June 7, 2005
VIA EDGAR &
UNITED PARCEL DELIVERY
Ms. Angela Crane
Reviewing Accountant
Mail Stop 0306
Securities and Exchange Commission
Washington, D.C. 20549
Re: Fonar Corporation
Form 10-K for the fiscal year ended
June 30, 2004
Form 10-Q for the quarter ended
December 31, 2004
File No. 0-10248
Dear Ms. Crane:
I am writing in response to the Commission's comment letter dated March 31,
2005 addressed to the attention of Dr. Raymond V. Damadian, President of Fonar
Corporation. As requested, the responses contained in our letter are presented
in the same order as in the Commission's letter. Amendments to the applicable
Exchange Act reports are being filed concurrently herewith.
Form 10-K for Fiscal Year Ended June 30, 2004
Management's Discussion and Analysis
Comment No. 1. The costs of closing underperforming facilities in fiscal 2004
incurred by our subsidiary, Health Management Corporation of America, also
referred to as HMCA, was $37,370. The costs consisted of the removal and
transportation of the magnetic resonance imaging, or MRI, equipment from the
site in the amount of $15,500, repairs and reconstruction to the premises
following removal in the amount of $4,400 and additional rent for the period
during which we were removing the equipment of $17,470. These costs were
accounted for in our consolidated financial statements under costs of revenues.
We will revise future filings to quantify known or expected savings that
have resulted from the closing of these facilities as requested by the
Commission in Comment No. 1.
Liquidity and Capital Resources
Comment No. 2. As requested by the Commission, we have expanded in our most
recent filing, and will do so in all future filings, our discussions to describe
the reasons for the increases and decreases in the various components of working
capital impacting cash flow from operations.
Comment No. 3. As requested by the Commission, we have revised our most recent
filing, and will do so in all future filings, for the disclosure of liquidity to
describe more fully our overall financial structure with a particular emphasis
on agreements between Fonar and related parties. Transactions, arrangements and
relationships with unconsolidated entities that are reasonably likely to affect
liquidity will be fully disclosed.
Please note, however, we do not see any part of our financial structure,
inclusive of our agreements with related entities, that is not already fully
disclosed. With respect to our management agreements with related entities, the
fees HMCA charges are renegotiated on an annual basis. The management fee
receivables have remained fairly consistent over the last few years and for
sales of products to related parties, we receive progress payments during the
construction period and are paid in full prior to the delivery and installation
of the product.
Comment No. 4. As requested by the Commission, we will revise future filings to
discuss the financial terms of the management contracts and provide detailed
disclosure of the financial terms of any individually material agreements.
Consolidated Statement of Cash Flows
Comment No. 5. As requested by the Commission, we have revised our most recent
filing, and will do so in future filings, to separately present cash flows from
purchases, sales and maturities of available-for-sale securities as separate
line items in the consolidated statement of cash flows, as contemplated in
Paragraph 18 of SFAS 115.
Note. 2. Summary of Significant Accounting Policies
Revenue Recognition
Comment No. 6. As noted by the Commission, the management agreements between
HMCA and each of the MRI facilities are for one year terms and the fees are
reviewed on an annual basis and adjusted by mutual agreement. HMCA reviews the
fees and negotiates a modification of the fee based upon the change in direct
operating expenses incurred by HMCA for each individual management agreement.
HMCA is not obligated to make up any losses of the MRI facilities.
Comment No. 7. We recognize revenue for equipment and services to related party
entities the same way we recognize revenue for unrelated parties. On sales of
equipment we recognize revenues on a percentage of completion basis. Payment
terms require a down payment upon signing, a second payment 60 days afterwards,
a payment prior to the delivery of the magnet subsystem of the MRI, a payment
prior to the delivery of the electronics system and a final payment upon the
acceptance by and delivery of the MRI system to the customer. On our service
agreements, which are mostly for one-year periods, we recognize revenue on a
monthly basis as services are provided. Payment by the customer is required in
advance, however, usually on a quarterly basis. Sales to related parties are
made on terms which are within the same parameters as sales to unrelated
parties. We have recognized gross profit on sales to related parties which have
been at similar margins to those of unrelated parties. Due to our net losses in
the last three years, we did not recognize any net profit on sales to related
parties in each of the last three years. We believe these accounting procedures
comply with GAAP.
Comment No. 8. We do not sell new products on terms for which financial
reimbursement is not guaranteed as payment in full is required before delivery
and installation of the product. There are no third party reimbursements,
estimates or adjustments in connection with new product sales. Please note our
response to Comment No. 7 where we discuss revenue recognition and customer
payment terms.
Note 3 Management Agreements
Comment No. 9. The Company evaluates the recoverability of its intangibles in
accordance with the Statement of Financial Accounting Standards ("SFAS") No.
