a director. The note is included in the accompanying consolidated balance sheets under the caption "Notes receivable from stockholders". (c) Note receivable, with interest at 10% (which was paid in full in the first quarter of fiscal 1995) for exercise of options and purchase of 1,850,000 shares of common stock by a company owned by an officer of the Company. The note is included in the accompanying consolidated balance sheets under the caption "Notes receivable from stockholders". (d) Note receivable with interest at 10% (which was paid in full during fiscal 1995) for exercise of options and purchase of 250,000 shares of common stock by a company in which an officer of the Company was a director. The note is included in the accompanying consolidated balance sheets under the caption "Notes receivable from stockholders". (e) Note receivable with interest at 10% (which was paid in full in the first quarter of fiscal 1996) for exercise of options and purchase of 1,050,000 shares of common stock by a company owned by an officer of the Company. The note is included in the accompanying consolidated balance sheets under the caption "Notes receivable from stockholders". S-2
FONAR CORPORATION AND SUBSIDIARIES SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE YEARS ENDED JUNE 30, 1996
Balance At Other Balance At Beginning Additions Add End of Description of Period At Cost Deletions (Deduct) Period ----------- ----------- ---------- ---------- -------- ----------- For the Year Ended June 30, 1994: Deducted from asset accounts: Allowance for doubtful accounts in accounts receivable $ 2,114,263 $ 287,310 $ (77,020) $ - $ 2,324,553 Allowance for doubtful accounts in notes receivable - current 600,000 108,411 - - 708,411 Allowance for doubtful accounts in accounts receivable and investments in affiliates 1,250,000 - - - 1,250,000 Allowance for possible losses - net investment in sales-type leases 115,000 - - - 115,000 Accumulated amortization of other intangible assets 5,821,762 203,266 - - 6,025,028 Accumulated amortization of capitalized software development costs 3,722,746 1,168,416 (287,596) - 4,603,566 ----------- ---------- ---------- -------- ----------- $13,623,771 $1,767,403 $(364,616) $ - $15,026,558 ----------- ---------- ---------- -------- ----------- For the Year Ended June 30, 1995: Deducted from asset accounts: Allowance for doubtful accounts in accounts receivable $ 2,324,553 $ 116,514 $ - $ - $ 2,441,067 Allowance for doubtful accounts in notes receivable - current 708,411 - - - 708,411 Allowance for doubtful accounts in accounts receivable and investments in affiliates 1,250,000 - - - 1,250,000 Allowance for possible losses - net investment in sales-type leases 115,000 - - - 115,000 Accumulated amortization of other intangible assets 6,025,028 176,276 (169,163) - 6,032,141 Accumulated amortization of capitalized software development costs 4,603,566 1,255,012 - - 5,858,578 ----------- ---------- ---------- -------- ----------- $15,026,558 $1,547,802 $(169,163) $ - $16,405,197 ----------- ---------- ---------- -------- ----------- For the Year Ended June 30, 1996: Deducted from asset accounts: Allowance for doubtful accounts in accounts receivable $ 2,441,067 $ 472,326 $(210,573) $ - $ 2,702,820 Allowance for doubtful accounts in notes receivable - current 708,411 - - - 708,411 Allowance for doubtful accounts in accounts receivable and investments in affiliates 1,250,000 - - - 1,250,000 Allowance for possible losses - net investment in sales-type leases 115,000 - - - 115,000 Accumulated amortization of other intangible assets 6,032,141 219,478 - - 6,251,619 Accumulated amortization of capitalized software development costs 5,858,578 1,013,615 - - 6,872,193 ----------- ---------- ---------- -------- ----------- $16,405,197 $1,705,419 $(210,573) $ - $17,900,043 ----------- ---------- ---------- -------- ----------- S-3
SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FONAR CORPORATION Dated: October 11, 1996 By: /s/ Raymond Damadian Raymond V. Damadian, President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Raymond Damadian Chairman of the October 11, 1996 Raymond V. Damadian Board of Directors, President and a Director (Principal Executive Officer) /s/ Claudette J.V. Chan Director October 11, 1996 Claudette J.V. Chan /s/ Robert J. Janoff Director October 11, 1996 Robert J. Janoff /s/ Herbert Maisel Director October 11, 1996 Herbert Maisel FONAR CORPORATION AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON STOCK EXHIBIT 11
WEIGHTED AVERAGE NUMBER OF SHARES NUMBER OF FOR THE YEARS ENDED SHARES ALLOCATION ------------------------------------ ISSUED RATIO JUNE 30, JUNE 30, JUNE 30, 1996 1995 1994 -------- --------- ---------- ---------- ---------- NUMBER OF SHARES OUTSTANDING AT BEGINNING OF YEAR 49,047,021 34,430,329 28,367,408 JULY 1 - SEPTEMBER 30 987,750 320 / 365 865,973 2,035,500 322 / 365 1,793,114 1,366,500 313 / 365 1,172,270 OCTOBER 1 - DECEMBER 31 1,093,050 228 / 365 682,782 1,539,700 234 / 365 988,800 1,333,200 235 / 365 858,928 JANUARY 1 - MARCH 31 1,481,566 137 / 365 556,095 1,600,000 135 / 365 591,233 1,345,875 145 / 365 533,451 APRIL 1 - JUNE 30 1,079,500 45 / 365 133,089 1,817,375 55 / 365 275,062 2,017,346 44 / 365 245,055 WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING @ JUNE 30 BEFORE STOCK DIVIDEND - 10/20/96 0 38,078,538 31,177,112 LESS : CLASS B COMMON STOCK 0 (3,194,556) (3,202,189) WEIGHTED AVERAGE NUMBER OF SHARES AVAILABLE FOR STOCK DIVIDEND 0 34,883,982 27,974,923 STOCK DIVIDEND - CLASS A NON-VOTING PREFERRED STOCK ( 1 SHARE OF PREFERRED STOCK FOR 5 SHARES OF COMMON STOCK) 0 41,860,778 33,569,908 CLASS B COMMON STOCK 0 3,194,556 3,202,189 STOCK DIVIDEND ADJUSTMENT - CLASS A NON-VOTING PREFERRED STOCK 231,510 0 0 WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING @ JUNE 30 51,516,470 45,055,334 36,772,097 NET (LOSS) INCOME (3,376,411) (1,762,971) (334,574) NET (LOSS) INCOME PER WEIGHTED AVERAGE SHARE OUTSTANDING (0.07) (0.04) (0.01)
EX-27 2
5 0000355019 FONAR CORPORATION 1,000 YEAR JUN-30-1996 JUL-01-1995 JUN-30-1996 3712 0 2385 588 3624 11464 13820 11319 63096 13819 0 0 1 5 48138 63096 12778 13130 8755 8956 11818 1226 626 (3524) 20 (3544) 0 0 0 (3544) (.07) (.07)
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