SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
_____________________
FORM 10-K/A
_____________________
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [Fee Required]
For the fiscal year ended June 30, 2009
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from _____________ to _____________
Commission File No. 0-10248
___________________________
FONAR CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 11-2464137
(State of incorporation) (IRS Employer Identification Number)
110 Marcus Drive, Melville, New York 11747
(Address of principal executive offices) (Zip Code)
(631) 694-2929
(Registrant's telephone number, including area code)
____________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.0001 per share
Securities registered pursuant to Section 12(g) of the Act:
None
________________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes ___ No _X_
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes ___ No _X_
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers, pursuant to Item 405
of Regulation S-K, {section}229.405 of this Chapter, is not contained, and will
not be contained, to the best of the registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this 10-K or
any amendment to the Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of "large accelerated filer", "accelerated filer and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ___ Accelerated filer ___
Non-accelerated filer ___ Smaller reporting company _X_
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes ___ No _X_
The aggregate market value of the shares of Common Stock held by non-affiliates
as of December 31, 2008 based on the closing price of $0.83 per share on such
date as reported on the NASDAQ System, was approximately $4.0 million. The other
outstanding classes do not have a readily determinable market value.
As of September 30, 2009, 4,906,275 shares of Common Stock, 158 shares of Class
B Common Stock, 382,513 shares of Class C Common Stock and 313,451 shares of
Class A Non-voting Preferred Stock of the registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
REASON FOR AMENDMENT
Fonar Corporation is amending its 10-K to change the language in Item 9A,
Controls and Procedures, in accordance with comments made by the Securities and
Exchange Commission, to disclose the conclusions of certain of our officers
regarding the effectiveness of our disclosure controls and procedures and
statements regarding internal control over our financial reporting. We have also
been asked to include certain language in our exhibits referring to internal
control over financial reporting.
PART I
ITEM 1. BUSINESS
GENERAL
Fonar Corporation, sometimes referred to as the "Company" or "Fonar", is a
Delaware corporation which was incorporated on July 17, 1978. Our address is 110
Marcus Drive, Melville, New York 11747 and our telephone number is 631-694-
2929. Fonar also maintains a WEB site at www.Fonar.com. Fonar provides copies of
its filings with the Securities and Exchange Commission on Forms 10-K, 10-Q and
8-K and amendments to these reports to stockholders on request.
We conduct our business in two segments. The first, conducted directly through
Fonar, is referred to as our medical equipment segment. The second, conducted
through our wholly owned subsidiary Health Management Corporation of America, is
referred to as the physician management and diagnostic services segment.
MEDICAL EQUIPMENT SEGMENT
Fonar is engaged in the business of designing, manufacturing, selling and
servicing magnetic resonance imaging, also referred to as "MRI" or "MR",
scanners which utilize MRI technology for the detection and diagnosis of human
disease. Fonar's founders built the first scanner in 1977 and Fonar introduced
the first commercial MRI scanner in 1980. Fonar is the originator of the iron-
core non-superconductive and permanent magnet technology.
Fonar's iron frame technology made Fonar the originator of "open" MRI scanners.
We introduced the first "open" MRI in 1980. Since that time we have concentrated
on further application of our "open" MRI, introducing most recently the
Upright(R) Multi-Position(TM) MRI scanner (also referred to as the "Upright(R)"
or "Stand-Up(R)" MRI scanner) and the Fonar 360(TM) MRI scanner.
The product we are now most vigorously promoting is our Upright(R) MRI. The
Upright(R) MRI is unique in the industry in that it allows patients to be
scanned in a fully weight-bearing condition, such as standing, sitting or
bending in any position that causes symptoms. This means that an abnormality or
injury, such as a slipped disk can be visualized where it may not be visualized
with the patient lying down. We are introducing the name "Upright(R)" as an
alternative to "Stand-UP(R)" because of the multiplicity of positions in which
the patient may be scanned where the patient is not standing.
PHYSICIAN MANAGEMENT AND DIAGNOSTIC SERVICES SEGMENT
Health Management Corporation of America, which we sometimes refer to as "HMCA",
was formed by Fonar in March 1997 as a wholly-owned subsidiary in order to
enable us to expand into the business of providing comprehensive management
services to medical providers. HMCA provides management services, administrative
services, office space, equipment, repair, maintenance service and clerical and
other non-medical personnel to medical providers. Since July 28, 2005, following
the sale of HMCA's physical therapy and rehabilitation business, HMCA has
elected to provide its services solely to diagnostic imaging centers.
See Note 20 to the Consolidated Financial Statements for separate financial
information respecting our medical equipment and physician and diagnostic
management services segments.
FORWARD LOOKING STATEMENTS.
Certain statements made in this Annual Report on Form 10-K are "forward-looking
statements", within the meaning of the Private Securities Litigation Reform Act
of 1995, regarding the plans and objectives of Management for future operations.
Such statements involve known and unknown risks, uncertainties and other factors
that may cause our actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. These forward-looking statements are
based on current expectations that involve numerous risks and uncertainties. Our
plans and objectives are based, in part, on assumptions involving the expansion
of business. These assumptions involve judgments with respect to, among other
things, future economic, competitive and market conditions and future business
decisions, all of which are difficult or impossible to predict accurately and
many of which are beyond our control. Although we believe that our assumptions
underlying the forward-looking statements are reasonable, any of the assumptions
could prove inaccurate and, therefore, there can be no assurance that the
forward-looking statements included in this Annual Report will prove to be
accurate. In light of the significant uncertainties inherent in our
forward-looking statements, the inclusion of such information should not be
regarded as a representation by us or any other person that our objectives and
plans will be achieved.
RECENT DEVELOPMENTS AND OVERVIEW.
Our products and works-in-progress are intended to significantly improve our
competitive position. Our current products are the Upright(R) MRI and the Fonar
360(TM).
The Upright(R) MRI permits, for the first time, MRI diagnoses to be made in the
weight-bearing state. The Upright(R) MRI is the only MRI scanner which allows
patients to be scanned while standing, sitting or reclining, either horizontally
or at an angle. This means that an abnormality or injury, such as a slipped
disk, will be able to be scanned under full weight-bearing conditions and, more
often than not, in the position in which the patient experiences pain. A patient
handling system built into the floor brings the patients to the desired height
in the scanner. An adjustable bed allows the patients to stand, sit or lie on
their backs, sides or stomachs at any angle. The Upright(R) MRI may also be
useful for MRI guided interventional procedures.
More recently a new application of the Fonar Upright(R) technology is in the
evaluation and diagnosis of patients with the Arnold-Chiari syndrome believed to
affect from 200,000 to 500,000 Americans. In this syndrome brain stem
compression and entrapment of the brain at the base of the skull in the foramen
magnum, which is the circular bony opening at the base of the skull where the
spinal cord exits the skull. Classic symptoms of the Chiari syndrome include the
"drop attack", where the erect patient unexpectedly experiences an explosive
rush or nervous discharge at the base of the brain which rushes down the body to
the extremities, causing the patient to collapse in a transient neuromuscular
paralysis which then subsides when the patient is in a horizontal position.
The Fonar Upright(R) MRI has recently demonstrated its key value on two patients
with Chiari syndrome establishing that the conventional lie- down MRI scanners
cannot make an adequate evaluation of their pathology since the patient's
pathology is most visible and symptoms are most acute when the patient is
upright. It is critical to have an image of the patient in an upright position
so that the neurosurgeons can fully evaluate the extent of the brain stem
compression which is occurring so they can choose the most appropriate surgical
approach for the operative repair.
Another milestone in the sale and utilization of Fonar's Upright(R) technology
is the sale in September, 2006 of an Upright(R) MRI scanner to the largest
orthopedic hospital in the Netherlands, the St. Maartenskliniek. St.
Maartenskliniek has over 300 in- patient beds and an extensive outpatient clinic
program that diagnosis and treats 25,000 patients with orthopedic problems
annually. In placing their order, St. Maartenskliniek announced from the point
of view of their internationally recognized "Spine Center" that "once Fonar made
available upright weight-bearing MRI imaging technology, owning one for the St.
Maartenskliniek "Spine Center" was not optional but mandatory. For our hospital
to continue to engage in spine surgery without it, once this new technology
became available, was unacceptable. Once the means were available to make
certain we were getting the complete picture of the patient's spine pathology
before undertaking surgery, so that we could be certain we were not performing
surgery based on a wrong diagnosis and running the risk of doing the wrong
surgery, we did not regard the utilization of this new technology, from our
patient's perspective as optional. It was mandatory."
We are vigorously promoting sales of the Upright(R) MRI which we regard as our
most promising product. The market for the Upright(R) shows strong progress.
Revenues recognized from the sale of Upright(R) MRI scanners increased in fiscal
2009 by 48.3% over fiscal 2008 from approximately $11.2 million in fiscal 2008
to approximately $16.6 million in fiscal 2009. The following chart shows the
revenues attributable to our different model scanners for the fiscal years ended
June 30, 2008 and June 30, 2009. Note that we recognize revenue on a percentage
of completion basis. Accordingly, revenue is recognized as each sub-assembly of
a scanner is manufactured. Consequently the revenues for a fiscal period do not
necessarily relate to orders placed in that period.
Revenues Recognized
Model Fiscal 2008 Fiscal 2009
------------- ----------- -----------
Upright(R) $11,203,688 $16,617,352
Fonar 360(TM) $ 0 $ 0
Other $ 0 $ 65,965
The Fonar 360(TM) includes the Open Sky(TM) MRI. We received our first order for
a Fonar 360(TM) scanner in the first quarter of fiscal 2005. The magnet frame is
incorporated into the floor, ceiling and sidewalls of the scan room and is open.
Consequently, physicians and family members can walk inside the magnet to
approach the patient. The Open Sky(TM) version of the Fonar 360(TM) is
decoratively designed so that it is incorporated into the panoramic landscape
that decorates the walls of the scan room. The ability of the Fonar 360(TM) to
give physicians direct 360 degree access to patients and the availability of MRI
compatible interventional instruments such as needles, catheters, probes,
scalpels and forceps, will also enable the Fonar 360(TM) to be used for image
guided interventions.
Fonar's showcase installation of the first Fonar 360(TM) MRI scanner was
completed at the Oxford Nuffield Orthopedic Center in Oxford, United Kingdom.
Oxford-Nuffield had two objectives in the choice of the Fonar 360(TM) MRI. The
first was to have an open mid-field MRI imaging scanner to meet their medical
imaging needs. The second was to have an open scanner that would enable direct
image guided surgical intervention. The Oxford-Nuffield scanner is carrying a
full diagnostic imaging load daily.
Additionally, development of the works in progress Fonar 360(TM) MRI image
guided interventional technology is actively progressing. Fonar software
engineers have completed and installed their 2nd generation tracking software at
Oxford-Nuffield which is designed to enable the surgeons to insert needles into
the patient and accurately advance them under direct visual image guidance to
the target tissue, such as a tumor, so that therapeutic agents can be injected.
Health Management Corporation of America ("HMCA"), a wholly-owned subsidiary of
Fonar, currently is managing 10 diagnostic imaging centers located principally
in New York and Florida.
MEDICAL EQUIPMENT SEGMENT
PRODUCTS
Fonar's principal products are the Upright(R) MRI and the Fonar 360(TM).
The Upright(R) MRI is a whole-body open MRI system that enables positional MRI
(pMRI(R)) applications, such as weight-bearing MRI studies. Operating at a
magnetic field strength of 0.6 Tesla, the scanner is a powerful, diagnostically
versatile and cost-effective open MRI that provides a broad range of clinical
capabilities and a complete set of imaging protocols. Patients can be scanned
standing, bending, sitting, upright at an intermediate angle or in any of the
conventional recumbent positions. This multi-positional MRI system accommodates
an unrestricted range of motion for flexion, extension, lateral bending, and
rotation studies of the cervical (upper)and lumbar (lower) spine. Previously
difficult patient scanning positions can be achieved using the system's
MRI-compatible, three-dimensional, motorized patient handling system. Patients,
lying horizontally, are placed into the magnet in the conventional manner. The
system's lift and tilt functions then deliver the targeted anatomical region to
the center of the magnet. The ceiling and floor are recessed to accommodate the
full vertical travel of the table. True image orientation is assured, regardless
of the rotation angle, via computer read- back of the table's position. Spines
and extremities can be scanned in weight- bearing states; brains can be scanned
with patients either standing or sitting.
Recently, this capability of the Fonar Upright(R) technology has demonstrated
its key value on patients with the Arnold-Chiari syndrome, which is believed to
affect 200,000 to 500,000 Americans. In this syndrome, brain stem compression
and subsequent severe neurological symptoms occur in these patients, when
because of weakness in the support tissues within the skull, the brain stem
descends and is compressed at the base of the skull in the foramen magnum, which
is the circular bony opening at the base of the skull where the spinal cord
exits the skull. Conventional lie-down MRI scanners cannot make an adequate
evaluation of the pathology since the patient's pathology is most visible and
the symptoms most acute when the patient is scanned in the upright
weight-bearing position.
The Upright(R) MRI has also demonstrated its value for patients suffering from
scoliosis. Scoliosis patients have been typically subjected to routine x-ray
exams for years and must be imaged upright for an adequate evaluation of their
scoliosis. Because the patient must be standing for the exam, an x-ray machine
has been the only modality that could provide that service. The Upright(R) MRI,
is the only MRI scanner which allows the patient to stand during the MRI exam.
Fonar has developed a new RF receiver and scanning protocol that for the first
time allows scoliosis patients to obtain diagnostic pictures of their spines
without the risks of x-rays. A recent study by the National Cancer Institute
(2000) of 5,466 women with scoliosis reported a 70% increase in breast cancer
resulting from 24.7 chest x-rays these patients received on the average in the
course of their scoliosis treatment.
The Upright(R) MRI is exceptionally open, making it the most non-claustrophobic
whole-body MRI scanner. Patients can walk into the magnet, stand or sit for
their scans and then walk out. From the patient's point of view, the magnet's
front-open and top-open design provides an unprecedented degree of comfort
because the scanner allows the patient an unobstructed view of the scanner room
from inside the magnet, and there is nothing in front of one's face or over
one's head. The only thing in front of the patient's face during the scan is a
very large (42") panoramic TV (included with the scanner) mounted on the wall.
The bed is tilted back five degrees to stabilize a standing patient. Special
coil fixtures, a patient seat, Velcro straps, and transpolar stabilizing bars
are available to keep the patient comfortable and motionless throughout the
scanning process.
Full-range-of-motion studies of the joints in virtually any direction will be
possible, an especially promising feature for sports injuries. Full range of
motion cines, or movies, of the lumbar spine will be achieved under full body
weight.
The Upright(R) MRI will also be useful for MRI guided interventional procedures
as the physician would have unhindered access to the patient with no
restrictions in the vertical direction.
This easy-entry, mid-field-strength scanner should be ideal for trauma centers
where a quick MRI screening within the first critical hour of treatment will
greatly improve patients' chances for survival and optimize the extent of
recovery.
The Fonar 360(TM) is an enlarged room sized magnet in which the floor, ceiling
and walls of the scan room are part of the magnet frame. This is made possible
by Fonar's patented Iron-Frame(TM) technology which allows our engineers to
control, contour and direct the magnet's lines of flux in the patient gap where
wanted and almost none outside of the steel of the magnet where not wanted.
Consequently, this scanner allows 360 degree access to the patient, and
physicians and family members are able to enter the scanner and approach the
patient.
The Fonar 360(TM) is presently marketed as a diagnostic scanner and is sometimes
referred to as the Open Sky(TM) MRI. In its Open Sky(TM) capacity, the Fonar
360(TM) serves as an open patient- friendly scanner which allows 360 degree
access to the patient on the scanner bed.
To optimize the patient-friendly character of the Open Sky(TM) MRI, the walls,
floor, ceiling and magnet poles are decorated with landscape murals. The patient
gap is twenty inches and the magnetic field strength is 0.6 Tesla.
We also expect to enable the Fonar 360(TM) to function as an MRI guided
interventional scanner, for the purpose of performing intra-operative,
interventional and therapeutic procedures with MR compatible instrumentation. In
this capacity, the enlarged room sized magnet and 360 degree access to the
patient afforded by the Fonar 360(TM) would permit full-fledged support teams to
walk into the magnet and perform MRI guided interventions on the patient inside
the magnet. Most importantly, the exceptional quality of the MRI image and its
exceptional capacity to exhibit tissue detail on the image, by virtue of the
nuclear resonance signal's extraordinary capacity to create image contrast, can
then be obtained very near real time to guide the physician during the MRI
guided intervention. Thus MRI compatible instruments, needles, catheters,
endoscopes and the like can be introduced directly into the human body and
guided to the malignant lesion or other pathology by means of the MRI image.
Surgically inoperable lesions could be accessed through MRI guided catheters and
needles making it possible to deliver the treatment agent directly to the
targeted tissue.
The first Fonar 360(TM) MRI scanner, installed at the Oxford-Nuffield Orthopedic
Center in Oxford, United Kingdom, is now carrying a full diagnostic imaging
caseload. In addition, however, development of the works in progress Fonar
360(TM) MRI image guided interventional technology is actively progressing.
Fonar software engineers have completed and installed their 2nd generation
tracking software at Oxford-Nuffield which is designed to enable the surgeons to
insert needles into the patient and accurately advance them, under direct visual
image guidance, to the target tissue, such as a tumor, so that therapeutic
agents can be injected.
With current treatment methods, such as chemotherapy taken by mouth, the therapy
must always be restricted in the doses that can be applied to the malignant
tissue because of the adverse effects on the healthy tissues. Thus
chemotherapies must be limited at the first sign of toxic side effects. The same
is the case with radiation therapy. Fonar expects that with the Fonar 360(TM)
treatment agents may be administrated directly to the malignant tissue through
small catheters or needles, thereby allowing much larger doses of chemotherapy,
x-rays, laser ablation, microwave and other anti-neoplastic agents to be applied
directly and exclusively to the malignant tissue with more effective results.
Since the interventional procedure of introducing a treatment needle or catheter
under image guidance will be minimally invasive, the procedure can be readily
repeated should metastases occur elsewhere, with minimum impact on the patient
beyond a straightforward needle injection. The presence of the MRI image during
treatment would enable the operator to make assessments during treatment whether
the treatment is being effective.
In addition to the patient comfort and new applications, such as MRI directed
interventions, made possible by our scanners' open design, the Upright(R) and
Fonar 360(TM) scanners are designed to maximize image quality through an optimal
combination of signal-to-noise (S/N) and contrast-to-noise (C/N) ratios. The
technical improvements realized in these scanners' design over their
predecessors also include increased image- processing speed and diagnostic
flexibility.
MRI directed interventions are made possible by the scanners' ability to supply
images to a monitor positioned next to the patient, enabling the operator to
view in process an interventional procedure from an unlimited number of angles.
The openness of Fonar's scanners would enable a physician to perform a wide
range of interventional procedures inside the magnet.
In the case of breast imaging the access by a physician permits an image guided
biopsy to be performed easily which is essential once suspicious lesions are
spotted by any diagnostic modality. In addition to being far superior to x-ray
in detecting breast lesions because of the MRI's ability to create the soft
tissue contrast needed to see them, where x-ray is deficient in its ability to
generate the needed contrast between cancer and normal tissue, there is not the
painful compression of the breast characteristic of X-ray mammography.
The Upright(R) MRI and Fonar 360(TM) scanners share much of the same fundamental
technology and offer the same speed, precision and image quality. Fonar's
scanners initiated the new market segment of high-field open MRI in which the
Fonar Upright(R) MRI is one of the market leaders. High-field open MRIs operate
at significantly higher magnetic field strengths and, therefore, produce more of
the MRI image-producing signal needed to make high-quality MRI images (measured
by signal-to-noise ratios, S/N).
The Upright(R) MRI and Fonar 360(TM) scanners utilize a 6000 gauss (0.6 Tesla
field strength) iron core electromagnet. The greater field strength of the 6000
gauss magnet, as compared to lower field open MRI scanners that operate at 3,000
gauss (0.3 Tesla) when enhanced by the electronics already utilized by Fonar's
scanners, produces images of higher quality and clarity. Fonar's 0.6 Tesla open
scanner magnets are among the highest field "open MRI" magnets in the industry.
The Upright(R) MRI and Fonar 360(TM) scanners are designed to maximize image
quality through an optimal combination of signal-to-noise (S/N) and
contrast-to-noise (C/N) ratios. The technical improvements realized in the
scanners' design over their lower field predecessors also include increased
image-processing speed and diagnostic flexibility.