144, "Accounting for Impairment or Disposal of Long-Lived Assets". At June 30,
2004, the Company determined there were no triggering events indicating that an
impairment had occurred. The associated facilities have consistently generated
operating profits since the Company consummated the acquisitions (during fiscal
1997 and 1998) and allocated amounts to the management agreements. The
facilities generated operating profits of approximately $4,000,000 for each of
the years ended June 30, 2004 and 2003, respectively.
The Company continues to amortize the management agreements over the 20 year
term of the agreements as there are no changes to the terms of the agreements
and no indicators of impairment as discussed above.
Note 11. Capital Stock
Comment No. 10. We account for common stock utilized to pay for goods and
services to non-employees based on the fair market value of the stock issued,
for which stock certificates are issued after the goods have been delivered to
us or the services performed. As requested by the Commission, we will revise
future filings to provide more detailed disclosures required by SFAS 123 and
EITF 96-18.
Note 16. Commitments and Contingencies
Comment No. 11. As requested by the Commission we will revise future filings to
disclose any material commitments and guarantees of the management companies to
the medical practices and any material amounts that may be paid under those
arrangements. Please note, however, that we do not guarantee any financial
obligations of the medical practices.
Note 21. Quarterly Financial Data
Comment No. 12. The $344,000 in selling, general and administrative expenses
consisted of royalties on scanner sales which had not been accrued in prior
quarters under a patent license which we pay on an annual basis. This was
corrected and the royalties are now being accrued as the liabilities arise. This
item was disclosed in Item 9A of our Form 10-K. The $215,000 consisted of
various smaller items which also are now being accrued as the liabilities arise.
These amounts were deemed to be immaterial to the previously reported quarters
in fiscal 2004.
During the second quarter of fiscal 2003, we closed one of our facilities.
At that time, we did not record any impairment loss due to our belief that we
would be successful in transferring the business to our nearby facility. During
the fourth quarter of fiscal 2003, we determined that we were unsuccessful in
retaining the revenue from our closed facility, and accordingly, we recorded an
impairment loss during the fourth quarter ended June 30, 2003. We believe the
impairment loss was recorded in the proper period.
Item 9A. Controls and Procedures
Comment No. 13. We believe that our disclosure controls and procedures are now
effective because we have taken the necessary steps to correct the issues raised
in Comment No. 12.
We will amend Item 9A of our Form 10-K to address the Commission's comments
contained in Comment 13. We expect to file the document with the following
language:
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this annual report on Form 10-K, we
carried out an evaluation of the design and operation of our disclosure controls
and procedures. Based upon that evaluation and the weakness described below, our
principal executive and acting principal financial officer concluded that as of
the end of the period covered by the annual report on Form 10-K our disclosure
controls and procedures were not effective.
In performing their audit of our consolidated financial statements for the
year ended June 30, 2004, our independent registered public accounting firm
noted that certain royalties under a patent license and certain other expenses
had not been accrued during the first three quarters. This was corrected through
appropriate adjustments and our internal procedures and controls were
subsequently modified to assure that such accruals will be made on an ongoing
basis.
Except as described above, there were no significant changes in our
internal controls over financial reporting that occurred during the year ended
June 30, 2004 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Comment No. 14. There were no such changes. We will amend Items 9A to our Form
10-K to reflect this, consistent with the language used in amended Item 308(c)
of Regulation S-K. We expect to file the document with the language included in
the Comment 13 response above.
Form 10-Q for the Quarterly Period ended December 31, 2004
Item 4. Controls and Procedures
Comment No. 15. We will amend Part I, Item 4 of our Form 10-Q for the period
ended December 31, 2004 in accordance with Comment No. 15. We expect to file the
document with the following language:
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
The Company maintains controls and procedures designed to ensure that
information required to be disclosed in the reports that it files or submits
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission. Based upon their evaluation of those
controls and procedures performed as of the end of the period covered by this
report, the principal executive and acting principal financial officer of the
Company concluded that disclosure controls and procedures were effective as of
the end of the period covered by the report.
(b) Change in internal controls.
The Company made no significant changes in its internal controls or in
other factors that could significantly affect these controls subsequent to the
date of the evaluation of those controls by the principal executive and acting
principal financial officer.
Comment No. 16. We will amend Part I, Item 4 of our Form 10-Q for the period
ended December 31, 2004 in accordance with Comment No. 16. We expect to file the
document with the language included in the Comment 15 response above.
Please feel free to call me at (631) 694-2929 in connection with your
comments and our responses.
Very truly yours,
/s/Henry T. Meyer
Henry T. Meyer
General Counsel
HTM/jr
M-11515Dear