Several technological advances have been engineered into the Upright(R) MRI and
Fonar 360(TM) scanners for extra improvements in S/N, including: new high-S/N
Organ Specific(TM) receiver coils; new advanced front-end electronics featuring
high-speed, wide-dynamic-range analog-to-digital conversion and a miniaturized
ultra-low-noise pre-amplifier; high-speed automatic tuning, bandwidth-optimized
pulse sequences, multi- bandwidth sequences, and off-center FOV imaging
capability.
In addition to the signal-to-noise ratio, however, the factor that must be
considered when it comes to image quality is contrast, the quality that enables
reading physicians to clearly distinguish adjacent, and sometimes minute,
anatomical structures from their surroundings. This quality is measured by
contrast-to-noise ratios (C/N). Unlike S/N, which increases with increasing
field strength, relaxometry studies have shown that C/N peaks in the mid-field
range and actually falls off precipitously at higher field strengths. The
Upright(R) MRI and Fonar 360(TM) scanners operate squarely in the optimum C/N
range.
The Upright(R) MRI and Fonar 360(TM) provide various features allowing for
versatile diagnostic capability. For example, SMART(TM) scanning allows for
same-scan customization of up to 63 slices, each slice with its own thickness,
resolution, angle and position. This is an important feature for scanning parts
of the body that include small-structure sub-regions requiring finer slice
parameters. There is also Multi-Angle Oblique(TM) (MAO) imaging, and oblique
imaging.
The console for these scanners includes a mouse-driven, multi-window interface
for easy operation and a 19-inch, 1280 x 1024-pixel, 20-up, high-resolution
image monitor with features such as electronic magnifying glass and real-time,
continuous zoom and pan.
Prior to the introduction of the Upright(R) MRI and Fonar 360(TM) QUAD(TM)
scanner, the Ultimate(TM) 7000 scanner and the Beta(TM) scanner. The Beta(TM)
3000 scanner utilized a permanent magnet and the Beta(TM) earlier Fonar's
products included the 3000M scanner utilized an iron core electromagnet. All of
our current and earlier model scanners create cross-sectional images of the
human body.
During fiscal 2009, sales of our Upright(R) MRI scanners accounted for
approximately 41.8% of our total revenues and 56.4% of our medical equipment
revenues, as compared to 31.5% of total revenues and 47.6% of medical equipment
revenues in fiscal 2008. These sales show the market penetration being achieved
by the Upright(R) MRI scanner.
During fiscal 2009 and fiscal 2008, we had no revenues attributable to sales of
our Fonar 360(TM) scanner.
Our principal selling, marketing and advertising efforts have been focused on
the Upright(R) MRI, which we believe is a particularly unique product, being the
only MRI scanner which is both open and allows for weight bearing imaging. Since
we perceive that the Upright(R) MRI is successfully penetrating the market and
enabled us to achieve profitability in fiscal 2009, we expect to continue our
focus on the Upright(R) MRI in the immediate future, notwithstanding the losses
incurred in fiscal 2008. We are optimistic that the Fonar 360(TM) and our other
products and works in progress will also contribute to increased product sales.
The materials and components used in the manufacture of our products (circuit
boards, computer hardware components, electrical components, steel and plastic)
are generally available at competitive prices. We have not had difficulty
acquiring such materials.
WORKS-IN-PROGRESS
All of our products and works-in-progress seek to bring to the public MRI
products that are expected to provide important advances against serious
disease.
MRI takes advantage of the nuclear resonance signal elicited from the body's
tissues and the exceptional sensitivity of this signal for detecting disease.
Much of the serious disease of the body occurs in the soft tissue of vital
organs. The principal diagnostic modality currently in use for detecting
disease, as in the case of x-ray mammography, are diagnostic x-rays. X-rays
discriminate soft tissues, such as healthy breast tissue and cancerous tissue
poorly, because the x-ray particle traverses the various soft tissues almost
equally thereby causing target films to be nearly equally exposed by x-rays
passing through adjacent soft tissues and creating healthy and cancerous shadows
on the film that differ little in brightness. The image contrast between
cancerous and healthy breast tissue is poor, making the detection of breast
cancers by the x-ray mammogram less than optimal and forcing the mammogram to
rely on the presence or absence of microscopic stones called
"microcalcifications" instead of being able to "see" the breast cancer itself.
If microcalcifications are not present to provide the missing contrast, then the
breast cancer goes undetected. They frequently are not present. The maximum
contrast available by x-ray with which to discriminate disease is 4%. Brain
cancers differ from surrounding healthy brain by only 1.6% while the contrast in
the brain by MRI is 25 times greater at 40%. X-ray contrasts among the body's
soft tissues are maximally 4%. Their contrast by MRI is 32.5 times greater
(130%).
The soft tissue contrasts with which to distinguish cancers on images by MRI are
up to 180%. In the case of cancer these contrasts can be even more marked making
cancers readily visible and detectable anywhere in the body. This is because the
nuclear resonance signals from the body's tissues differ so dramatically. Liver
cancer and healthy liver signals differ by 180% for example. Thus there is some
urgency to bring to market an MRI based breast scanner that can overcome the
x-ray limitation and assure that mammograms do not miss serious lesions. The
added benefit of MRI mammography relative to x- ray mammography is the
elimination of the need for the patient to disrobe and the painful compression
of the breast typical of the x-ray mammogram. The patient is scanned in her
street clothes in MRI mammography. Moreover MRI mammogram scans the entire chest
wall including the axilla for the presence of nodes which the x-ray mammogram
cannot reach.
We view our Upright(R) MRI as having the potential for being an ideal breast
examination machine as it permits the patient to be seated for the examination,
which would allow easy access for an MRI guided breast biopsy when needed. The
Fonar 360(TM) MRI scanner would also be ideal for breast examinations.
PRODUCT MARKETING
The principal markets for the Company's scanners are private scanning centers
and hospitals.
Our internal sales force handles the domestic market, although we also have
non-exclusive domestic independent sales representatives. We continue to use
independent manufacturer's representatives and distributors for foreign markets.
In addition to its internal domestic sales force, Fonar and General Electric
Medical Systems, a division of General Electric Company, have entered into an
arrangement pursuant to which General Electric Medical Systems is an independent
manufacturer's representative for Fonar's Upright(R) MRI scanner in the domestic
market as well. Neither General Electric nor any of Fonar's other competitors,
however, are entitled to make the Upright(R) MRI scanner. In August 2007, Fonar
engaged the services of a second independent sales representative to focus on
spine surgeons or groups of spine surgeons pre-approved by Fonar who have a
pre-existing relationship with the sales representative.
Fonar's Website includes interactive product information for reaching customers.
We plan to commence an online program for providing demonstrations of our
products to potential customers on an international basis.
Fonar has exhibited its new products at the annual meeting of the Radiological
Society of North America ("RSNA") in Chicago from November 1995 through 2007 and
plans to attend RSNA meetings in future years. The RSNA meeting is attended by
radiologists from all over the world. Most manufacturers of MRI scanners
regularly exhibit at this meeting.
Fonar has targeted orthopedic surgeons and neurosurgeons, particularly spine
surgeons, as important markets for the Upright(R) MRI. Accordingly, Fonar has
exhibited at annual meetings of The American Academy of Orthopaedic Surgeons
(AAOS); the North American Spine Society (NASS); the American Association of
Neurological Surgeons (AANS); and the Congress of Neurological Surgeons (CNS).
In addition, in 2007, Fonar attended the Global Health Care Expansion Congress
and the Abu Dahabi International Surgical Conference abroad.
Fonar's success in targeting surgeons was most evident in the sale, in September
2006, of an Upright(R) MRI scanner to the largest orthopedic hospital in the
Netherlands, the St. Maartenskliniek in Nijmegen. In addition to being a key
sale to a prestigious hospital, the medical conclusions reached and stated by
the buyer and the buyer's intention to conduct research and publish articles
concerning the Upright(R) technology, are a vital component to Fonar's objective
to prove to the medical community at large, insurers, governmental agencies and
others the benefits, if not necessity of Upright(R) scanning. A Director of St.
Maartenskliniek and the Chairman of Spine Surgery stated that "We at St.
Maartenskliniek, the biggest orthopedic hospital in the Netherlands, are very
much looking forward to this new technology from Fonar which will enable us to
evaluate the spine anatomy in the fully weight bearing state and in multiple
positions. We expect these new multi-position capabilities to lead to more
accurate diagnosis and better surgery outcomes for patients. Once our active
research program has discovered the benefits of this new Fonar technology for
patients, we intend to publish the results in a lot of peer reviewed scientific
journals." The Chairman stated further "that once Fonar made available upright
weight-bearing MRI imaging technology, owning one for the St. Maartenskliniek
"Spine Center" was not optional but mandatory. For our hospital to continue to
engage in spine surgery without it, once this new technology became available,
was unacceptable".
Fonar's advertising strategy has been designed to reach key purchasing decision
makers with information concerning our flagship product, the Upright(R) MRI.
This has led to many inquires and to some sales of the Upright(R) MRI scanner
and is intended to increase Fonar's presence in the medical market. Fonar's
advertising has been directed at four target audiences: neurosurgeons,
orthopaedic surgeons, radiologists and physicians in general.
1) Neurosurgeons and Orthopaedic Surgeons: These are the surgeons who can
most benefit from the superior diagnostic benefits of the Fonar Upright(R) MRI
with its Multi-Position(TM) diagnostic ability. Advertisements to them have
appeared in the journal Spine, The Journal of Neurosurgery, and the Journal of
the American Academy of Orthopedic Surgery.
2) Radiologists: This segment of the campaign is aimed at the physicians
who now have a new modality to offer their referring physicians. Our
advertisements directed to them have appeared in Radiology and Diagnostic
Imaging.
3) All Physicians: These advertising efforts have been directed to the
total physician audience, so that the vast number of doctors who send patients
for MRI's are aware of the diagnostic advantages of the Fonar Upright(R)
Multi-Position(TM) MRI. Advertisements directed to this audience have appeared
in the Journal of the American Medical Association, which has a readership of
over 350,000 physicians.
This advertising has featured a series of compelling messages. One advertisement
pointed out that the AMA book, Guides to the Evaluation of Permanent Impairment,
indicates that diagnosis must be performed upright in flexion and extension.
Another advertisement was educational and headlined, "Discover the power of
Upright Imaging". Fonar realizes that peer-to-peer communications is the most
powerful way to speak to physicians. Consequently, testimonials from surgeons
and radiologists have been used to promote our Upright(R) MRI scanner. The first
such advertisement featured five surgeons and two radiologists, explaining the
Multi- Position(TM) diagnostic benefits of the Fonar Upright(R) MRI scanner to
them. Another advertisement featured a leading radiologist, telling why he
bought 12 Fonar Upright(R) MRI scanners and planned to buy more.
Most recently, we have commenced a telemarketing campaign for the purpose of
reaching prospective customers beyond the reach of our existing sales force, so
they can be made aware of the medical benefits of Fonar's new Upright(R) MRI
imaging technology.
We have an extensive advertising effort on Google, Yahoo and Bing Search
Marketing. Enter relevant terms, such as "mri" or "mri for back pain", and an ad
for Fonar will very likely appear in the paid search listings on the right side
of the results page or along the top of it.
Also, our new advertising for HMCA also serves as advertising for Fonar MRI
scanners. We are increasing internet awareness of and driving patient traffic to
the Upright(R) scanning centers we manage, by installing new Websites for every
location and embarking on a new internet advertising campaign. These websites
and advertising give prospective customers of Upright(R) MRI scanners a view of
operating Upright(R) MRI centers and the benefits of using an Upright(R) MRI
scanner. The success of HMCA-managed sites not only increases management fees to
HMCA but encourages new sales for Fonar as well.
To meet the demand for high field open MRI scanners, Fonar plans to devote its
principal efforts to marketing the Upright(R) MRI. The Upright(R) MRI is the
only scanner in the industry that has the unique capability of scanning patients
under weight-bearing conditions and in various positions of pain or other
symptoms. In addition we will continue to market our Fonar 360(TM) MRI scanners.
Utilizing a 6000 gauss (0.6 Tesla field strength) iron core electromagnet, the
Upright(R) MRI and Fonar 360(TM) scanner magnets are among the highest field
"open MRI" scanners in the industry. Announcements in the press have reported
the occurrence of MRI scanner explosions secondary to entrapped helium gas
evaporating from the liquid helium that circulates in conventional MRI scanners
to refrigerate the super-conducting wire generating the magnet fields of these
magnets. Fonar's Upright(R) MRI magnet does not utilize liquid Helium and is
free of this liability as is the Fonar 360(TM).
The Upright(R) MRI is also suited to fill a demand for better diagnoses of
scoliosis patients, who must be standing for the exam. Scoliosis patients are
typically subjected to routine x-ray exams for years. In the past, an x-ray
machine was the only modality that could provide that service. Typical MRI
scanners cannot provide this service because the patient cannot stand up inside
of them. The Fonar Upright(R) MRI scanner is the only MRI scanner which allows
the patient to stand during the exam. The Fonar Upright(R) Scanner avoids
radiation of the x-ray machines currently used for scoliosis, which have been
reported by the National Cancer Institute to cause a 70% increase in the risk of
breast cancer. Other important new applications are Upright(R) imaging of the
pelvic floor and abdomen to image prolapses and inguinal hernias. Fonar has also
developed the first non-invasive method to image the prostate: the patient
simply sits on a flat, seat-like coil.
We also will seek to introduce new MRI applications for our scanners such as
MRI-directed interventions.
Our areas of operations are principally in the United States. During the fiscal
year ended June 30, 2009, 13.2% of the Company's revenues were generated by
foreign sales, as compared to 2.4% for fiscal 2008.
We are seeking to promote foreign sales and have sold scanners in various
foreign countries. Foreign sales, however, have not yet proved to be a
significant source of revenue.
SERVICE AND UPGRADES FOR MRI SCANNERS
Our customer base of installed scanners has been and will continue to be an
additional source of income, independent of direct sales.
Income is generated from the installed base in two principal areas namely,
service and upgrades. Service and maintenance revenues from our external
installed base were approximately $10.5 million in fiscal 2009 and $11.0 million
in fiscal 2008. We expect service revenues to continue to increase as warranties
expire on previously sold scanners, and the customers then enter into service
contracts.
We also anticipate that our new scanners will result in upgrades income in
future fiscal years. The potential for upgrades income, particularly in the form
of new patient supporting upright imaging fixtures and receiver coils,
originates in the versatility and productivity of the new Upright(R) Imaging
technology. New medical uses for MRI technology are constantly being discovered
and are anticipated for the Upright(R) Imaging technology as well. New features
can often be added to the scanner by the implementation of little more than
versatile new software packages. For example, software can be added to existing
MRI angiography applications to synchronize angiograms with the cardiac cycle.
By doing so the dynamics of blood vessel filling and emptying can be visualized
with movies. Such enhancements are attractive to end users because they extend
the useful life of the equipment and enable the user to avoid obsolescence and
the expense of having to purchase new equipment. At the present time, however,
upgrade revenue is not significant. We had no upgrade revenue in fiscal 2009 and
fiscal 2008.
Service and upgrade revenues are expected to increase as sales of scanners and
the size of the customer base increases.
RESEARCH AND DEVELOPMENT
During the fiscal year ended June 30, 2009, we incurred expenditures of
$4,085,177, $491,707 of which was capitalized, on research and development, as
compared to $5,463,963, $457,372 of which was capitalized during the fiscal year
ended June 30, 2008.
Research and development activities have focused principally, on the development
and enhancement of the Upright(R) and Fonar 360(TM) MRI scanners. The Upright(R)
MRI and Fonar 360(TM) involve significant software and hardware development as
the new products represent entirely new hardware designs and architecture
requiring a new operating software. Our research activity includes developing a
multitude of new features for upright scanning made possible by the new high
speed data processing power of Fonar's newest scanners. In addition, the
Company's research and development efforts include the development of new
software, such as its Sympulse(TM) software and hardware upgrade and the
designing and continuing introduction of new receiver surface coils for the
Upright(R) MRI.
BACKLOG
Our backlog of unfilled orders at September 30, 2009 was approximately $25.7
million, as compared to $36.5 million at September 26, 2008. It is expected that
a substantial portion of the existing backlog of orders will be filled within
the 2010 fiscal year. Our contracts generally provide that if a customer cancels
an order, the customer's initial down payment for the MRI scanner is
nonrefundable.
PATENTS AND LICENSES
We currently have numerous patents in effect which relate to the technology and
components of the MRI scanners. We believe that these patents, and the know-how
we have developed, are material to our business.
One of our patents, issued in the name of Dr. Damadian and licensed to Fonar,
was United States patent No. 3,789,832, Apparatus and Method for Detecting
Cancer in Tissue, also referred to as the "1974 Patent". The development of our
MRI scanners have been based upon the 1974 Patent, and we believe that the 1974
Patent was the first of its kind to utilize MR to scan the human body and to
detect cancer. The 1974 Patent was extended beyond its original 17-year term and
expired in February, 1992.
We have significantly enhanced our patent position within the industry and now
possesses a substantial patent portfolio which provides us, under the aegis of
United States patent law, "the exclusive right to make, use and sell" many of
the scanner features which Fonar pioneered and which are now incorporated in
most MRI scanners sold by the industry. As of June 30, 2009, Fonar had 153
patents issued and approximately 50 patents pending. A number of Fonar's
existing patents specifically relate to protecting Fonar's position in the
high-field iron frame open MRI market. The patents further enhance Dr.
Damadian's pioneer patent, the 1974 Patent, that initiated the MRI industry and
provided the original invention of MRI scanning. The 153 issued patents extend
to various times up to 2027.
We also have patent cross-licensing agreements with other MRI manufacturers.
PRODUCT COMPETITION
MRI SCANNERS
A majority of the MRI scanners in use in hospitals and outpatient facilities and
at mobile sites in the United States are based on high field air core magnet
technology while the balance are based on open iron frame magnet technology.
Fonar's open iron frame MRI scanners are competing principally with high-field
air core scanners. Fonar's open MRI scanners, however, utilizing a 6,000 gauss
or 0.6 Tesla field strength, iron core electromagnet, were the first "open" MR
scanners at high field strength.
Fonar believes that its MRI scanners have significant advantages as compared to
the high-field air core scanners of its competitors. These advantages include:
1. There is no expansive fringe magnetic field. High field air core scanners
require a more expensive shielded room than is required for the iron frame
scanners. The shielded room required for the iron frame scanners is intended to
prevent interference from external radio frequencies.
2. They are more open and quiet.
3. They can scan the trauma victim, the cardiac arrest patient, the
respirator-supported patient, and premature and newborn babies. This is not
possible with high- field air core scanners because their magnetic field
interferes with conventional life-support equipment.
The principal competitive disadvantage of our products is that they are not
"high field strength", 1.0 Tesla +, magnets. As a general principle, the higher
field strength can produce a faster scan. In some parts of the body a faster
scan can be traded for a clearer picture. Although we believe that the benefits
of "openness" provided by our scanners compensate for the lower field strength,
certain customers will still prefer the higher field strength.
Fonar faces competition within the MRI industry from such firms as General
Electric Company, Philips N.V., Toshiba Corporation, Hitachi Corporation and
Siemens A.G. Most competitors have marketing and financial resources more
substantial than those available to us. They have in the past, and may in the
future, heavily discount the sales price of their scanners. Such competitors
sell both high field air core superconducting MRI scanners and iron frame
products. Fonar's original iron frame design, ultimately imitated by Fonar's
competitors to duplicate Fonar's origination of "Open" MRI magnets, gave rise to
current patient protected Upright(R) MRI technology with the result that Fonar
today is the unique and only supplier of the highest field MRI magnets (.6
Tesla) that are not superconducting, do not use liquid helium and are not
therefore susceptible to explosion.
The iron frame, because it could control the magnetic lines of force and place
them where wanted and remove them from where not wanted, such as in the Fonar
360(TM) where physicians and staff are standing, provide a much more versatile
magnet design than is possible with air core magnets. Air core magnets contain
no iron but consist entirely of turns of current carrying wire.
For an 11 year period from 1983-1994, Fonar's large competitors, with one
exception, generally rejected Fonar's "open" design but by now all have added
the iron frame "open" magnet to their MRI product lines. One reason for this
market shift, in addition to patient claustrophobia, is the awareness that the
open magnet designs permit access to the patient to perform MRI guided
procedures, a field which is now growing rapidly and is called "interventional
MRI."
The Fonar 360(TM) scanner explicitly addresses this growing market reception of
MRI guided interventions, and the first of these scanners was sold to a hospital
in England. Fonar's Upright(R) magnet also addresses the growing market
reception of MRI guided interventions. Although not enabling a full
interventional theater as the Fonar 360(TM) does, the iron frame Upright(R) MRI
design permits ready access to the patient and enables a wide range of
interventional procedures such as biopsies and needle or catheter delivered
therapies to be performed under MRI image guidance. The "tunnel" air core
superconductive scanners do not permit access to the patient while the patient
is inside the scanner.
Fonar expects to be the leader Upright(R) Multi-Position(TM) MRI for providing
dynamic visualization of body parts such as the spine and other joints as well
as dynamic visualization of the heart in its upright position when it is
sustaining its full normal physiological load. No companies possess the patented
Upright(R) MRI technology or the Fonar 360(TM)'s 360 degree full access
interventional technology.
OTHER IMAGING MODALITIES
Fonar's MRI scanners also compete with other diagnostic imaging systems, all of
which are based upon the ability of energy waves to penetrate human tissue and
to be detected by either photographic film or electronic devices for
presentation of an image on a television monitor. Three different kinds of
energy waves - X-ray, gamma and sound - are used in medical imaging techniques
which compete with MRI medical scanning, the first two of which involve exposing
the patient to potentially harmful radiation. These other imaging modalities
compete with MRI products on the basis of specific applications.
X-rays are the most common energy source used in imaging the body and are
employed in three imaging modalities:
1. Conventional X-ray systems, the oldest method of imaging, are typically used
to image bones and teeth. The image resolution of adjacent structures that have
high contrast, such as bone adjacent to soft tissue, is excellent, while the
discrimination between soft tissue organs is poor because of the nearly
equivalent penetration of x-rays.
2. Computerized Tomography, also referred to as "CT", systems couple computers
to x-ray instruments to produce cross-sectional images of particular large
organs or areas of the body. The CT scanner addresses the need for images, not
available by conventional radiography, that display anatomic relationships
spatially. However, CT images are generally limited to the transverse plane and
cannot readily be obtained in the two other planes, sagittal and coronal.
Improved picture resolution is available at the expense of increased exposure to
x-rays from multiple projections. Furthermore, the pictures obtained by this
method are computer reconstructions of a series of projections and, once
diseased tissue has been detected, CT scanning cannot be focused for more
detailed pictorial analysis or obtain a chemical analysis.
3. Digital radiography systems add computer image processing capability to
conventional x-ray systems. Digital radiography can be used in a number of
diagnostic procedures which provide continuous imaging of a particular area with
enhanced image quality and reduced patient exposure to radiation.
Nuclear medicine systems, which are based upon the detection of gamma radiation
generated by radioactive pharmaceuticals introduced into the body, are used to
provide information concerning soft tissue and internal body organs and
particularly to examine organ function over time.
Ultrasound systems emit, detect and process high frequency sound waves reflected
from organ boundaries and tissue interfaces to generate images of soft tissue
and internal body organs. Although the images are substantially less detailed
than those obtainable with x-ray methods, ultrasound is generally considered
harmless and therefore has found particular use in imaging the pregnant uterus.
X-ray machines, ultrasound machines, digital radiography systems and nuclear
medicine compete with the MRI scanners by offering significantly lower price and
space requirements. However, Fonar believes that the quality of the images
produced by its MRI scanners is generally superior to the quality of the images
produced by those other methodologies.
GOVERNMENT REGULATION
FDA Regulation
The Food and Drug Administration in accordance with Title 21 of the Code of
Federal Regulations regulates the manufacturing and marketing of Fonar's MRI
scanners. The regulations can be classified as either pre-market or post-
market. The pre-market requirements include obtaining marketing clearance,
proper device labeling, establishment registration and device listing. Once the
products are on the market, Fonar must comply with post-market surveillance
controls. These requirements include the Quality Systems Regulation, or "QSR",
also known as Current Good Manufacturing Practices or CGMPs, and Medical Device
Reporting, also referred to as MDR regulations. The QSR is a quality assurance
requirement that covers the design, packaging, labeling and manufacturing of a
medical device. The MDR regulation is an adverse event-reporting program.
Classes of Products
Under the Medical Device Amendments of 1976 to the Federal Food, Drug and
Cosmetic Act, all medical devices are classified by the FDA into one of three
classes. A Class I device is subject only to general controls, such as labeling
requirements and manufacturing practices; a Class II device must comply with
certain performance standards established by the FDA; and a Class III device
must obtain pre-market approval from the FDA prior to commercial marketing.
Fonar's products are Class II devices. Class I devices are subject to the least
regulatory control. They present minimal potential for harm to the user and are
often simpler in design than Class II or Class III devices. Class I devices are
subject to "General Controls" as are Class II and Class III devices. General
Controls include:
1. Establishment registration of companies which are required to register
under 21 CFR Part 807.20, such as manufacturers, distributors, re-packagers and
re- labelers.
2. Medical device listing with FDA of devices to be marketed.
3. Manufacturing devices in accordance with the Current Good Manufacturing
Practices Quality System Regulation in 21 CFR Part 820.
4. Labeling devices in accordance with labeling regulations in 21 CFR Part
801 or 809.
5. Submission of a Premarket Notification, pursuant to 510(k), before
marketing a device.
Class II devices are those for which general controls alone are insufficient to
assure safety and effectiveness, and existing methods are available to provide
such assurances. In addition to complying with general controls, Class II
devices are also subject to special controls. Special controls may include
special labeling requirements, guidance documents, mandatory performance
standards and post-market surveillance.
We received approval to market our Beta(TM) 3000 and Beta(TM) 3000M scanners as
Class III devices on September 26, 1984 and November 12, 1985. On July 28, 1988,
the Magnetic Resonance Diagnostic Device which includes MR Imaging and MR
Spectroscopy was reclassified by the FDA to Class II status. Consequently,
Fonar's products are now classified as Class II products. On July 26, 1991,
Fonar received FDA clearance to market the Ultimate(TM) Magnetic Resonance
Imaging Scanner as a Class II device. Fonar received FDA clearance to market the
QUAD(TM) 7000 in April 1995 and the QUAD(TM) 12000 in November 1995. On March
16, 2000, Fonar received FDA clearance to market the Fonar 360(TM) for
diagnostic imaging, the Open Sky(TM) version, and on October 3, 2000 received
FDA clearance for the Upright(R) MRI.
Premarketing Submission
Each person who wants to market Class I, II and some III devices intended for
human use in the U.S. must submit a 510(k) to FDA at least 90 days before
marketing unless the device is exempt from 510(k) requirements. A 510(k) is a
pre-marketing submission made to FDA to demonstrate that the device to be
marketed is as safe and effective, that is, substantially equivalent, SE, to a
legally marketed device that is not subject to pre-market approval, PMA.
Applicants must compare their 510(k) device to one or more similar devices
currently on the U.S. market and make and support their substantial equivalency
claims.
The FDA is committed to a 90-day clearance after submission of a 510(k),
provided the 510(k) is complete and there is no need to submit additional
information or data.
The 510(k) is essentially a brief statement and description of the product. As
Fonar's scanner products are Class II products, there are no pre-market data
requirements and the process is neither lengthy nor expensive.
An investigational device exemption, also referred to as IDE, allows the
investigational device to be used in a clinical study pending FDA clearance in
order to collect safety and effectiveness data required to support the Premarket
Approval, also referred to as PMA, application or a Premarket Notification
pursuant to 510(k), submission to the FDA. Clinical studies are most often
conducted to support a PMA.
For the most part, however, we have not found it necessary to utilize IDE's. The
standard 90 day clearance for our new MRI scanner products classified as Class
II products makes the IDE unnecessary, particularly in view of the time and
effort involved in compiling the information necessary to support an IDE.
Quality System Regulation
The Quality Management System is applicable to the design, manufacture,
administration of installation and servicing of magnetic resonance imaging
scanner systems. The FDA has authority to conduct detailed inspections of
manufacturing plants, to establish Good Manufacturing Practices which must be
followed in the manufacture of medical devices, to require periodic reporting of
product defects and to prohibit the exportation of medical devices that do not
comply with the law.
Medical Device Reporting Regulation
Manufacturers must report all MDR reportable events to the FDA. Each
manufacturer must review and evaluate all complaints to determine whether the
complaint represents an event which is required to be reported to FDA. Section
820.3(b) of the Quality Systems regulation defines a complaint as, "any written,
electronic or oral communication that alleges deficiencies related to the
identity, quality, durability, reliability, safety, effectiveness, or
performance of a device after it is released for distribution."
A report is required when a manufacturer becomes aware of information that
reasonably suggests that one of their marketed devices has or may have caused or
contributed to a death, serious injury, or has malfunctioned and that the device
or a similar device marketed by the manufacturer would be likely to cause or
contribute to a death or serious injury if the malfunction were to recur.
Malfunctions are not reportable if they are not likely to result in a death,
serious injury or other significant adverse event experience.
A malfunction which is or can be corrected during routine service or device
maintenance still must be reported if the recurrence of the malfunction is
likely to cause or contribute to a death or serious injury if it were to recur.
We have established and maintained written procedures for implementation of the
MDR regulation. These procedures include internal systems that:
provide for timely and effective identification, communication and
evaluation of adverse events;
provide a standardized review process and procedures for determining
whether or not an event is reportable; and
provide procedures to insure the timely transmission of complete
reports.
These procedures also include documentation and record keeping requirements for:
information that was evaluated to determine if an event was
reportable;
all medical device reports and information submitted to the FDA;
any information that was evaluated during preparation of annual
certification reports; and
systems that ensure access to information that facilitates timely
follow up and inspection by FDA.
FDA Enforcement
FDA may take the following actions to enforce the MDR regulation:
FDA-Initiated or Voluntary Recalls
Recalls are regulatory actions that remove a hazardous, potentially hazardous,
or a misbranded product from the marketplace. Recalls are also used to convey
additional information to the user concerning the safe use of the product.
Either FDA or the manufacturer can initiate recalls.
There are three classifications, i.e., I, II, or III, assigned by the Food and
Drug Administration to a particular product recall to indicate the relative
degree of health hazard presented by the product being recalled.
Class I
Is a situation in which there is a reasonable probability that the use of, or
exposure to, a violative product will cause serious adverse health consequences
or death.
Class II
Is a situation in which use of, or exposure to, a violative product may cause
temporary or medically reversible adverse health consequences or where the
probability of serious adverse health consequences is remote.
Class III
Is a situation in which use of, or exposure to, a violative product is not
likely to cause adverse health consequences.
Fonar has initiated five voluntary recalls. Four of the recalls were Class II
and one was Class III. The recalls involved making minor corrections to the
product in the field. Frequently, corrections which are made at the site of the
device are called field corrections as opposed to recalls.
Civil Money Penalties
The FDA, after an appropriate hearing, may impose civil money penalties for
violations of the FD&C Act that relate to medical devices. In determining the
amount of a civil penalty, FDA will take into account the nature, circumstances,
extent, and gravity of the violations, the violator's ability to pay, the effect
on the violator's ability to continue to do business, and any history of prior
violations. The civil money penalty may not exceed $15,000 for each violation
and may not exceed $1,000,000 for all violations adjudicated in a single
proceeding, per person.
Warning Letters
FDA issues written communications to a firm, indicating that the firm may incur
more severe sanctions if the violations described in the letter are not
corrected. Warning letters are issued to cause prompt correction of violations
that pose a hazard to health or that involve economic deception. The FDA
generally issues the letters before pursuing more severe sanctions.
Seizure
A seizure is a civil court action against a specific quantity of goods which
enables the FDA to remove these goods from commercial channels. After seizure,
no one may tamper with the goods except by permission of the court. The court
usually gives the owner or claimant of the seized merchandise approximately 30
days to decide a course of action. If they take no action, the court will
recommend disposal of the goods. If the owner decides to contest the
government's charges, the court will schedule the case for trial. A third option
allows the owner of the goods to request permission of the court to bring the
goods into compliance with the law. The owner of the goods is required to
provide a bond or, security deposit, to assure that they will perform the orders
of the court, and the owner must pay for FDA supervision of any activities by
the company to bring the goods into compliance.
Citation
A citation is a formal warning to a firm of intent to prosecute the firm if
violations of the FD&C Act are not corrected. It provides the firm an
opportunity to convince FDA not to prosecute.
Injunction
An injunction is a civil action filed by FDA against an individual or company.
Usually, FDA files an injunction to stop a company from continuing to
manufacture, package or distribute products that are in violation of the law.
Prosecution
Prosecution is a criminal action filed by FDA against a company or individual
charging violation of the law for past practices.
Foreign and Export Regulation
We obtain approvals as necessary in connection with the sales of our products in
foreign countries. In some cases, FDA approval has been sufficient for foreign
sales as well. Our standard practice has been to require either the distributor
or the customer to obtain any such foreign approvals or licenses which may be
required.
Legally marketed devices that comply with the requirements of the Food Drug &
Cosmetic Act require a Certificate to Foreign Government issued by the FDA for
export. Other devices that do not meet the requirements of the FD&C Act but
comply with the laws of a foreign government require a Certificate of
Exportability issued by the FDA. All products which we sell have FDA clearance
and would fall into the first category.
Foreign governments have differing requirements concerning the import of medical
devices into their respective jurisdictions. The European Union, also referred
to as EU, made up of 27 individual countries, has some essential requirements
described in the EU's Medical Device Directive, also referred to as MDD. In
order to export to one of these countries, we must meet the essential
requirements of the MDD and any additional requirements of the importing
country. The essential requirements are similar to some of the requirements
mandated by the FDA. In addition the MDD requires that we enlist a Notified Body
to examine and assess our documentation, a Technical Construction File, and
verify that the product has been manufactured in conformity with the
documentation. The notified body must carry out or arrange for the inspections
and tests necessary to verify that the product complies with the essential
requirements of the MDD, including safety performance and Electromagnetic
Compatibility, also referred to as EMC. Also required is a Quality System,
ISO-9001, assessment by the Notified Body. We were approved for ISO 9001
certification for its Quality Management System in April, 1999.
We received clearances to sell the Fonar 360(TM) and Upright(R) MRI scanners in
the EU in May, 2002.
Other countries require that their own testing laboratories perform an
evaluation of our devices. This requires that we must bring the foreign agency's
personnel to the USA to perform the evaluation at our expense before exporting.
Some countries, including many in Latin America and Africa, have very few
regulatory requirements.
To date, Fonar has been able to comply with all foreign regulatory requirements
applicable to its export sales.
Reimbursement to Medical Providers for MRI Scans
Effective November 22, 1985, the Department of Health and Human Services
authorized reimbursement of MRI scans under the Federal Medicare program. In
addition, most private insurance companies have authorized reimbursement for MRI
scans.
Anti-Kickback and Self-Referral Legislation
Proposed and enacted legislation at the State and Federal levels has restricted
referrals by physicians to medical and diagnostic centers in which they or their
family members have an interest. In addition, regulations have been adopted by
the Secretary of Health and Human Services which provide limited "safe harbors"
under the Medicare Anti-Kickback Statute. These safe harbors describe payments
and transactions which are permitted between an entity receiving reimbursement
under the Medicare program and those having an interest in or dealings with the
entity. Although the Company cannot predict the overall effect of the adoption
of these regulations on the medical equipment industry, the use and continuation
of limited partnerships, where investors may be referring physicians, to own and
operate MRI scanners could be greatly diminished.
Deficit Reduction Act
The Deficit Reduction Act, among other things, limits reimbursements for MRI
scans performed at MRI facilities. We believe that these limitations may be
having a general negative impact on the market for MRI scanners, but believe
that the unique capabilities of our products should counter any such effect on
Fonar as our marketing and advertising campaigns reach prospective customers.
Our Upright(R) MRI is the only MRI scanner which enables patients to be scanned
in a weight bearing position and the Fonar 360(TM) MRI is the only MRI scanner
which allows complete unobstructed 360 degree* access to the patient.
HEALTH MANAGEMENT CORPORATION OF AMERICA PHYSICIAN AND DIAGNOSTIC SERVICES
MANAGEMENT BUSINESS
Health Management Corporation of America, formed under the name U.S. Health
Management Corporation and referred to as "HMCA", was organized by us in March
1997. HMCA is a wholly-owned subsidiary which engages in the business of
providing comprehensive management services to imaging facilities. The services
we provide include development, administration, leasing of office space,
facilities and medical equipment, provision of supplies, staffing and
supervision of non-medical personnel, legal services, accounting, billing and
collection and the development and implementation of practice growth and
marketing strategies.
HMCA currently manages 10 MRI facilities. In April 2003, HMCA sold the portion
of its business which managed primary care medical practices, and in July 2005,
HMCA sold the portion of its business engaged in the management of physical
therapy and rehabilitation practices. This was the result of HMCA's decision to
focus on management of MRI facilities, the business in which HMCA is most
experienced. For the 2009 fiscal year, the revenues HMCA recognized from the MRI
facilities were $10.3 million. For the 2008 fiscal year, the revenues HMCA
recognized from the MRI facilities were $12.0 million.
HMCA GROWTH STRATEGY
HMCA's growth strategy focuses on upgrading and expanding the existing
facilities it manages and expanding the number of facilities it manages for its
clients. Our most important effort in this regard has been to promote and
facilitate the replacement of existing MRI scanners with new Fonar Upright(R)
MRI scanners. Presently, we have Upright(R) MRI scanners at all of the MRI
facilities we manage with the exception of the one in Dublin, Georgia.
In connection with its focus on managing MRI facilities, HMCA decided to sell
its business of managing physical therapy and rehabilitation practices. The sale
was completed on July 28, 2005, at the beginning of the 2006 fiscal year. The
sale was made pursuant to an asset purchase agreement to Health Plus Management
Services, L.L.C.
The purchase price under the asset purchase agreement was $6.6 million, payable
pursuant to a promissory note in 120 monthly installments commencing on August
28, 2005. The first twelve installments were interest only and the remaining 108
payments consisted of equal installments of principal and interest in the amount
of $76,014 each. The note is subject to prepayment provisions to the extent
Health Plus resells all or part of the assets and business or utilizes the
assets sold as collateral in any debt financing.
Pursuant to a Modification Agreement dated August 8, 2008, Health Plus made a
prepayment of principal in the amount of $2,000,000 in consideration for the
balance of the note being discounted by $1,000,000. After taking into account
the prepayment of $2,000,000 and the discount of $1,000,000, the remaining
balance of $2,378,130, was amortized and made payable over a period of 60
consecutive months, in equal installments of principal and interest of $47,089
each pursuant to a new replacement promissory note, bearing interest at a rate
of 7% per annum.
On July 31, 2007, HMCA sold its 20% equity interest in a non-consolidated entity
providing management services to a scanning center in the Bronx, New York for
approximately $600,000 and its 50% equity interest in a consolidated entity
providing management services to a scanning center in Orlando, Florida for
approximately $4.3 million.
Effective September 30, 2008, a wholly-owned subsidiary of HMCA sold its 92.3%
equity interest in an entity providing management services to a scanning center
in Bensonhurst, New York for approximately $2.3 million.
PHYSICIAN AND DIAGNOSTIC MANAGEMENT SERVICES
HMCA's services to the facilities it manages encompass substantially all of
their business operations. Each facility is controlled, however, by the
physician owner, not HMCA, and all medical services are performed by the
physicians and other medical personnel under the physician owner's supervision.
HMCA is the management company and performs services of a non-professional
nature. These services include:
1. Offices and Equipment. HMCA identifies, negotiates leases for and/or provides
office space and equipment to its clients. This includes technologically
sophisticated medical equipment. HMCA also provides improvements to leaseholds,
assistance in site selection and advice on improving, updating, expanding and
adapting to new technology.
2. Personnel. HMCA staffs all the non-medical positions of its clients with its
own employees, eliminating the client's need to interview, train and manage
non-medical employees. HMCA processes the necessary tax, insurance and other
documentation relating to employees.
3. Administrative. HMCA assists in the scheduling of patient appointments,
purchasing of medical supplies and equipment and handling of reporting,
accounting, processing and filing systems. It prepares and files the physician
portions of complex forms to enable its clients to participate in managed care
programs and to qualify for insurance reimbursement. We assist the clients to
implement programs and procedures to ensure full and timely regulatory
compliance and appropriate cost reimbursement under no-fault insurance and
workers' compensation guidelines, as well as compliance with other applicable
governmental requirements and regulations, including HIPAA and other privacy
requirements.
4. Billing and Collections. HMCA is responsible for the billing and collection
of revenues from third-party payors including those governed by no-fault and
workers' compensation statutes. HMCA is presently using a third party to perform
its billing and collection services for its clients' no-fault and workers'
compensation scanning business.
5. Cost Saving Programs. Based on available volume discounts, HMCA seeks to
obtain favorable pricing for medical supplies, equipment, contrast agents, such
as gadolinuim, and other inventory for its clients.
6. Diagnostic Imaging and Ancillary Services. HMCA can offer access to
diagnostic imaging equipment through diagnostic imaging facilities it manages.
The Company may expand the ancillary services offered in its network to include
CT-scans and x-rays, if it is determined that such additions may be useful to
clients.
7. Marketing Strategies. HMCA is responsible for developing marketing plans for
its clients.
8. Expansion Plans. HMCA assists the clients in developing expansion plans
including the opening of new or replacement facilities where appropriate.
HMCA advises clients on all aspects of their businesses, including expansion
where it is a reasonable objective, on a continuous basis. HMCA's objective is
to free physicians from as many non-medical duties as is practicable. Practices
can treat patients more efficiently if the physicians can spend less time on
business and administrative matters and more time practicing medicine.
HMCA provides its services pursuant to negotiated contracts with its clients.
While HMCA believes it can provide the greatest value to its clients by
furnishing the full range of services appropriate to that client, HMCA would
also be willing to enter into contracts providing for a more limited spectrum of
management services.
The facilities enter into contracts with third party payors, including managed
care companies. Neither HMCA's clients nor HMCA participate in any capitated
plans or other risk sharing arrangements. Capitated plans are those HMO programs
where the provider is paid a flat monthly fee per patient.
As of June 22, 2007, Dr. Robert Diamond purchased the stock of the professional
corporations owning the eight New York sites managed by HMCA, previously owned
by Dr. Raymond V. Damadian, the President, Chairman of the Board and principal
stockholder of Fonar. Dr. Diamond has been reading scans for HMCA managed
facilities for more than seven years. In connection with the sale, new
management agreements were substituted for the existing management agreements,
providing, for the same management services. The fees in fiscal 2008, however,
were flat monthly fees in the aggregate amount of $682,500 per month. The fees
in fiscal 2009 were flat monthly fees in the aggregate amount of $578,500. Fees
under the management agreements are subject to adjustment by mutual agreement on
an annual basis.
Dr. Damadian still owns the four MRI facilities in Georgia and Florida managed
by HMCA. In the case of contracts with these MRI facilities, fees are charged by
HMCA based on the number of procedures performed. These fees are also subject to
adjustment on an annual basis, based on mutual agreement. The per procedure
charges to the MRI facilities during fiscal 2009 ranged from $300 to $400 per
MRI scan. No MRI facilities or other medical facilities are owned by HMCA.
HMCA entered into an agreement in September, 2007 with Integrity Healthcare
Management, Inc., also referred to as "Integrity", which is owned by an
unrelated party. Under the terms of the agreement, Integrity supervised and
directed HMCA and the management of the facilities including the performance of
billing and collection services. The existing management agreements between the
facilities and HMCA remained in place. As compensation Integrity was entitled to
an annual fee equal to one-half of the increase in the consolidated cash flow of
HMCA and the facilities over the period from July 1, 2006 through June 30, 2007.
The term of the agreement automatically renewed on a year to year basis, but was
terminated by HMCA as of the end of June, 2008.
Commencing upon the termination of this agreement, however, we hired Health
Diagnostics, LLC, the parent company of Integrity, to perform all billing and
collection procedures for HCMA's clients on HMCA's behalf for a fee of 6% of all
adjusted deposits for these services. Effective May 1, 2009, this agreement was
terminated. HMCA now contracts with TriTech (Plainview, New York) to perform
billing and collection for its clients' no-fault and workers' compensation
business for a fee of 6% of all adjusted no-fault and workers' compensation
claims. HMCA handles all of its clients' other billings and collections.
HMCA MARKETING
HMCA's marketing strategy is to expand the business and improve the facilities
which it manages. HMCA will seek to increase the number of locations of those
facilities where market conditions are promising and to promote growth of its
clients' patient volume and revenue.
DIAGNOSTIC IMAGING FACILITIES AND OTHER ANCILLIARY SERVICES
Diagnostic imaging facilities managed by HMCA provide diagnostic imaging
services to patients referred by physicians who are either in private practice
or affiliated with managed care providers or other payor groups. The facilities
are operated in a manner which eliminates the admission and other administrative
inconveniences of in-hospital diagnostic imaging services. Imaging services are
performed in an outpatient setting by trained medical technologists under the
direction of physicians. Following diagnostic procedures, the images are
reviewed by the interpreting physicians who prepare a report of these tests and
their findings. These reports are transcribed by HMCA personnel and then
delivered to the referring physician.
HMCA develops marketing programs in an effort to establish and maintain
profitable referring physician relationships and to maximize reimbursement
yields. These marketing approaches identify and target selected market segments
consisting of area physicians with certain desirable medical specialties and
reimbursement yields. Corporate and facility managers determine these market
segments based upon an analysis of competition, imaging demand, medical
specialty and payor mix of each referral from the local market. HMCA also
directs marketing efforts at managed care providers.
Managed care providers have become an important factor in the diagnostic imaging
industry. To further its position, HMCA will seek to expand the imaging
modalities offered at its managed diagnostic imaging facilities.
HMCA COMPETITION
The physician and diagnostic management services field is highly competitive. A
number of large hospitals have acquired medical practices and this trend may
continue. HMCA expects that more competition will develop. Many competitors have
greater financial and other resources than HMCA.
With respect to the diagnostic imaging facilities managed by HMCA, the
outpatient diagnostic imaging industry is highly competitive. Competition
focuses primarily on attracting physician referrals at the local market level
and increasing referrals through relationships with managed care organizations.
HMCA believes that principal competitors for the diagnostic imaging centers are
hospitals and independent or management company-owned imaging centers.
Competitive factors include quality and timeliness of test results, ability to
develop and maintain relationships with managed care organizations and referring
physicians, type and quality of equipment, facility location, convenience of
scheduling and availability of patient appointment times. HMCA believes that it
will be able to effectively meet the competition in the outpatient diagnostic
imaging industry with the new Fonar Upright(R) MRI scanners at its facilities.
GOVERNMENT REGULATION APPLICABLE TO HMCA
FEDERAL REGULATION
Stark Law
Under the federal Self-Referral Law, also referred to as the "Stark Law", which
is applicable to Medicare and Medicaid patients, and the self-referral laws of
various States, certain health practitioners, including physicians,
chiropractors and podiatrists, are prohibited from referring their patients for
the provision of designated health services, including diagnostic imaging and
physical therapy services, to any entity with which they or their immediate
family members have a financial relationship, unless the referral fits within
one of the specific exceptions in the statutes or regulations. Statutory
exceptions under the Stark Law include, among others, direct physician services,
in-office ancillary services rendered within a group practice, space and
equipment rental and services rendered to enrollees of certain prepaid health
plans. Some of these exceptions are also available under the State self-referral
laws. HMCA believes that it and its clients are in compliance with these laws.
Anti-kickback Regulation
Under the federal Anti-kickback statute, which is applicable to Medicare and
Medicaid, it is illegal, among other things, for a provider of MRI services to
pay or offer money or other consideration to induce the referral of MRI scans.
Neither HMCA nor its clients engage in this practice.
In fiscal 2009, approximately 16.8% of the revenues of HMCA's clients were
attributable to Medicare and 1.5% were attributable to Medicaid. In fiscal 2008,
approximately 17.3% of the revenues of HMCA's clients were attributable to
Medicare and 1.8% were attributable to Medicaid.
Deficit Reduction Act
The Deficit Reduction Act, which among other things, places limits on Medicare
reimbursements to MRI scanning facilities, has had a negative but not material
effect on the Medicare receipts of HMCA's clients.
State Regulation
In addition to the federal self-referral law and federal Anti-kickback statute,
many States, including those in which HMCA and its clients operate, have their
own versions of self-referral and anti-kickback laws. These laws are not limited
in their applicability, as are the federal laws, to specific programs. HMCA
believes that it and its clients are in compliance with these laws.
Various States prohibit business corporations from practicing medicine. Various
States also prohibit the sharing of professional fees or fee splitting.
Consequently, HMCA leases space and equipment to clients and provides clients
with a range of non-medical administrative and managerial services for agreed
upon fees. HMCA does not engage in the practice of medicine or establish
standards of medical practice or policies for its clients in any State even
where permitted.
HMCA's clients generate revenue from patients covered by no-fault insurance and
workers' compensation programs. For the fiscal year ended June 30, 2009
approximately 39.6% of our clients' receipts were from patients covered by no-
fault insurance and approximately 6.7% of our client's receipts were from
patients covered by worker's compensation programs. For the fiscal year ended
June 30, 2008, approximately 37.9% of HMCA's clients' receipts were from
patients covered by no-fault insurance and approximately 6.5% of HMCA's clients'
receipts were from patients covered by workers compensation programs. In the
event that changes in these laws alter the fee structures or methods of
providing service, or impose additional or different requirements, HMCA could be
required to modify its business practices and services in ways that could be
more costly to HMCA or in ways that decrease the revenues which HMCA receives
from its clients.
HMCA believes that it and its clients are in compliance with applicable Federal,
State and local laws. HMCA does not believe that such laws will have any
material effect on its business.
EMPLOYEES
As of July 1, 2009, we employed 292 persons on a full-time and part-time basis.
Of such employees, 27 were engaged in marketing and sales, 35 in research and
development, 39 in production, 41 in customer support services, 36 in
administration, 74 on site at facilities and offices, 18 performing billing and
collection functions managed by HMCA and 22 performing transcription services
for those facilities.
ITEM 2. PROPERTIES
Fonar leases approximately 117,000 square feet of office and plant space at its
principal offices in Melville, New York and at one other location in Melville,
New York at a current aggregate annual rental rate of $1,194,596, excluding
utilities, taxes and other related expenses. The term of one of the leases
includes options to renew up through 2016 and the terms of the other leases
extend to 2013. Management believes that these premises are adequate for its
current needs. HMCA has consolidated its headquarters with those of Fonar as
part of Fonar's cost cutting program. HMCA maintains leased office premises for
its clients having an aggregate annual rental rate of approximately $800,000
under leases having various terms.
ITEM 3. LEGAL PROCEEDINGS
There is no material litigation pending, or to its knowledge, threatened against
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is traded in the Nasdaq SmallCap market under the National
Association of Securities Dealers Automated Quotation System, also referred to
as "NASDAQ", symbol FONR. The following table sets forth the high and low trades
reported in NASDAQ System for the periods shown.
Fiscal Quarter High Low
--------------------------- ---- ----
January - March 2007 8.75 5.00
April - June 2007 7.50 4.01
July - September 2007 10.00 4.20
October - December 2007 8.80 5.18
January - March 2008 5.45 2.38
April - June 2008 4.20 2.21
July - September 2008 2.43 1.35
January - March 2009 1.38 0.62
April - June 2009 3.92 0.82
July - September 15, 2009 2.33 1.60
On September 30, 2009, we had approximately 4,392 stockholders of record of our
Common Stock, 12 stockholders of record of our Class B Common Stock, 3
stockholders of record of our Class C Common Stock and 3,864 stockholders of
record of our Class A Non-voting Preferred Stock.
At the present time, the only class of our securities for which there is a
market is the Common Stock.
In July, 2008 we received a notice from NASDAQ that our common stock would be
delisted due to failure to hold our annual meeting during fiscal 2008. We
appealed and requested a hearing before the Hearing Panel stating that we
planned, subject to their approval to hold a joint two-year meeting on November
17, 2008. Fonar held its two-year meeting on November 17, 2008 and accordingly
remained listed. Fonar received an additional notice of delisting for failure to
meet certain continuing listing requirements. Fonar appealed again and requested
a hearing, asking that Fonar be granted additional time to come into compliance.
Fonar was then granted until October 5, 2009 to demonstrate compliance with the
criteria.
We paid cash dividends in fiscal 1998 and the first three quarters of fiscal
1999 on monies we received from the enforcement of our patents. Except for these
dividends, we have not paid any cash dividends. Except for these dividends, we
expect that we will retain earnings to finance the development and expansion of
our business.
Item 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data has been extracted from our
consolidated financial statements for the five years ended June 30, 2009. This
consolidated selected financial data should be read in conjunction with our
consolidated financial statements and the related notes included in Item 8 of
this form.
As of and For the Periods Ended June 30,
2009 2008 2007 2006 2005
------------- ------------- ------------- ------------ ------------
STATEMENT OF
OPERATIONS
Revenues $ 39,722,000 $ 35,569,000 $ 33,212,000 $ 33,076,000 $104,899,000
Cost of
revenues $ 22,123,000 $ 24,893,000 $ 26,660,000 $ 26,950,000 $ 67,331,000
Research
and Development
Expenses $ 3,593,000 $ 5,007,000 $ 5,692,000 $ 6,868,000 $ 6,007,000
Net Income(Loss) $ 1,121,000 $(13,508,000) $(25,539,000) $(29,963,000) $ 1,014,000
Basic and Diluted
Net Income (Loss)
per common share-
continuing
operations $0.21 $(2.76) $(5.29) $(6.78) $0.23
Basic Weighted
average number of
shares outstanding 4,904,358 4,897,997 4,830,652 4,416,125 4,063,680
Diluted Weighted
average number of
shares outstanding 5,031,862 4,897,997 4,830,652 4,416,125 4,220,228
BALANCE SHEET DATA
Working capital $(10,838,000) $(15,965,000) $ (7,566,000) $ 14,237,000 $3 6,224,000
Total Assets 28,359,000 35,226,000 $ 41,210,000 $ 57,230,000 $ 76,094,000
Long-term debt
and obligations
under capital
leases (1) $ 919,000 $ 1,130,000 $ 1,213,000 $ 1,406,000 $ 1,392,000
Stockholder's
(deficiency)
equity $ (2,941,000) $ (4,245,000) $ 8,898,000 $ 30,419,000 $ 51,869,000
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
INTRODUCTION.
Fonar was formed in 1978 to engage in the business of designing, manufacturing
and selling MRI scanners. In 1997, we formed a wholly-owned subsidiary, Health
Management Corporation of America, also referred to as "HMCA", formerly known as
U.S. Health Management Corporation, in order to expand into the physician and
diagnostic management services business.
Fonar's principal MRI products are its Stand-Up(R)/Upright(R) MRI and Fonar
360(TM) MRI scanners. The Stand-Up(R) MRI allows patients to be scanned for the
first time under weight-bearing conditions. The Company has been aggressively
seeking new sales. The Stand-Up(R) MRI is the only MRI capable of producing
images in the weight bearing state.
At 0.6 Tesla field strength, the Upright(R) MRI and Fonar 360(TM) magnets are
among the highest field open MRI scanners in the industry, offering
non-claustrophobic MRI together with high-field image quality. Fonar's open MRI
scanners were the first high field strength MRI scanners in the industry.
HMCA commenced operations in July, 1997 and generates revenues from providing
comprehensive management services, including development, administration,
accounting, billing and collection services, together with office space, medical
equipment, supplies and non-medical personnel to its clients. Revenues are in
the form of fees which are earned under contracts with HMCA's clients. Since
July 2005, HMCA has engaged only in the management of MRI facilities.
For the fiscal years ended June 30, 2009 and June 30, 2008, 28.4% and 30.8%,
respectively, of HMCA's revenues were derived from contracts with facilities
owned by Dr. Raymond V. Damadian, the President of Fonar and HMCA and principal
stockholder of Fonar. The agreements with these MRI facilities are for one- year
terms which renew automatically on an annual basis, unless terminated. The fees
are based on the number of procedures performed and ranged from $300 to $400 per
MRI scan. The balance of HMCA's revenues are derived from contracts with MRI
facilities purchased by Dr. Robert Diamond from Dr. Damadian. The MRI facilities
owned by Dr. Diamond are charged a flat fee, pursuant to new contracts executed
in connection with the sale of the MRI facilities at the end of fiscal 2007. The
fees are reviewed and if appropriate, adjusted on an annual basis by mutual
agreement.
Critical Accounting Policies
----------------------------
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States
of America. The preparation of these consolidated financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to investments, intangible assets, income taxes, contingencies and
litigation. We base our estimates on historical experience and on various
assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements. We recognize revenue and related costs of revenue from
sales contracts for our MRI scanners, under the percentage-of-completion method.
Under this method, we recognize revenue and related costs of revenue, as each
sub-assembly is completed. Amounts received in advance of our commencement of
production are recorded as customer advances.
We record a valuation allowance to reduce our deferred tax assets to the amount
that is more likely than not to be realized. As of June 30, 2009, we recorded a
valuation allowance which reduced our deferred tax assets to equal our deferred
tax liability.
We amortize our intangible assets, including patents, purchased management
agreements and capitalized software development costs, over the shorter of the
contractual/legal life or the estimated economic life. Our amortization life for
patents and capitalized software development costs is 15 to 17 years and 5
years, respectively.
We periodically assess the recoverability of long-lived assets, including
property and equipment, intangibles and management agreements, when there are
indications of potential impairment, based on estimates of undiscounted future
cash flows. The amount of impairment is calculated by comparing anticipated
discounted future cash flows with the carrying value of the related asset. In
performing this analysis, management considers such factors as current results,
trends, and future prospects, in addition to other economic factors.
RESULTS OF OPERATIONS. FISCAL 2009 COMPARED TO FISCAL 2008
In fiscal 2009, we experienced a net income of $1.1 million on revenues of $39.7
million, as compared to a net loss of $13.5 million on revenues of $35.6 million
for fiscal 2008. This represents an increase in revenues of 11.7%. Included in
net income for fiscal 2009 is a gain of $1.4 million recognized by the Company
on the sale of a consolidated subsidiary. The impact of increased unrelated
party product sales, which increased by 51.6%, was the principal factor
accounting for the increased revenues of the Company. Related management fees
decreased by 11.9%. In addition, total costs and expenses decreased by 23.0%.
Our consolidated operating results improved by $16.2 million to an operating
loss of $704,000 for fiscal 2009 as compared to an operating loss of $16.9
million for fiscal 2008.
Discussion of Operating Results of Medical Equipment Segment
Fiscal 2009 Compared to Fiscal 2008
------------------------------------------------------------
Revenues attributable to our medical equipment segment increased by 25.3% to
$29.5 million in fiscal 2009 from $23.5 million in fiscal 2008, with product
sales revenues increasing 51.6% from $11.3 million in fiscal 2008 to $17.2
million in fiscal 2009, and service revenue decreasing by 4.6%, from $11.0
million in fiscal 2008 to $10.5 million in fiscal 2009. This increase in
revenues was attributable to an increase in sales of our Upright(R) MRI to
unrelated parties, notwithstanding the decrease in service and repair fees.
We anticipate an improvement in our Upright(R) MRI sales because the Upright(R)
MRI is unique in that it permits MRI scans to be performed on patients upright
in the weight-bearing state and in multiple positions that correlate with
symptoms. An important event in our ongoing effort to educate both the medical
community and payors about the benefits, if not necessity, of utilizing
Upright(R) MRI scanning, occurred in fiscal 2007 when we sold an Upright(R) MRI
scanner to the largest orthopedic hospital in the Netherlands, St.
Maartenskliniek. Upon placing the order, the Chairman of Spine Surgery at St.
Maartenskliniek expressed the view that for their hospital to continue to engage
in spine surgery without Fonar's Upright(R) MRI technology, now that it was
available was "unacceptable" and that owning the scanner "was not optional, but
mandatory". He further stated that "[o]nce our active research program has
discovered the benefits of this new Fonar technology for patients, we intend to
publish the results in a lot of peer reviewed scientific journals".
In addition, significant progress is being made in developing the Fonar 360(TM)
MRI scanner so that it can be used in interventional procedures. At the
Oxford-Nuffield site in the United Kingdom, where we installed the first Fonar
360(TM) MRI, Fonar software engineers have completed and installed our 2nd
generation tracking software, which is designed to enable the surgeons to insert
needles into the patient and accurately advance them under direct visual image
guidance to the target tissue, such as a tumor, in order to inject therapeutic
agents directly into the tissue.
Product sales to unrelated parties increased by 51.6% in fiscal 2009 from $11.3
million in fiscal 2008 to $17.2 million in fiscal 2009. There were no product
sales to related parties in fiscal 2009 and 2008.
We believe that one of our principal challenges in achieving greater market
penetration is attributable to the better name recognition and larger sales
forces of our larger competitors such as General Electric, Siemens, Hitachi,
Philips and Toshiba and the ability of some of our competitors to offer
attractive financing terms through affiliates, such as G.E. Capital.
Nevertheless, no other competitor offers a whole body weight bearing MRI scanner
such as the Upright(R) MRI, and the General Electric Medical Systems division of
General Electric acts as a manufacturer's representative for the Stand-Up(R)
MRI.
We believe that our aggregate product sales to unrelated parties of Upright(R)
Scanners shows that we are successfully meeting that challenge.
The operating results for the medical equipment segment improved by $14.2
million from a loss of $14.1 million in fiscal 2008 to an income of $27,000 in
fiscal 2009. This improvement is attributable most significantly to an increase
in our scanner sales and a decrease in our total costs and expenses.
We recognized revenues of $16.6 million from the sale of our Upright(R) MRI
scanners in fiscal 2009. In fiscal 2008, we recognized revenues of $11.2 million
from the sale of Upright(R) MRI scanners.
None of our revenues for fiscal 2009 and fiscal 2008 were attributable to sales
to related parties.
License and royalty revenue in fiscal 2009 increased to $1.8 million as compared
to $1.2 million in fiscal 2008.
Research and development expenses, net of capitalized costs, decreased by 28.2%
to $3.6 million in fiscal 2009 as compared to $5.0 million in fiscal 2008. Our
expenses for fiscal 2009 represented continued research and development of
Fonar's scanners, Fonar's new hardware and software product, Sympulse(TM) and
new surface coils to be used with the Upright(R) MRI scanner.
Discussion of Operating Results of Physician and Diagnostic Services Management
Segment.
Fiscal 2009 Compared to Fiscal 2008
--------------------------------------------------------------------------------
Revenues attributable to the Company's physician and diagnostic services
management segment, HMCA, decreased by 14.9% to $10.3 million in fiscal 2009
from $12.0 million in fiscal 2008. The decrease in revenues was primarily due to
the sale of a 92.3% equity interest in an enterprise managing an MRI center.
Presently, nine of the ten MRI facilities managed by HMCA have Upright(R) MRI
scanners.
Cost of revenues as a percentage of the related revenues for our physician and
diagnostic services management segment decreased from $8.6 million or 71.3% of
related revenues for the year ended June 30, 2008 to $7.3 million, or 71.2% of
related revenue for the year ended June 30, 2009. The decrease in revenues
resulted from our sale of a 92.3% equity interest in an enterprising managing an
MRI center.
Operating results of this segment improved from an operating loss of $2.8
million in fiscal 2008 to operating loss of $731,000 in fiscal 2009. We
attribute the improvement to a decrease in our cost of revenues.
Discussion of Certain Consolidated Results of Operations Fiscal 2009 Compared to
Fiscal 2008
--------------------------------------------------------------------------------
Interest and investment income decreased in 2009 compared to 2008. We recognized
interest income of $346,506 in 2009 as compared to $728,711 in fiscal 2008,
representing an decrease of 52.4%.
Interest expense of $333,229 was recognized in fiscal 2009, as compared to
$535,322 in fiscal 2008, representing an decrease of 37.8%.
Notwithstanding that revenue increased by 11.7%, selling, general and
administrative expenses, decreased by 34.2% to $13.4 million in fiscal 2009 from
$20.4 million in fiscal 2008.
Compensatory element of stock issuances also increased from approximately $360
in fiscal 2008 to $4,061 in fiscal 2009. This reflected Fonar's policy to
refrain from using its stock bonus plans to pay employees and others, in order
to prevent dilution of its outstanding stock.
The lower provision for bad debts of $1.3 million in fiscal 2009 as compared to
$2.2 million in fiscal 2008, reflected an increase in reserves of certain
indebtedness in fiscal 2008 by our physician and diagnostic services management
segment. In fiscal 2009, the three Florida sites managed by HMCA jointly and
severally guaranteed the payment of their management fees to HMCA, further
securing HMCA's management fee receivables.
Service and repair fees have decreased, from $11.0 million in fiscal 2008 and to
$10.5 million in fiscal 2009.
Continuing our tradition as the originator of MRI, we remain committed to
maintaining our position as the leading innovator of the industry through
aggressive investing in research and development. In fiscal 2009 we continued
our investment in the development of our new MRI scanners, together with
software and upgrades, with an investment of $4,085,177 in research and
development, $491,707 of which was capitalized, as compared to $5,463,963,
$457,372 of which was capitalized, in fiscal 2008. The research and development
expenditures were approximately 12.2% of revenues attributable to our medical
equipment segment, and 9.0% of total revenues, in 2009 and 21.3% of medical
equipment segment revenues, and 14.1% of total revenues in fiscal 2008. This
represented a 28.2% decrease in research and development expenditures in fiscal
2009 as compared to fiscal 2008. Notwithstanding the decrease in research and
development expenditures, in connection with our overall cost cutting programs,
the Company remains fully committed to developing new features, software and
upgrades to improve its products.
The physician and diagnostic services management segment, HMCA, revenues
decreased, from $12.0 in fiscal 2008 to $10.3 million in fiscal 2009. This is
primarily attributable to the sale of HMCA's 92.3% equity interest in an entity
providing management services to a scanning center in Bensonhurst, New York.
We have been taking steps to improve HMCA revenues by our marketing efforts,
which focus on the unique capability of our Upright(R) MRI scanners to scan
patients in different positions.
Marketing expenditures are likely to increase, as the Company continues its
efforts to promote sales.
In the beginning of fiscal 2006, in July of 2005, HMCA sold the portion of its
business engaged in the management of physical therapy and rehabilitation
facilities to Health Plus Management Services, L.L.C. for a purchase price of
$6.6 million, payable pursuant to a promissory note payable in 120 monthly
installments.
The first twelve installments were interest only and the remaining 108 payments
were to consist of equal installments of principal and interest in the amount of
$76,014 each. The note was secured by a first lien on all of the assets of
Health Plus, including its accounts receivable. The note was subject to
prepayment provisions to the extent Health Plus resells all or part of the
assets and business or utilizes the assets sold as collateral in any debt
financing.
Pursuant to a Modification Agreement dated August 8, 2008, Health Plus made a
prepayment of $2,000,000 on the note and received a discount of $1,000,000 in
return. A new note was executed for the balance of the indebtedness remaining,
in the amount of $2,378,130, providing for 60 consecutive equal monthly payments
of principal and interest of $47,090 each. The security agreement and the
mandatory prepayment provisions applicable to the original note are also
applicable to the replacement note.
In fiscal 2008 and 2009, HMCA received no revenue from the physical therapy and
rehabilitation business.
The Company's management fees are dependent on collection by its clients of fees
from reimbursements from Medicare, Medicaid, private insurance, no fault and
workers' compensation carriers, self -pay and other third-party payors. The
health care industry is experiencing the effects of the federal and state
governments' trend toward cost containment, as governments and other third-
party payors seek to impose lower reimbursement and utilization rates and
negotiate reduced payment schedules with providers. The cost-containment
measures, consolidated with the increasing influence of managed-care payors and
competition for patients, have resulted in reduced rates of reimbursement for
services provided by the Company's clients from time to time. The Company's
future revenues and results of operations may be adversely impacted by future
reductions in reimbursement rates.
In 2009, the Obama administration announced its intentions for healthcare reform
in the United States. The plan includes providing healthcare coverage for some
40 million uninsured Americans. The plan calls for, among other things, more
vigilant control of healthcare utilization, including diagnostic imaging
services. The use of radiology benefit managers, or RBM's has increased in
recent years. It is common practice for health insurance carriers to contract
with RBMs to manage utilization of diagnostic imaging procedures for their
insureds. In many cases, this leads to lower utilization of imaging procedures
based on a determination of medical necessity. The efficacy of RBMs is still a
high controversial topic. The Company cannot predict whether the current
administration's healthcare plan and the use of RBMs will negatively impact its
business, but it is possible that the Company's financial position and results
of operations could be negatively affected by increased utilization of RBMs.
While the Company has prepared certain estimates of the impact of the above
discussed changes and proposed changes, it is not possible to fully quantify
their impact on its business. There can be no assurance that the impact of these
changes will not be greater than estimated or that any future health care
legislation or reimbursement changes will not adversely affect the Company's
business.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and marketable securities decreased by 52.1% from $2.4
million at June 30, 2008 to $1.2 million at June 30, 2009.
Marketable securities approximated $23,000 as of June 30, 2009, as compared to
$1.1 million as of June 30, 2008.
Cash used in operating activities for fiscal 2009 approximated $6.1 million.
Cash used in operating activities was attributable to a decrease in customer
advances of $5.0 million and a decrease in billings in excess of costs and
estimated earnings on uncompleted contracts of $3.7 million, offset by the net
income of $1.1 million and an increase in notes receivables of $508,000.
Cash provided by investing activities for fiscal 2009 approximated $5.9 million.
The principal uses of cash from investing activities were purchases of property
and equipment of $28,000, costs of capitalized software development of $492,000
and costs of patents and copyrights of $331,000. The principal source of cash
provided by investing activities were the proceeds of approximately $2.3 million
from the sale of a consolidated subsidiary, proceeds from note receivables of
$2.0 million and proceeds of $1.3 million from the cash surrender value of life
insurance.
Cash used in financing activities for fiscal 2009 approximated $83,000. The
principal sources of cash in financing activities were proceeds from the long
term debt of $258,000 and proceeds of $127,000 from repayment of notes
receivable from employee stockholders, offset by the repayment of borrowings and
capital lease obligations of $279,000 and distributions to holders of minority
interests of $23,000.
Total liabilities decreased by 20.5% during fiscal 2009, from approximately
$39.3 million at June 30, 2008 to approximately $31.2 million at June 30, 2009.
The decrease in total liabilities reflected principally an decrease in billings
in excess of costs and estimated earnings on uncompleted contracts of 64.9% from
$5.8 million at June 30, 2008 to $2.0 million at June 30, 2009 and a decrease in
customer advances of 35.3% from $14.3 million at June 30, 2008 to $9.2 million
at June 30, 2009, resulting from our decreased backlog.
Our contractual obligations and the periods in which they are scheduled to
become due are set forth in the following table:
Due in
Less Due Due Due
Contractual than 1 in 1-3 in 4-5 after 5
Obligation Total Year years years years
-------------- ---------- ----------- ---------- ---------- ----------
Long-term debt $ 962,591 $ 235,771 $ 191,136 $ - $ 535,684
Capital lease
Obligation $ 313,799 $ 121,232 $ 192,567 $ - $ -
Operating
leases $12,054,134 $1,994,523 $4,068,513 $3,623,430 $2,367,668
Stipulation
Agreements $ 763,511 $ 579,343 $ 184,168 $ - $ -
----------- ---------- ---------- ---------- ---------
Total cash
Obligations $14,094,035 $2,930,869 $4,636,384 $3,623,430 $2,903,352
=========== ========== ========== ========== ==========
As at June 30, 2009, our obligations included approximately $2.4 million in
various state sales taxes.
At June 30, 2009, however, we had a working capital deficit of approximately
$10.8 million as compared to a working capital deficit of $16.0 million at June
30, 2008 and a stockholders' deficiency of $2.9 million at June 30, 2009 as
compared to a stockholders' deficiency of $4.2 million at June 30, 2008. For the
year ended June 30, 2009, we realized a net income of $1.1 million, which
included non-cash charges of approximately $3.1 million. Our net income for
fiscal 2009 included a gain of $1.4 million recognized on the sale of a
consolidated subsidiary.
Our principal source of liquidity has been derived from revenues, as well as by
cash provided by the sale of marketable securities and other assets.
In July 2007, we sold our 50% interest in a consolidated subsidiary and our 20%
interest in a non-consolidated subsidiary, and received proceeds of
approximately $4.8 million.
Effective September 30, 2008, a wholly-owned subsidiary of HMCA sold its 92.3%
equity interest in an entity providing management services to a scanning center
in Bensonhurst, New York for approximately $2.3 million.
In August, 2008, the Company entered into a modification agreement with regard
to the asset purchase agreement with Health Plus Management Services, L.L.C. The
Company received a $2,000,000 payment on the note issued by Health Plus.
Our business plan includes an aggressive program for manufacturing and selling
our Upright(R) MRI scanners. In addition, we are enhancing our revenue by
participating in the physician and diagnostic services management business
through our subsidiary, HMCA and have upgraded the facilities which it manages,
most significantly by the replacement of existing MRI scanners with new
Upright(R) MRI scanners. Presently, of the 10 MRI facilities managed by HMCA, 9
are equipped with Upright(R) MRI scanners.
Our business plan also calls for a continuing emphasis on providing our
customers with enhanced equipment service and maintenance capabilities and
delivering state-of-the-art, innovative and high quality equipment upgrades at
competitive prices. Fees for on-going service and maintenance from our installed
base of scanners were $11.0 million for the year ended June 30, 2008 and $10.5
million for the year ended June 30, 2009.
In order to reduce our net losses and demands on our cash and other liquid
reserves, we instituted an aggressive program of cost cutting during and
following the end of fiscal 2008. These measures included consolidating HMCA's
office space with Fonar's office space, reductions in the size of our workforce,
compensation and benefits, as well as across the board reduction of expenses.
The cost reductions were intended to enable us to withstand periods of low
volumes of MRI scanner sales, by keeping expenditures at levels which, if
necessary, can be supported by service revenues and HMCA revenues. We are also
seeking equity and debt financing and have been engaged in discussions with
several possible sources.
In order to promote sales, we are continuing to focus on marketing campaigns to
strengthen the demand for our products and services. Management anticipates that
Fonar's capital resources will improve if Fonar's MRI scanner products gain
wider market recognition and acceptance resulting in both increased product
sales and scan volumes. If we are not successful with our marketing efforts to
increase sales, we will experience a shortfall in cash, and it will be necessary
to further reduce operating expenses in a manner or obtain funds through equity
or debt financing in sufficient amounts to avoid the need to curtail our
operations subsequent to June 30, 2010. Current economic credit conditions have
contributed to a slowing business environment. Given such liquidity and credit
constraints in the markets, the business may suffer, should the credit markets
not improve in the near future. The direct impact of these conditions is not
fully known. However, there can be no assurance that we would be able to secure
additional funds if needed and that if such funds were available, whether the
terms or conditions would be acceptable to us. In such case, the reduction in
operating expenses might need to be substantial in order for us to generate
positive cash flow to sustain our operations.
If we are unable to meet expenditures with revenues or financing then it will be
necessary to reduce expenses further, or seek other sources of funds through the
issuance of debt or equity financing in order to conduct operations as now
conducted subsequent to fiscal 2010.
Capital expenditures for fiscal 2009 approximated $28,000. Capitalized software
costs were approximately $492,000, and capitalized patent costs were
approximately $331,000.
Fonar has not committed to making capital expenditures in the 2010 fiscal year
other than its plans to continue research and development expenditures at
current levels.
The accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America and
assume that the Company will continue as a going concern. The Company has
suffered recurring losses from operations, continues to generate negative cash
flows from operating activities and had negative working capital at June 30,
2009. These conditions raise substantial doubt about the Company's ability to
continue as a going concern. The accompanying financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Fonar's investments in fixed rate instruments. None of the fixed rate
instruments in which we invest extend beyond June 30, 2010. All of our revenue,
expense and capital purchasing activities are transacted in United States
dollars.
See [Note 13] to the consolidated Financial Statements for information on long-
term debt.
Item 8.
FINANCIAL STATEMENTS
FONAR CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No.
-------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED BALANCE SHEETS
At June 30, 2009 and 2008
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30, 2009 and 2008
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
For the Years Ended June 30, 2009 and 2008
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30, 2009 and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
FONAR Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of FONAR
Corporation and Subsidiaries (the "Company") as of June 30, 2009 and 2008, and
the related consolidated statements of operations, comprehensive loss,
stockholders' deficiency and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of FONAR
Corporation and Subsidiaries at June 30, 2009 and 2008, and the consolidated
results of its operations and its cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying consolidated financial statements have been prepared assuming
that FONAR Corporation and Subsidiaries will continue as a going concern. As
more fully described in Note 1, the Company has suffered recurring losses from
operations, continues to generate negative cash flows from operating activities,
has negative working capital at June 30, 2009 and is dependent on asset sales to
fund its shortfall from operations. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Marcum LLP
New York, New York
October 5, 2009
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
------
June 30,
------------------------
2009 2008
----------- -----------
Current Assets:
Cash and cash equivalents $ 1,225,619 $ 1,325,512
Marketable securities 22,652 1,068,168
Accounts receivable - net of allowances for
doubtful accounts of $2,393,326 and $2,020,208
at June 30, 2009 and 2008, respectively 5,391,822 5,157,594
Medical receivables - net of allowances for
doubtful accounts of $1,343,500 and $769,000
at June 30, 2009 and 2008, respectively 374,225 1,227,858
Management fee receivable - net of allowances for
doubtful accounts of $5,093,345 and $3,958,733
at June 30, 2009 and 2008, respectively 3,273,756 5,040,523
Management fee receivable - related medical
practices - net of allowances for doubtful
accounts of $1,094,818 and $2,413,483 at
June 30, 2009 and 2008, respectively 2,196,580 1,372,261
Costs and estimated earnings in excess of
billings on uncompleted contracts 1,475,706 6,285
Inventories 3,172,397 3,255,915
Current portion of advances and notes to related
medical practices 164,611 155,423
Current portion of note receivable 517,934 2,508,306
Prepaid expenses and other current assets 472,397 869,353
----------- -----------
Total Current Assets 18,287,699 21,987,198
Property and Equipment - Net 2,892,380 3,932,533
Advances and Notes to Related Medical Practices -
net of allowances for doubtful accounts of
$264,791 at June 30, 2009 and at June 30, 2008 89,032 263,363
Notes Receivable - net of allowance for doubtful
accounts of $65,000 at June 30, 2009 and at
June 30, 2008 1,778,626 2,296,560
Other Intangible Assets - Net 4,920,241 4,809,564
Other Assets 391,237 1,936,415
----------- -----------
Total Assets $28,359,215 $35,225,633
=========== ===========
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES
-----------
June 30,
------------------------
2009 2008
----------- -----------
Current Liabilities:
Current portion of long-term debt and capital
Leases $ 277,494 $ 372,722
Current portion of long-term debt - related party 79,509 -
Accounts payable 3,518,609 4,019,993
Other current liabilities 8,460,042 8,316,263
Unearned revenue on service contracts 5,526,006 5,193,645
Customer advances 9,237,921 14,276,311
Billings in excess of costs and estimated
earnings on uncompleted contracts 2,026,441 5,773,286
----------- -----------
Total Current Liabilities 29,126,022 37,952,220
----------- -----------
Long-Term Liabilities:
Accounts payable 184,168 -
Due to related medical practices 643,135 97,663
Long-term debt and capital leases, less
current portion 759,211 756,976
Long-term debt, less current
portion - related party 160,176 -
Other liabilities 363,550 496,837
----------- -----------
Total Long-Term Liabilities 2,110,240 1,351,476
----------- -----------
Total Liabilities 31,236,262 39,303,696
----------- -----------
Commitments, Contingencies and Other Matters
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
STOCKHOLDERS' DEFICIENCY
----------------------------------
June 30,
-------------------------
2009 2008
----------- -----------
Minority Interest $ 63,815 $ 166,966
Stockholders' Deficiency:
Class A non-voting preferred stock - $.0001
par value; authorized - 1,600,000 shares;
issued and outstanding - 313,451 shares
at June 30, 2009 and 2008 31 31
Preferred stock - $.001 par value;
authorized - 2,000,000 shares; issued
and outstanding - none - -
Common stock - $.0001 par value; authorized -
30,000,000 shares at
June 30, 2009 and 2008, respectively;
issued - 4,917,918 and 4,915,918 shares
at June 30, 2009 and 2008, respectively;
outstanding - 4,906,275 and 4,904,275
shares at June 30, 2009 and 2008, respectively 491 490
Class B common stock (10 votes per share) -
$.0001 par value; authorized - 800,000
shares; issued and outstanding - 158
shares at June 30, 2009 and 2008 - -
Class C common stock (25 votes per share) -
$.0001 par value; authorized - 2,000,000
shares; issued and outstanding - 382,513
shares at June 30, 2009 and 2008
Paid-in capital in excess of par value
Accumulated other comprehensive loss 38 38
Accumulated deficit 172,280,600 172,276,540
Notes receivable from employee stockholders (20,995) (72,723)
Treasury stock, at cost - 11,643 shares (174,258,607) (175,379,874)
of common stock at June 30, 2009 and 2008 (267,030) (394,141)
Total Stockholders' Deficiency (675,390) (675,390)
------------ ------------
Total Liabilities and Stockholders' (2,940,862) (4,245,029)
Deficiency ------------ ------------
$ 28,359,215 $ 35,225,633
============ ============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30,
----------------------------
2009 2008
------------- -------------
Revenues
Product sales - net $ 17,175,417 $ 11,326,388
Service and repair fees - net 10,345,091 10,930,331
Service and repair fees - related
parties - net 192,500 110,000
Management and other fees 7,342,614 8,337,000
Management and other fees - related
medical practices - net 2,911,318 3,706,636
License fees and royalties 1,755,493 1,158,478
------------- ------------
Total Revenues - Net 39,722,433 35,568,833
------------- ------------
Costs and Expenses
Costs related to product sales 10,758,201 11,143,826
Costs related to service and repair fees 3,992,557 5,107,802
Costs related to service and repair fees
- related parties 74,293 51,404
Costs related to management and other fees 4,507,587 5,548,605
Costs related to management and other fees
- related medical practices 2,790,745 3,041,828
Research and development 3,593,470 5,006,591
Selling, general and administrative,
inclusive of compensatory element of stock
issuances of $4,061 and $360 for the years
ended June 30, 2009 and 2008, respectively 13,423,066 20,386,748
Provision for bad debts 1,286,451 2,208,820
------------- -------------
Total Costs and Expenses 40,426,370 52,495,624
------------- -------------
Loss from Operations ( 703,937) (16,926,791)
Other Income and (Expenses):
Interest expense (333,229) (535,322)
Investment income 325,688 694,910
Interest income - related parties 20,818 33,801
Other income - net 410,657 129,368
Minority interests in income of partnerships ( 10,995) ( 219,058)
Gain on sale of investment - 571,161
Gain on sale of consolidated subsidiary 1,448,196 3,394,975
Loss on note receivable - ( 658,351)
------------- -------------
Income (Loss) Before Provision For
(Benefit From) Income Taxes 1,157,198 (13,515,307)
Provision for (Benefit from) Income Taxes 35,931 (6,940)
------------- -------------
Net Income (Loss) $ 1,121,267 $(13,508,367)
============= =============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30,
----------------------------
2009 2008
------------- -------------
Net Income (Loss) Available to Common and
Class C Common Stockholders $ 1,053,898 $(13,508,367)
============= =============
Basic and Diluted Net Income (Loss) Per
Common Share $ 0.21 $(2.76)
============= =============
Basic Net Income Per Share - Common C $ 0.06 N/A
============= =============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
FOR THE YEAR ENDED JUNE 30, 2009
Class A
Non-Voting Common Stock
Preferred ----------------------
Stock Shares Amount
---------- ---------- ----------
Balance - June 30, 2008 $ 31 4,904,275 $ 490
Net income - - -
Other comprehensive loss, net of tax:
Unrealized gains on securities arising
during the year, net of tax - - -
Stock issued to employees under stock
bonus plans - 2,000 1
Payments on notes receivable
from employee stockholders - - -
---------- ---------- ---------
Balance - June 30, 2009 $ 31 4,906,275 $ 491
========== ========== ==========
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
FOR THE YEAR ENDED JUNE 30, 2009
Paid-in
Class B Class C Capital in
Common Common Excess of
Stock Stock Par Value
---------- ---------- ------------
Shares
----------
Balance - June 30, 2008 158 $ 38 $172,276,540
Net income - - -
Other comprehensive loss, net of tax:
Unrealized gains on securities arising
during the year, net of tax - - -
Stock issued to employees under
stock bonus plans - - 4,060
Payments on notes receivable from
employee stockholders - - -
---------- ---------- ------------
Balance - June 30, 2009 158 $ 38 $172,280,600
========== ========== ============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
FOR THE YEAR ENDED JUNE 30, 2009
Notes
Receivable Accumulated
From Other
Treasury Employee Comprehensive
Stock Stockholders Loss
---------- ------------ -------------
Balance - June 30, 2008 $(675,390) $ (394,141) $ (72,723)
Net income - -
-
Other comprehensive loss, net of tax:
Unrealized gains on securities arising
during the year, net of tax - - 51,728
Stock issued to employees under stock
bonus plans - - -
Payments on notes receivable from employee
stockholders - 127,111 -
---------- ------------ -------------
Balance - June 30, 2009 $(675,390) $ (267,030) $ (20,995)
========== ============ =============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
FOR THE YEAR ENDED JUNE 30, 2009
Accumulated Comprehensive
Deficit Total Income (Loss)
-------------- ------------ -------------
Balance - June 30, 2008 $(175,379,874) $(4,245,029) $ -
Net income 1,121,267 1,121,267 1,121,267
Other comprehensive loss, net of tax:
Unrealized gains on securities
arising during the year, net of tax - 51,728 51,728
Stock issued to employees under
stock bonus plans - 4,061 -
Payments on notes receivable from
employee stockholders - 127,111 -
-------------- ------------ -------------
Balance - June 30, 2009 $(174,258,607) $(2,940,862) $ 1,172,995
============== ============ =============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
FOR THE YEAR ENDED JUNE 30, 2008
Class A
Non-Voting Common Stock
Preferred ----------------------
Stock Shares Amount
---------- ---------- ----------
Balance - June 30, 2007 $ 31 4,874,207 $ 487
Net loss - - -
Other comprehensive loss, net of tax:
Unrealized gains on securities arising
during the year, net of tax - - -
Stock issued to employees under stock
bonus plans - 68 -
Issuance of stock for goods and services - 30,000 3
Payments on notes receivable
from employee stockholders - - -
---------- ---------- ----------
Balance - June 30, 2008 $ 31 4,904,275 $ 490
========== ========== ==========
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
FOR THE YEAR ENDED JUNE 30, 2008
Paid-in
Class B Class C Capital in
Common Common Excess of
Stock Stock Par Value
---------- ---------- ------------
Shares
----------
Balance - June 30, 2008 158 $ 38 $172,071,727
Net loss - -
-
Other comprehensive loss, net of tax:
Unrealized gains on securities arising
during the year, net of tax - - -
Stock issued to employees under
stock bonus plans - - 360
Issuance of stock for goods and services - - 204,453
Payments on notes receivable from
employee stockholders - - -
---------- ---------- ------------
Balance - June 30, 2008 158 $ 38 $172,276,540
========== ========== ============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
FOR THE YEAR ENDED JUNE 30, 2008
Notes
Receivable Accumulated
From Other
Treasury Employee Comprehensive
Stock Stockholders Loss
---------- ------------ -------------
Balance - June 30, 2007 $(675,390) $ (523,754) $ (103,604)
Net loss - - -
Other comprehensive loss, net of tax:
Unrealized gains on securities arising
during the year, net of tax - - 30,881
Stock issued to employees under stock
bonus plans - - -
Issuance of stock for goods and services - - -
Payments on notes receivable from
employee stockholders - 129,613 -
---------- ------------ -------------
Balance - June 30, 2008 $(675,390) $ (394,141) $ (72,723)
========== ============ =============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
FOR THE YEAR ENDED JUNE 30, 2008
Accumulated Comprehensive
Deficit Total Income (Loss)
-------------- ------------ -------------
Balance - June 30, 2007 $(161,871,507) $ 8,898,028 $ -
Net loss (13,508,367) (13,508,367) (13,508,367)
Other comprehensive loss, net of tax:
Unrealized gains on securities
arising during the year, net of tax - 30,881 30,881
Stock issued to employees under
stock bonus plans - 360 -
Issuance of stock for goods and services - 204,456 -
Payments on notes receivable from
employee stockholders - 129,613 -
-------------- ------------ -------------
Balance - June 30, 2008 $(175,379,874) $(4,245,029) $(13,477,486)
============== ============ =============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30,
----------------------------
2009 2008
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 1,121,267 $(13,508,367)
Adjustments to reconcile net income
(loss) to net cash used in operating activities:
Minority interest in income of partnerships 10,995 219,058
Depreciation and amortization 1,733,499 2,793,592
Abandoned patents written off 46,327 -
Provision for bad debts 1,286,451 2,208,820
Compensatory element of stock issuances 4,061 360
Stock issued for costs and expenses - 204,456
Gain on sale of consolidated subsidiary (1,448,196) (3,394,975)
Gain on sale of investment - ( 571,161)
Loss on note receivable - 658,351
(Increase) decrease in operating
assets, net:
Accounts, management fee and medical
receivable (642,004) (2,905,437)
Notes receivable 508,306 578,451
Costs and estimated earnings in excess of
billings on uncompleted contracts (1,469,421) (6,285)
Inventories 83,518 1,210,009
Prepaid expenses and other current assets 338,375 292,577
Other assets 166,032 (251,214)
Advances and notes to related parties
medical practices 223,724 200,528
Increase (decrease) in operating
liabilities, net:
Accounts payable (132,713) 80,196
Other current liabilities 476,140 687,227
Customer advances (5,038,390) 4,195,673
Billings in excess of costs and estimated
earnings on uncompleted contracts (3,746,845) 2,292,597
Other liabilities (133,287) 346,298
Due to related medical practices 545,472 5,000
------------- -------------
NET CASH USED IN
OPERATING ACTIVITIES (6,066,689) (4,664,246)
------------- -------------
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30,
----------------------------
2009 2008
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of marketable securities $ - $ (765,203)
Sales of marketable securities 1,097,244 1,707,225
Purchases of property and equipment ( 28,076) ( 366,574)
Costs of capitalized software development (491,707) (457,372)
Collection of note receivable 2,000,000 -
Proceeds from loans on cash surrender
value of life insurance policies 1,344,901 -
Cost of patents (331,300) (229,886)
Proceeds from sale of investment - 571,161
Proceeds from sale of consolidated subsidiary 2,293,013 4,142,134
------------- -------------
NET CASH PROVIDED BY
INVESTING ACTIVITIES 5,884,075 4,601,485
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 258,000 265,000
Repayment of borrowings and capital lease
obligations (279,399) (348,504)
Distributions to holders of minority interests (22,991) (127,657)
Repayment of notes receivable from
employee stockholders 127,111 129,613
------------- -------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 82,721 ( 81,548)
------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS ( 99,893) (144,309)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 1,325,512 1,469,821
------------- -------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 1,225,619 $ 1,325,512
============= =============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
NOTE 1 - DESCRIPTION OF BUSINESS AND LIQUIDITY AND CAPITAL RESOURCES
Description of Business
-----------------------
FONAR Corporation (the "Company" or "FONAR") is a Delaware corporation, which
was incorporated on July 17, 1978. FONAR is engaged in the research,
development, production and marketing of medical scanning equipment, which uses
principles of Magnetic Resonance Imaging ("MRI") for the detection and diagnosis
of human diseases. In addition to deriving revenues from the direct sale of MRI
equipment, revenue is also generated from its installed-base of customers
through its service and upgrade programs.
FONAR, through its wholly-owned subsidiary Health Management Corporation of
America ("HMCA") provides comprehensive management services to diagnostic
imaging facilities. The services provided by the Company include development,
administration, leasing of office space, facilities and medical equipment,
provision of supplies, staffing and supervision of non-medical personnel, legal
services, accounting, billing and collection and the development and
implementation of practice growth and marketing strategies. As of June 30, 2009,
HMCA manages 10 diagnostic imaging facilities located in the states of New York,
Georgia and Florida.
Liquidity and Going Concern
---------------------------
In September 2008, the Company sold to a related party its 92.3% interest in an
entity that provided management services to a scanning center in Bensonhurst,
New York and received cash proceeds of approximately $2,300,000. The Company
recorded a gain of $1,448,196 on the sale of this consolidated subsidiary.
In August 2008, the Company signed a modification agreement with regards to the
asset purchase agreement with Health Plus (See Note 10). The Company received a
$2,000,000 payment on the note issued by Health Plus.
At June 30, 2009, the Company had a working capital deficit of $10,838,323 and a
stockholders' deficiency of $2,940,862. For the year ended June 30, 2009, the
Company's net income was $1,121,267, which included non-cash charges of
approximately $3,070,000. Net cash used in operating activities for the year
ended June 30, 2009 was approximately $6,067,000. The Company funded its cash
flow deficit from operations for the year ended June 30, 2009 through cash
provided from the sale of marketable securities of approximately $1,097,000,
proceeds from notes receivable of $2,000,000, loans from life insurance policies
of approximately $1,345,000 and proceeds from the sale of its subsidiary of
approximately $2,293,000. In addition, during June 2008, the Company implemented
a restructuring program, including a reduction of its workforce, across the
board salary reductions, elimination of manufacturing facilities and
restructuring of its diagnostic imaging management service business.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
NOTE 1 - DESCRIPTION OF BUSINESS AND LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Going Concern (Continued)
---------------------------
The Company continues to focus its efforts on increased marketing campaigns to
strengthen the demand for its products and services. Management anticipates that
its capital resources will improve if Fonar's MRI scanner products gain wider
market recognition and acceptance resulting in increased product sales. Current
economic credit conditions have contributed to a slowing business environment.
Given such liquidity and credit constraints in the markets, the business has and
may continue to suffer, should the credit markets not improve in the near
future. The direct impact of these conditions is not fully known. However, there
can be no assurance that the Company would be able to secure additional funds if
needed and that if such funds were available, whether the terms or conditions
would be acceptable to the Company. In such case, the further reduction in
operating expenses as well as possible sale of other operating subsidiaries
might need to be substantial in order for the Company to generate positive cash
flow to sustain the operations of the Company.
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("USGAAP") and assume that the Company will continue as a going concern.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. The accompanying consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of FONAR Corporation,
its majority and wholly-owned subsidiaries and partnerships. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
----------------
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities in
the consolidated financial statements and accompanying notes. The most
significant estimates relate to accounts receivable allowances, intangible
assets, income taxes, useful lives of property and equipment, contingencies,
revenue recognition and litigation. In addition, healthcare industry reforms and
reimbursement practices will continue to impact the Company's operations and the
determination of contractual and other allowance estimates. Actual results could
differ from those estimates.
Investment in Marketable Securities
-----------------------------------
The Company accounts for its investments using Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS No. 115"). This standard requires that certain debt
and equity securities be adjusted to market value at the end of each accounting
period. Unrealized market value gains and losses are charged to operations if
the securities are traded for short-term profit. Otherwise, such unrealized
gains and losses are charged or credited to other comprehensive income (loss).
Management determines the proper classifications of investments in obligations
with fixed maturities and marketable equity securities at the time of purchase
and re-evaluates such designations as of each balance sheet date. At June 30,
2009 and 2008, all securities covered by SFAS No. 115 were designated as
available for sale. Accordingly, these securities are stated at fair market
value, with unrealized gains and losses reported in comprehensive income (loss).
Realized gains and losses on sales of investments, as determined on a specific
identification basis, are included in investment income in the accompanying
consolidated statements of operations.
Inventories
-----------
Inventories consist of purchased parts, components and supplies, as well as
work-in-process, and are stated at the lower of cost determined on the first-
in, first-out method or market.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and Equipment
----------------------
Property and equipment procured in the normal course of business is stated at
cost. Property and equipment purchased in connection with an acquisition is
stated at its estimated fair value, generally based on an appraisal. Property
and equipment is being depreciated for financial accounting purposes using the
straight-line method over the shorter of their estimated useful lives, generally
five to seven years, or the term of a capital lease, if applicable. Leasehold
improvements are being amortized over the shorter of the useful life or the
remaining lease term. Upon retirement or other disposition of these assets, the
cost and related accumulated depreciation of these assets are removed from the
accounts and the resulting gains or losses are reflected in the results of
operations. Expenditures for maintenance and repairs are charged to operations.
Renewals and betterments are capitalized. Maintenance and repair expenses
totaled approximately $228,000 and $402,000 for the years ended June 30, 2009
and 2008, respectively.
Other Intangible Assets
-----------------------
1) Capitalized Software Development Costs
Capitalization of software development costs begins upon the establishment of
technological feasibility. Technological feasibility for the Company's computer
software is generally based upon achievement of a detail program design free of
high risk development issues and the completion of research and development on
the product hardware in which it is to be used. The establishment of
technological feasibility and the ongoing assessment of recoverability of
capitalized computer software development costs require considerable judgment by
management with respect to certain external factors, including, but not limited
to, technological feasibility, anticipated future gross revenue, estimated
economic life and changes in software and hardware technology.
Amortization of capitalized software development costs commences when the
related products become available for general release to customers. Amortization
is provided on a product by product basis. The annual amortization is the
greater of the amount computed using (a) the ratio that current gross revenue
for a product bear to the total of current and anticipated future gross revenue
for that product, or (b) the straight-line method over the remaining estimated
economic life of the product.
The Company periodically performs reviews of the recoverability of such
capitalized software development costs. At the time a determination is made that
capitalized amounts are not recoverable based on the estimated cash flows to be
generated from the applicable software, any remaining capitalized amounts are
written off.
2) Patents and Copyrights
Amortization is calculated on the straight-line basis over a period ranging from
15 to 17 years.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Long-Lived Assets
-----------------
The Company periodically assesses the recoverability of long-lived assets,
including property and equipment and intangibles, when there are indications of
potential impairment, based on estimates of undiscounted future cash flows. The
amount of impairment is calculated by comparing anticipated discounted future
cash flows with the carrying value of the related asset. In performing this
analysis, management considers such factors as current results, trends, and
future prospects, in addition to other economic factors.
Revenue Recognition
-------------------
Revenue on sales contracts for scanners, included in "product sales" in the
accompanying consolidated statements of operations, is recognized under the
percentage-of-completion method. The Company manufactures its scanners under
specific contracts that provide for progress payments. Production and
installation take approximately three to six months. The percentage of
completion is determined by the ratio of costs incurred to date on completed
sub-assemblies to the total estimated cost for each scanner. Contract costs
include purchased parts and components, direct labor and overhead. Revisions in
cost estimates and provisions for estimated losses on uncompleted contracts, if
any, are made in the period in which such losses are determined. The asset,
"Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts",
represents revenues recognized in excess of amounts billed. The liability,
"Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts",
represents amounts billed in excess of revenues recognized.
Revenue on scanner service contracts is recognized on the straight-line method
over the related contract period, usually one year.
Revenue from sales of other items is recognized upon shipment.
Revenue under management contracts is recognized based upon contractual
agreements for management services rendered by the Company primarily under
various long-term agreements with various medical providers (the "PCs"). As of
June 30, 2009, the Company has ten management agreements of which four are with
PC's owned by Raymond V. Damadian, M.D., President and Chairman of the Board of
FONAR ("the Related medical practices") and six are with PC's, which are all
located in the state of New York ("the New York PC's"), owned by one unrelated
radiologist. The contractual fees for services rendered to the New York PCs
consists of fixed monthly fees per diagnostic imaging facility ranging from
approximately $45,000 to $125,000. The contractual fees for services rendered to
the related medical practices are primarily calculated on activity based efforts
at pre-determined rates per unit of activity. All fees are re- negotiable at the
anniversary of the agreements and each year thereafter.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Research and Development Costs
------------------------------
Research and development costs are charged to expense as incurred. The costs of
materials and equipment that are acquired or constructed for research and
development activities, and have alternative future uses (either in research and
development, marketing or production), are classified as property and equipment
and depreciated over their estimated useful lives.
Advertising Costs
-----------------
Advertising costs are expensed as incurred. Advertising expense approximated
$261,000 and $1,293,000 for the years ended June 30, 2009 and 2008,
respectively.
Shipping Costs
--------------
The Company's shipping and handling costs are included under costs related to
product sales.
Income Taxes
------------
Deferred tax assets and liabilities are determined based on the difference
between the financial statement carrying amounts and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse.
Customer Advances
-----------------
Cash advances and progress payments received on sales orders are reflected as
customer advances until such time as revenue recognition begins.
Minority Interest
-----------------
The Company records adjustments to minority interest for the allocable portion
of income or loss that the minority interest holders are entitled based upon
their portion of certain of the subsidiaries that they own. Distributions to
holders of minority interests are adjusted to the respective minority interest
holders' balance.
The Company suspends allocation of losses to minority interest holders when the
minority interest balance for a particular minority interest holder is reduced
to zero. Any excess loss above the minority interest holders' balance is not
charged to minority interest as the minority interest holders have no obligation
to fund such losses.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings (Loss) Per Share
-------------------------
Basic earnings (loss) per share ("EPS") is computed based on weighted average
shares outstanding and excludes any potential dilution. In accordance with
Emerging Issues Task Force ("EITF 03-6"), "Participating Securities and the
Two-Class Method under FASB Statement No. 128" ("EITF 03-6"), the Company uses
the two-class method to calculate the effect of the Company's participating
convertible securities on basic EPS, which include the Class A Non-voting
Preferred stock, Class B common stock and Class C common stock, and the if-
converted method is used to calculate the effect of participating convertible
securities on diluted EPS. In addition, these participating convertible
securities were not included in the computation of basic EPS for the year ended
June 30, 2008 because the participating securities did not have a contractual
obligation to share in the losses of the Company. For the year ended June 30,
2009, the Company used the Two-Class method for calculating basic earnings per
share and applied the if converted method in calculating diluted earnings per
share.
Diluted EPS reflects the potential dilution from the exercise or conversion of
all dilutive securities into common stock based on the average market price of
common shares outstanding during the period. The number of common shares
potentially issuable upon the exercise of options and warrants or conversion of
the participating convertible securities that were excluded from the diluted EPS
calculation, because they are antidilutive as a result of the net losses, was
267,062 as of June 30, 2008. For the year ended June 30, 2009, the number of
common shares potentially issuable upon the exercise of certain options of
$96,014 have not been included in the computation of diluted EPS since the
effect would be antidilutive.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings (Loss) Per Share (Continued)
-------------------------
June 30, June 30,
2009 2008
---------------------------------- ----------
Class C
Common Common
Basic Total Stock Stock
-------------------------- ---------- ---------- ----------
Numerator:
Net income (loss)
available to common
stockholders $1,053,898 1,032,717 $21,181 $(13,508,367)
========== ========== ========== =============
Denominator:
Weighted average
shares outstanding 4,904,358 382,513 4,897,997
========== ========== =============
Basic income (loss) per
common share available to
common stockholders $0.21 $0.06 $(2.76)
========== ========== =============
Diluted
----------------------
Denominator:
Weighted average
shares outstanding 4,904,358 4,897,997
Stock options - -
Convertible C Stock 127,504 -
---------- -------------
Total Denominator for
diluted earnings
per share 5,031,862 4,897,997
========== =============
Diluted income (loss)
per common share available
to common stockholders $0.21 $(2.76)
========== =============
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.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,2009
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Concentration of Credit Risk
----------------------------
Cash: The Company maintains its cash and cash equivalents with various financial
institutions, which exceed federally insured limits throughout the year. At June
30, 2009, the Company had cash on deposit of approximately $483,000 in excess of
federally insured limits of $250,000.
Related Parties: Net revenues from related parties accounted for approximately
8% and 11% of the consolidated net revenues for the years ended June 30, 2009
and 2008, respectively. Net management fee receivables from the related medical
practices accounted for approximately 20% and 11% of the consolidated accounts
receivable for the years ended June 30, 2009 and 2008, respectively.
Fair Value of Financial Instruments
-----------------------------------
The financial statements include various estimated fair value information at
June 30, 2009 and 2008, as required by SFAS No. 107, "Disclosures about Fair
Value of Financial Instruments". Such information, which pertains to the
Company's financial instruments, is based on the requirements set forth in that
Statement and does not purport to represent the aggregate net fair value to the
Company.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and cash equivalents: The carrying amount approximates fair value because
of the short-term maturity of those instruments.
Accounts receivable and accounts payable: The carrying amounts approximate fair
value because of the short maturity of those instruments.
Investments and advances and notes to related medical practices: The carrying
amount approximates fair value because the discounted present value of the cash
flow generated by the related parties approximates the carrying value of the
amounts due to the Company.
Long-term debt, notes payable and accounts payable: The carrying amounts of debt
and notes payable approximate fair value due to the length of the maturities,
the interest rates being tied to market indices and/or due to the interest rates
not being significantly different from the current market rates available to the
Company.
All of the Company's financial instruments are held for purposes other than
trading.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accumulated Other Comprehensive Loss
------------------------------------
Accumulated other comprehensive loss generally includes all changes in equity
during a period, except those resulting from investments by stockholders and
distributions to stockholders.
Recent Accounting Pronouncements
---------------------------------
In September, 2006, the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value
Measurements", ("SFAS 157"). This statement provides a single definition of fair
value, a framework for measuring fair value, and expanded disclosures concerning
fair value. Previously, different definitions of fair value were contained in
various accounting pronouncements creating inconsistencies in measurement and
disclosures. SFAS 157 applies under those previously issued pronouncements that
prescribe fair value as the relevant measure of value, except SFAS No.
123(revised 2004), "Share-Based Payment", and related interpretations and
pronouncements that require or permit measurement similar to fair value but are
not intended to measure fair value. The Company adopted SFAS 157 on July 1,
2008, as required for its financial assets and financial liabilities. However,
the FASB issued FSP FAS No. 157-2, which deferred the effective date of SFAS 157
for one year as it relates to liabilities that are not recognized or disclosed
as fair value on a recurring basis. FSP FAS No. 157-2 will be effective
beginning in fiscal 2010. The adoption of SFAS 157 for the Company's financial
assets and financial liabilities did not have a material impact on its
consolidated financial statements. The Company is evaluating the effect the
implementation of SFAS 157 for its nonfinancial assets and nonfinancial
liabilities will have on the Company's consolidated financial statements.
On February 15, 2007, the FASB issued SFAS No. 159, entitled ``The Fair Value
Option for Financial Assets and Financial Liabilities,'' ("SFAS 159"). The
guidance in SFAS 159 ``allows'' reporting entities to ``choose'' to measure many
financial instruments and certain other items at fair value. The objective
underlying the development of this literature is to improve financial reporting
by providing reporting entities with the opportunity to reduce volatility in
reported earnings that results from measuring related assets and liabilities
differently without having to apply complex hedge accounting provisions, using
the guidance in SFAS No. 133, as amended, entitled ``Accounting for Derivative
Instruments and Hedging Activities.'' The provisions of SFAS No. 159 are
applicable to all reporting entities and are effective as of the beginning of
the first fiscal year that begins subsequent to November 15, 2007. The Company
adopted SFAS 159 effective July 1, 2008. Upon adoption, the Company did not
elect the fair value option for any items within the scope of SFAS 159 and,
therefore, the adoption of SFAS 159 did not have an impact on the Company's
consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
--------------------------------
In March 2007, the FASB ratified the Emerging Issues Task Force ("EITF")
consensus on EITF Issue No. 06-10. "Accounting for Collateral Assignment Split
Dollar Life Insurance". This EITF indicates that an employer should recognize a
liability for postretirement benefits related to collateral assignment split-
dollar life insurance arrangements. In addition, the EITF provides guidance for
the recognition of an asset related to a collateral assignment split-dollar life
insurance arrangement. The EITF is effective for fiscal years beginning after
December 15, 2007. The Company has adopted the EITF as required and it did not
have an impact on the Company's results of operations, financial condition and
liquidity.
In December 2007, the FASB issued SFAS No. 141R, "Business Combinations" ("SFAS
141R"), which replaces SFAS No. 141, "Business Combinations". SFAS 141R
establishes principles and requirements for determining how an enterprise
recognizes and measures the fair value of certain assets and liabilities
acquired in a business combination, including noncontrolling interests,
contingent consideration, and certain acquired contingencies. SFAS 141R also
requires acquisition-related transaction expenses and restructuring costs be
expensed as incurred rather than capitalized as a component of the business
combination. SFAS 141R will be applicable prospectively to business combinations
for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. SFAS 141R would have
an impact on accounting for any businesses acquired after the effective date of
this pronouncement.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51" ("SFAS 160").
SFAS 160 establishes accounting and reporting standards for the noncontrolling
interest in a subsidiary (previously referred to as minority interests). SFAS
160 also requires that a retained noncontrolling interest upon the
deconsolidation of a subsidiary be initially measured at its fair value. Upon
adoption of SFAS 160, the Company will be required to report its noncontrolling
interests as a separate component of stockholders' equity. The Company will also
be required to present net income allocable to the noncontrolling interest and
net income attributable to the stockholders of the Company separately in its
consolidated statements of income. Currently, minority interests are reported as
a liability in the Company's consolidated balance sheets and the related income
attributable to the minority interests is reflected as an expense in arriving at
net loss. SFAS 160 is effective for fiscal years, and interim periods within
those fiscal years, beginning on or after December 15, 2008. SFAS 160 requires
retroactive adoption of the presentation and disclosure requirements for
existing minority interests. All other requirements of SFAS 160 shall be applied
prospectively. The Company does not believe that adopting SFAS 160 will have a
material impact on the Company's financial position, results of operations or
cash flows.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
--------------------------------
In October 2008, the FASB issued FASB Staff Position No. FAS 157-3, "Determining
the Fair Value of a Financial Asset in a Market That Is Not Active" ("FSP
157-3"), which clarifies the application of SFAS 157 when the market for a
financial asset is inactive. Specifically, FSP 157-3 clarifies how (1)
management's internal assumptions should be considered in measuring fair value
when observable data are not present, (2) observable market information from an
inactive market should be taken into account, and (3) the use of broker quotes
or pricing services should be considered in assessing the relevance of
observable and unobservable data to measure fair value. The guidance in FSP
157-3 is effective immediately and did not have a material impact on the
Company's consolidated financial statements.
In June 2008, the FASB ratified Emerging Issue Task Force ("EIFT) 07-5,
"Determining Whether an Instrument (or an Embedded Feature) is Indexed to an
Entity's Own Stock" ("EIFT 07-5). EITF 07-5 provides framework for determining
whether an instrument is indexed to an entity's own stock. EIFT 07-5 is
effective for fiscal years beginning after December 15, 2008. The Company is
currently evaluating the impact of the adoption of EIFT 07-5 on its consolidated
financial position and results of operations.
In April 2009, the FASB issued FAS 107-1 and APB 28-1, Interim Disclosures about
Fair Value of Financial Instruments (FAS 107-1). SFAS 107-1 amends FASB No. 107,
Disclosures about Fair Value of Financial Instruments, to require disclosures
about fair value of financial instruments for interim reporting periods of
publicly traded companies as well as in annual financial statements. SFAS also
amends APB Opinion No. 28, Interim Financial Reporting, to require those
disclosures in summarized financial information at interim reporting periods.
SFAS 107-1 is effective for interim reporting periods ending after June 15,
2009. The adoption of this standard is not expected to have a material impact on
the Company's consolidated financial position, results of operations and cash
flows. The carrying value of our cash and cash equivalents approximates fair
value because these instruments have original maturities of three months or
less.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
--------------------------------
In May 2009, the FASB issued SFAS No. 165, "Subsequent Events". ("SFAS No. 165")
This Statement establishes general standards of accounting for and disclosures
of events that occur after the balance sheet date but before financial
statements are issued or are available to be issued. It requires the disclosure
of the date through which an entity has evaluated subsequent events and the
basis for that date and is effective for interim and annual periods ending after
June 15, 2009. The adoption of SFAS No. 165 did not have a material impact on
the Company's consolidated financial statements.
In June 2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles"
("SFAS No. 168"). SFAS No. 168 will become the single source of authoritative
nongovernmental U.S. generally accepted accounting principles ("GAAP"),
superseding existing FASB, American Institute of Certified Public Accountants
("AICPA"), EITF, and related accounting literature. SFAS No. 168 reorganizes the
thousand of GAAP pronouncements into roughly 90 accounting topics and displays
them using a consistent structure. Also included is relevant Securities and
Exchange Commission guidance organized using the same topical structure in
separate sections. SFAS No. 168 will be effective for financial statements
issued for reporting periods that end after September 15, 2009. As the
codification was not intended to change or alter existing U.S. GAAP, it will not
have any impact on our consolidated financial position, results of operations
and cash flows.
In April 2008, the FASB issued FSP FAS 142-3, "Determination of the Useful Life
of Intangible Assets" (FAS 142-3). FAS 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of an intangible asset under SFAS No. 142, "Goodwill and Other
Intangibles" (SFAS 142). FAS 142-3 aims to improve the consistency between the
useful life of an intangible asset as determined under SFAS 142 and the period
of expected cash flows used to measure the fair value of the asset under SFAS
No. 141, "Business Combinations", and other applicable accounting literature.
FAS 142-3 will be effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal
years. The adoption of this pronouncement did not have a material impact on the
Company's consolidated financial statements.
In June 2009, the FASB issued SFAS No. 166, ("SFAS 166"), "Accounting for
Transfers of Financial Assets - an amendment of FASB Statement No. 140, SFAS 166
requires additional disclosures concerning a transferor's continuing involvement
with transferred financial assets. SFAS 166 eliminates the concept of a
"qualifying special-purpose entity" and changes the requirements for
derecognizing financial assets. SFAS 166 is effective for fiscal years beginning
after November 15, 2009. The Company is currently evaluating the impact that the
adoption of SFAS No. 166 will have on its consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
--------------------------------
In June 2009, the FASB issued SFAS No. 167, "Amendments to FASB Interpretation
("FIN") No. 46(R)," which changes how a reporting entity determines when an
entity that is insufficiently capitalized or is not controlled through voting
(or similar rights) should be consolidated. The determination of whether a
reporting entity is required to consolidate another entity is based on, among
other things, the other entity's purpose and design and the reporting entity's
ability to direct the activities of the other entity that most significantly
impact the other entity's economic performance. SFAS No. 167 will require a
reporting entity to provide additional disclosures about its involvement with
variable interest entities and any significant changes in risk exposure due to
that involvement. A reporting entity will be required to disclose how its
involvement with a variable interest entity affects the reporting entity's
financial statements. SFAS 167 is effective for fiscal years beginning after
November 15, 2009, and interim periods within those fiscal years. Management is
currently evaluating the requirements of SFAS No. 167 and has not yet determined
the impact on the Company's consolidated financial statements.
In September 2009, the EITF reached final consensus on a new revenue recognition
standard, Issue No. 08-1, "Revenue Arrangements with Multiple Deliverables",
(EIFT 08-1). EITF 08-1 addresses how to determine whether an arrangement
involving multiple deliverables contains more than one unit of accounting, and
how the arrangement consideration should be allocated among the separate units
of accounting. This Issue is effective for fiscal years beginning after June 15,
2010 and may be applied retrospectively or prospectively for new or materially
modified arrangements. In addition, early adoption is permitted. The Company is
currently evaluating the potential impact of EITF 08-1 on its consolidated
financial statements.
In September 2009, the EITF reached final consensus on a new revenue recognition
standard, Issue No. 09-3, "Applicability of AICPA Statement of Position 97-2 to
Certain Arrangements That Contain Software Elements" (EITF 09- 3). EITF 09-3
amends the scope of AICPA Statement of Position 97-2, Software Revenue
Recognition to exclude tangible products that include software and non- software
components that function together to deliver the product's essential
functionality. This Issue shall be applied on a prospective basis for revenue
arrangements entered into or materially modified in fiscal years beginning on or
after June 15, 2010. Earlier application is permitted as of the beginning of a
company's fiscal year provided the company has not previously issued financial
statements for any period within that year. An entity shall not elect early
application of this Issue unless it also elects early application of Issue 08-1.
The Company is currently evaluating the potential impact of EITF 09-3 on its
consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform to the current year
presentation. The reclassifications did not have any effect on reported net
losses for any periods presented.
NOTE 3 - MEDICAL RECEIVABLES
The Company was assigned medical receivables valued at $11,775,000, in
connection with the satisfaction of the management fees and termination fees
related to a Termination and Replacement Agreement dated May 23, 2005. The
balance of the net medical receivables as of June 30, 2009 and 2008 was $374,225
and $1,227,858, respectively. As of June 30, 2009 and June 30, 2008, the
Company's allowance for doubtful accounts totaled $1,343,500 and $769,000,
respectively, on these receivables.
NOTE 4 - MARKETABLE SECURITIES
The following is a summary of marketable securities at June 30, 2009 and 2008:
June 30, 2009
-----------------------------------------
Unrealized Fair Market
Cost Loss Value
------------ ----------- ------------
Equities - other $ 43,647 $ (20,995) $ 22,652
------------ ----------- ------------
$ 43,647 $ ( 20,995) $ 22,652
============ =========== ============
June 30, 2008
-----------------------------------------
Unrealized Fair Market
Cost Loss Value
------------ ----------- ------------
Corporate and government
agency bonds $ 1,100,000 $ ( 59,915) $ 1,040,085
Equities - other 40,891 ( 12,808) 28,083
------------ ----------- -----------
$ 1,140,891 $ ( 72,723) $ 1,068,168
============ =========== ===========
All marketable securities are deemed to be available for sale.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
NOTE 5 - MANAGEMENT FEE RECEIVABLE AND ACCOUNTS RECEIVABLE
The Company's customers are concentrated in the healthcare industry.
Management Fee Receivable
-------------------------
The Company's receivables from the related and non-related professional
corporations ("PCs") substantially consists of fees outstanding under management
agreements. Payment of the outstanding fees is dependent on collection by the
PCs of fees from third party medical reimbursement organizations, principally
insurance companies and health management organizations.
Collection by the Company of its management fee receivables may be impaired by
the uncollectibility of the PCs' medical fees from third party payors,
particularly insurance carriers covering automobile no-fault and workers
compensation claims due to longer payment cycles and rigorous informational
requirements and certain other disallowed claims. Approximately 46% and 44%,
respectively, of the PCs' 2009 and 2008 net revenues were derived from no-fault
and personal injury protection claims. The Company considers the aging of its
accounts receivable in determining the amount of allowance for doubtful accounts
and contractual allowances. The Company generally takes all legally available
steps to collect its receivables. Credit losses associated with the receivables
are provided for in the consolidated financial statements and have historically
been within management's expectations.
Net revenues from management and other fees charged to the related medical
practices accounted for approximately 7% and 10%, of the consolidated net
revenues for the years ended June 30, 2009 and 2008, respectively.
Commencing with June 2008, the Company hired Health Diagnostics, LLC, to perform
all billing and collection procedures related to the Company's diagnostic
imaging facilities. The Company agreed to pay 6% of all adjusted collections for
these services. Amounts charged to HMCA during the fiscal year ended June 30,
2009 under this agreement totaled $880,848. HMCA terminated the billing and
collection agreement as of April 30, 2009.
Effective June 30, 2009, Tallahassee Magnetic Resonance Imaging, PA, Stand Up
MRI of Boca Raton, PA and Stand Up MRI & Diagnostic Center, PA (all related
medical practices) entered in a guaranty for all management fees which were
indebted to the Company. Each entity will jointly and severally guarantee to the
Company all payments due to the Company which have arisen under each individual
management agreement.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
NOTE 5 - MANAGEMENT FEE RECEIVABLE AND ACCOUNTS RECEIVABLE (Continued)
Management Fee Receivable (Continued)
-------------------------
Unaudited Financial Information of Unconsolidated Managed Medical Practices
---------------------------------------------------------------------------
Audited financial information related to the unconsolidated related and
unrelated PCs, which the Company provides management services to, is not
available. Substantially all of these medical practices' books and records are
maintained on a cash basis, their assets are depreciated on an accelerated tax
basis and have a December 31st year end.
Summarized unaudited income statement data for the years ended December 31, 2008
and 2007 related to the unconsolidated medical practices managed by the Company
are as follows:
(000's omitted)
2008 2007
-------- --------
Patient Revenue - Net $15,869 $16,490
======== ========
Loss from
Operations (Income Tax
- Cash Basis) $ (783) $ (385)
======== =========
Net (Loss) Income
(Income Tax - Cash Basis)
$ (872) $ 131
======== =========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
NOTE 5 - MANAGEMENT FEE RECEIVABLE AND ACCOUNTS RECEIVABLE (Continued)
Accounts Receivable
-------------------
Credit risk with respect to the Company's accounts receivable related to product
sales and service and repair fees is limited due to the customer advances
received prior to the commencement of work performed and the billing of amounts
to customers as sub-assemblies are completed. Service and repair fees are billed
on a monthly or quarterly basis and the Company does not continue providing
these services if accounts receivable become past due. The Company controls
credit risk with respect to accounts receivable from service and repair fees
through its credit evaluation process, credit limits, monitoring procedures and
reasonably short collection terms. The Company performs ongoing credit
authorizations before a product sales contract is entered into or service and
repair fees are provided.
NOTE 6 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND CUSTOMER
ADVANCES
1) Information relating to uncompleted contracts as of June 30, 2009 and 2008
is as follows:
As of June 30,
----------------------------
2009 2008
------------ ------------
Costs incurred on uncompleted
Contracts $10,140,938 $ 4,031,388
Estimated earnings 7,349,914 1,297,111
17,490,852 5,328,499
Less: Billings to date 18,041,587 11,095,500
------------ ------------
$( 550,735) $(5,767,001)
============ ============
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
NOTE 6 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND CUSTOMER
ADVANCES (Continued)
Included in the accompanying consolidated balance sheets under the following
captions:
As of June 30,
----------------------------
2009 2008
------------ ------------
Costs and estimated earnings
in excess of billings on
uncompleted contracts $ 1,475,706 $ 6,285
Less: Billings in excess
of costs and estimated
earnings on uncompleted
contracts 2,026,441 5,773,286
------------ ------------
$( 550,735) $(5,767,001)
============ ============
2) Customer advances consist of the following:
As of June 30, 2009
-------------------------------------
Related
Total Parties Other
----------- ----------- -----------
Total advances $27,279,508 $ - $27,279,508
Less: Advances on contracts
under construction 18,041,587 - 18,041,587
----------- ----------- -----------
$ 9,237,921 $ - $ 9,237,921
=========== =========== ===========
As of June 30, 2008
-------------------------------------
Related
Total Parties Other
----------- ----------- -----------
Total advances $25,371,811 $ - $25,371,811
Less: Advances on contracts
under construction 11,095,500 - 11,095,500
----------- ----------- -----------
$14,276,311 $ - $14,276,311
=========== =========== ===========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
NOTE 7 - INVENTORIES
Inventories included in the accompanying consolidated balance sheets consist
of:
As of June 30,
----------------------------
2009 2008
------------ ------------
Purchased parts, components
and supplies $ 2,065,528 $ 1,847,381
Work-in-process 1,106,869 1,408,534
------------ ------------
$ 3,172,397 $ 3,255,915
============ ============
NOTE 8 - PROPERTY AND EQUIPMENT
Property and equipment, at cost, less accumulated depreciation and amortization,
at June 30, 2009 and 2008, is comprised of:
As of June 30,
----------------------------
2009 2008
------------ ------------
Diagnostic equipment under
capital leases $ 633,675 $ 780,150
Diagnostic equipment 2,878,528 2,783,397
Research, development and
Demonstration equipment 9,605,961 9,605,961
Machinery and equipment 3,583,929 3,582,539
Furniture and fixtures 2,066,833 2,164,373
Equipment under capital leases 1,504,123 1,504,123
Leasehold improvements 4,981,658 5,201,350
Building 939,614 939,614
------------ ------------
26,194,321 26,561,507
Less: Accumulated depreciation
and amortization 23,301,941 22,628,974
------------ ------------
$ 2,892,380 $ 3,932,533
============ ============
Depreciation and amortization of property and equipment for the years ended June
30, 2009 and 2008 was $1,067,496 and $1,570,453, respectively.
Equipment under capital leases has a net book value of $135,597 and $295,073 at
June 30, 2009 and 2008, respectively.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
NOTE 9 - OTHER INTANGIBLE ASSETS
Other intangible assets, net of accumulated amortization, at June 30, 2009 and
2008 are comprised of:
As of June 30,
----------------------------
2009 2008
------------ ------------
Capitalized software
development costs $6,098,057 $5,606,350
Patents and copyrights 4,170,892 3,885,919
------------ ------------
10,268,949 9,492,269
Less: Accumulated amortization 5,348,708 4,682,705
------------ ------------
$4,920,241 $4,809,564
============ ============
Information related to the above intangible assets for the years ended June 30,
2009 and 2008 is as follows:
2009 2008
------------ ------------
Balance - Beginning of Year $4,809,564 $5,345,445
Amounts capitalized 823,007 687,258
Abandon patents written off (46,327) -
Amortization (666,003) (1,223,139)
------------ ------------
Balance - End of Year $4,920,241 $4,809,564
============ ============
Amortization of patents and copyrights for the years ended June 30, 2009 and
2008 amounted to $147,530 and $592,059, respectively. The Company also recorded
a write off of abandon patents in the amount of $46,327 for the year ended June
30, 2009.
Amortization of capitalized software development costs for the years ended June
30, 2009 and 2008 was $518,473 and $631,080, respectively.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
NOTE 9 - OTHER INTANGIBLE ASSETS (Continued)
The estimated amortization of patents and copyrights and capitalized software
development costs for the five years ending June 30, 2014 is as follows:
Capitalized
Software
For the Years Patents and Development
Ending June 30, Total Copyrights Costs
--------------- ---------- ----------- -----------
2010 $ 642,569 $ 133,716 $ 508,853
2011 598,897 139,145 459,752
2012 527,667 150,808 376,859
2013 469,798 166,942 302,856
2014 416,120 175,009 241,111
Thereafter 2,265,190 1,955,842 309,348
---------- ---------- ----------
$4,920,241 $2,721,462 $2,198,779
========== ========== ==========
The weighted average amortization period for other intangible assets is 9.4
years and has no expected residual value.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
NOTE 10 - NOTES RECEIVABLE
Notes receivable as of June 30, 2009 and 2008 consist of the following:
June 30, 2009 June 30, 2008
------------- -------------
Note Receivable - Sale of
assets (a) $ 2,037,100 $ 4,484,674
Note Receivable - (b) 65,000 65,000
Note Receivable - (c) 259,460 334,276
------------- -------------
Total Notes Receivable 2,361,560 4,883,950
Discount of note receivable - (14,084)
Allowance (65,000) (65,000)
------------- -------------
Net Notes Receivable $ 2,296,560 $ 4,804,866
============= =============
Current Portion $ 517,934 $ 2,508,306
Long-Term Portion $ 1,778,626 $ 2,296,560
a) On August 8, 2008, the Company signed a modification agreement with regards
to the Asset Purchase Agreement with Health Plus. Under the modification
agreement Health Plus made a $2,000,000 principal payment on the promissory note
in exchange for a discount on the original note of $1,000,000.
The original promissory note ("Note") was modified to $2,378,130 payable in 60
consecutive months in equal installments of principal and interest of $47,090.
The Note is secured by a first lien on all of the assets of Health Plus,
including its accounts receivable and is subject to prepayment provisions to the
extent Health Plus resells all or part of the assets and business or utilizes
the assets sold as collateral in any debt financing. The Note provides for
interest at 7% per annum. The Company recorded a charge to earnings for the
discount on the Note of $658,351 during the quarter ended June 30, 2008.
b) This note receivable represents a note due from a customer for the purchase
of a system. The note is payable over two years. The Company has an allowance
for doubtful accounts of $65,000 as of June 30, 2009 and 2008 on this note.
c) This note receivable represents a note due from a customer for the purchase
of an Upright MRI system. The note is payable in 48 consecutive equal monthly
payments of principal and interest of $8,426.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
NOTE 11 - CAPITAL STOCK
Common Stock
------------
Cash dividends payable on the common stock shall, in all cases, be on a per
share basis, one hundred twenty percent (120%) of the cash dividend payable on
shares of Class B common stock and three hundred sixty percent (360%) of the
cash dividend payable on a share of Class C common stock.
Class B Common Stock
--------------------
Class B common stock is convertible into shares of common stock on a one-for-
one basis. Class B common stock has 10 votes per share. There were 158 of such
shares outstanding at June 30, 2009 and 2008.
Class C Common Stock
--------------------
On April 3, 1995, the stockholders ratified a proposal creating a new Class C
common stock and authorized the exchange offering of three shares of Class C
common stock for each share of the Company's outstanding Class B common stock.
The Class C common stock has 25 votes per share, as compared to 10 votes per
share for the Class B common stock and one vote per share for the common stock.
The Class C common stock was offered on a three-for-one basis to the holders of
the Class B common stock. Although having greater voting power, each share of
Class C common stock has only one-third of the rights of a share of Class B
common stock to dividends and distributions. Class C common stock is convertible
into shares of common stock on a three-for-one basis.
Class A Non-Voting Preferred Stock
----------------------------------
On April 3, 1995, the stockholders ratified a proposal consisting of the
creation of a new class of Class A non-voting preferred stock with special
dividend rights and the declaration of a stock dividend on the Company's common
stock consisting of one share of Class A non-voting preferred stock for every
five shares of common stock. The stock dividend was payable to holders of common
stock on October 20, 1995. Class A non-voting preferred stock issued pursuant to
such stock dividend approximates 313,000 shares.
The Class A non-voting preferred stock is entitled to a special dividend equal
to 3-1/4% of first $10 million, 4-1/2% of next $20 million and 5-1/2% on amounts
in excess of $30 million of the amount of any cash awards or settlements
received by the Company in connection with the enforcement of five of the
Company's patents in its patent lawsuits, less the revised special dividend
payable on the common stock with respect to one of the Company's patents.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
NOTE 11 - CAPITAL STOCK (Continued)
Class A Non-Voting Preferred Stock (Continued)
----------------------------------
The Class A non-voting preferred stock participates on an equal per share basis
with the common stock in any dividends declared and ranks equally with the
common stock on distribution rights, liquidation rights and other rights and
preferences (other than the voting rights).
Options
-------
The Company has stock option plans, which provide for the awarding of incentive
and non-qualified stock options to employees, directors and consultants who may
contribute to the success of the Company. The options granted vest either
immediately or ratably over a period of time from the date of grant, typically
three or four years, at a price determined by the Board of Directors or a
committee of the Board of Directors, generally the fair value of the Company's
common stock at the date of grant. The options must be exercised within ten
years from the date of grant.
FONAR's 1993 Incentive Stock Option Plan (the "FONAR 1993 Plan"), adopted on
March 26, 1993, was intended to qualify as an incentive stock option plan under
Section 422A of the Internal Revenue Code of 1954, as amended. The FONAR 1993
Plan permitted the issuance of stock options covering an aggregate of 60,000
shares of common stock of FONAR. The FONAR 1993 Plan terminated on March 25,
2003. No options to purchase shares of common stock remained available for grant
under the FONAR 1993 Plan at that time. During the year ended June 30, 2008,
2,360 options expired, therefore, there are no options that were issued under
the FONAR 1993 Plan that remain outstanding.
FONAR's 1997 Nonstatutory Stock Option Plan, adopted on May 9, 1997, permits the
issuance of stock options covering an aggregate of 200,000 shares of common
stock of FONAR. The options may be issued at such prices and upon such terms and
conditions as are determined by FONAR. The 1997 Plan terminated on May 8, 2007.
During the year ended June 30, 2009, 1,105 options were forfeited, therefore of
the options granted under this plan 77,062 remain outstanding.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
NOTE 11 - CAPITAL STOCK (Continued)
Options (Continued)
-------
FONAR's 2002 Incentive Stock Option Plan (the "FONAR 2002 Plan"), adopted on
July 1, 2002, is intended to qualify as an incentive stock option plan under
Section 422A of the Internal Revenue Code of 1954, as amended. The FONAR 2002
Plan permits the issuance of stock options covering an aggregate of 100,000
shares of common stock of FONAR. The options have an exercise price equal to the
fair market value of the underlying stock on the date the option is granted, are
nontransferable, are exercisable for a period not exceeding ten years and expire
upon the voluntary termination of employment. The FONAR 2002 Plan will terminate
on June 30, 2012. As of June 30, 2009, options to purchase 50,943 shares of
common stock of FONAR were available for future grant under this plan. During
the year ended June 30, 2009, 283 options were forfeited, therefore 18,952
shares remain outstanding.
FONAR's 2005 Incentive Stock Option Plan (the "FONAR 2005 Plan"), adopted on
February 16, 2005, is intended to qualify as an incentive stock option plan
under Section 422A of the Internal Revenue Code of 1954, as amended. The FONAR
2005 Plan permits the issuance of stock options covering an aggregate of 80,000
shares of common stock of FONAR. The options have an exercise price equal to the
fair market value of the underlying stock on the date the option is granted, are
non-transferable, are exercisable for a period not exceeding ten years, and
expire upon the voluntary termination of employment. The FONAR 2005 Plan will
terminate on February 14, 2015. As of June 30, 2009, 80,000 shares of common
stock of FONAR were available for future grant under this Plan.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
NOTE 11 - CAPITAL STOCK (Continued)
Options (Continued)
-------
Stock option activity and weighted average exercise prices under these plans
and grants for the years ended June 30, 2009 and 2008 were as follows:
Weighted
Average Aggregate
Number of Exercise Intrinsic
Options Price Value
---------- --------- --------
Outstanding, June 30, 2007 109,270 30.55 -
Granted - - -
Exercised - - -
Forfeited / Expired ( 11,869) 29.70 -
--------- -----
Outstanding, June 30, 2008 97,401 30.66 -
Granted - - -
Exercised - - -
Forfeited ( 1,387) 28.77 -
--------- -----
Outstanding, June 30, 2009 96,014 30.69 -
========= =====
Exercisable at:
June 30, 2008 97,401 $30.66
June 30, 2009 96,014 $30.69
The range of exercise prices for options outstanding as of June 30, 2009 was as
follows:
Weighted
Average
Number of Remaining
Options Contractual
Range of Exercise Price Outstandings Life in Year
----------------------- ------------ ------------
$18.75 - $28.13 67,887 1.9
$29.00 - $42.18 20,352 2.8
$46.88 7,775 2.1
------------
96,014
============
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
NOTE 11 - CAPITAL STOCK (Continued)
Options (Continued)
-------
HMCA Stock Options
------------------
Stock option share activity and weighted average exercise prices under the HMCA
stock option plans for the two years ended June 30, 2009 and 2008 were as
follows:
Weighted
Average Aggregate
Number of Exercise Intrinsic
Options Price Value
---------- --------- --------
Outstanding, June 30, 2007 660,000 $1.00 -
Forfeited - -
---------- ---------
Outstanding, June 30, 2008 660,000 $1.00 -
Expired (660,000) -
---------- ---------
Outstanding, June 30, 2009 - - -
========== =========
Exercisable at:
June 30, 2008 -
June 30, 2009 -
Stock Bonus Plans
-----------------
On August 9, 2007, the Company filed a registration statement on Form S-8 to
register 100,000 shares under FONAR's 2007 Stock Bonus Plan. As of June 30,
2009, 67,932 shares of common stock of FONAR were available for future grant
under this plan.
Warrants
--------
On May 24, 2009, warrants of 42,000 shares of common stock with an exercise
price of $19.75 expired and no warrants remain outstanding.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
NOTE 12 - LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASES
Long-term debt, notes payable and capital leases consist of the following:
June 30,
------------------------
2009 2008
----------- -----------
Capital lease requiring monthly payments of $13,623,
including interest at a rate of 10.51% per annum
through July 2010. The loan is collateralized by the
related equipment. $ 254,989 $ 315,545
Capital lease requiring monthly payments of $2,997,
including interest at a rate of 8.36% per annum through
October 2008. The loan is collateralized by the related
equipment. - 11,704
Note payable requiring monthly payments of interest at
a rate of 7% until May 2009 followed by monthly
payments of $3,908 through May 2026. A final payment of
$535,684 will be due on May 29, 2026. The loan is
collateralized by the related building. 535,684 532,805
Note payable requiring monthly payments of $8,325,
including interest at a rate of 10.00% per annum
through April 2012. The loan is from a related party. 239,685 -
Other (including capital leases for property and 246,032 269,644
equipment). ----------- -----------
1,276,390 1,129,698
Less: Current portion 357,003 372,722
----------- -----------
$ 919,387 $ 756,976
=========== ===========
The maturities of long-term debt over the next three years are as follows:
Years Ending
June 30,
------------
2010 $ 357,003
2011 242,700
2012 141,003
2013 -
2014 -
Thereafter 535,684
----------
$1,276,390
==========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
NOTE 13 - INCOME TAXES
Effective January 1, 2007, the Company adopted the provisions of FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109" (FIN 48). FIN 48 prescribes a
recognition threshold and a measurement attribute for the financial statement
recognition and measurement of tax positions taken or expected to be taken in a
corporate tax return. For those benefits to be recognized, a tax position must
be more-likely-than-not to be sustained upon examination by taxing authorities.
Differences between tax positions taken or expected to be taken in a tax return
and the benefit recognized and measured pursuant to the interpretation are
referred to as "unrecognized benefits". A liability is recognized (or amount of
net operating loss carryforward or amount of tax refundable is reduced) for an
unrecognized tax benefit because it represents an enterprise's potential future
obligation to the taxing authority for a tax position that was not recognized as
a result of applying the provisions of FIN 48.
In accordance with FIN 48, interest costs related to unrecognized tax benefits
are required to be calculated (if applicable) and would be classified as
"Interest expense, net". Penalties if incurred would be recognized as a
component of "Selling, general and administrative" expenses.
The Company files corporate income tax returns in the United States (federal)
and in various state and local jurisdictions. In most instances, the Company is
no longer subject to federal, state and local income tax examinations by tax
authorities for years prior to 2004.
The adoption of the provisions of FIN 48 did not have a material impact on the
Company's consolidated financial position and results of operations. Upon the
adoption and as of June 30, 2009, no liability for unrecognized tax benefits was
required to be recorded. The Company does not expect its unrecognized tax
benefit position to change during the next 12 months.
The Company recognized a deferred tax asset of $876,868 and a deferred tax
liability of $876,868 as of June 30, 2009, primarily relating to net operating
loss carryforwards of approximately $164,465,000 available to offset future
taxable income through 2029. The net operating losses begin to expire in 2012
for federal tax purposes and in 2012 for state income tax purposes.
The ultimate realization of deferred tax assets is dependent on the generation
of future taxable income during the periods in which those temporary differences
become deductible. The Company considers projected future taxable income and tax
planning strategies in making this assessment. At present, the Company does not
have a sufficient history of income to conclude that it is more-likely-than-not
that the Company will be able to realize all of its tax benefits in the near
future and therefore a valuation allowance was established for the full value of
the deferred tax asset.
A valuation allowance will be maintained until sufficient positive evidence
exists to support the reversal of any portion or all of the valuation. Should
the Company become profitable in future periods with supportable trends, the
valuation allowance will be reversed accordingly.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
NOTE 13 - INCOME TAXES (Continued)
Components of the current provision (benefit from) for income taxes are as
follows:
Years Ended June 30,
----------------------
2009 2008
---------- ----------
Current:
Federal$ - $ -
State 35,931 ( 6,940)
---------- ----------
$ 35,931 $ ( 6,940)
========== ==========
A reconciliation of the federal statutory income tax rate to the Company's
effective tax rate as reported is as follows:
Years Ended June 30,
----------------------
2009 2008
---------- ----------
Taxes at federal statutory rate 34.0% (34.0)%
State and local income taxes
(benefit), net of federal benefit 6.0 0.0
Permanent differences 4.1 0.9
(Decrease) increase in the valuation
allowance and true ups (41.0) 33.1
---------- ----------
Effective income tax rate 3.1% 0.0%
========== ==========
As of June 30, 2009, the Company has net operating loss ("NOL") carryforwards of
approximately $164,465,000 that will be available to offset future taxable
income. The utilization of certain of the NOLs is limited by separate return
limitation year rules pursuant to Section 1502 of the Internal Revenue Code. The
expiration dates of NOL carryforwards are as follows:
June 30,
--------
2012 $ 3,953,000
2013 845,000
2019 15,801,000
2020 18,718,000
2021 19,657,000
2022 19,667,000
2023 16,114,000
2024 9,257,000
2025 44,000
2026 27,001,000
2027 22,698,000
2028 10,710,000
------------
$164,465,000
============
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
NOTE 13 - INCOME TAXES (Continued)
The Company has, for federal income tax purposes, research and development tax
credit carryforwards aggregating $4,059,401, which are accounted for under the
flow-through method. The tax credit carryforwards expire as follows:
June 30,
--------
2012 $ 70,145
2013 402,590
2019 432,195
2020 378,193
2021 448,221
2022 441,865
2023 444,970
2024 440,499
2025 285,564
2026 245,053
2027 62,208
2028 290,090
2029 117,808
----------
$4,059,401
==========
In addition, for New York State income tax purposes, the Company has tax credit
carryforwards, aggregating approximately $1,117,000, which are accounted for
under the flow-through method. The tax credit carryforwards expire during the
years ending June 30, 2012 to June 30, 2029.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
NOTE 13 - INCOME TAXES (Continued)
Significant components of the Company's deferred tax assets and liabilities at
June 30, 2009 and 2008 are as follows:
June 30,
--------------------------
2009 2008
------------ ------------
Deferred tax assets:
Allowance for doubtful accounts $ 4,111,445 $ 3,596,865
Non-deductible accruals 233,338 383,359
Net operating carryforwards 65,789,317 66,518,124
Tax credits 5,176,360 4,970,084
Inventory capitalization for tax purposes 39,320 113,101
Property and equipment and depreciation 1,315,706 1,217,280
Other 3,600 4,500
------------ ------------
76,669,086 76,803,313
Valuation allowance (75,792,218) (75,915,772)
------------ ------------
Net deferred tax assets 876,868 887,541
------------ ------------
Deferred tax liabilities:
Capitalized software development costs (876,868) (887,541)
------------ ------------
Gross deferred tax liabilities (876,868) ( 887,541)
------------ ------------
Net deferred tax liabilities $ - $ -
============ ============
The net change in the valuation allowance for deferred tax assets decreased by
approximately $124,000 during the year ended June 30, 2009 and increased by
approximately $4,923,000 during the year ended June 30, 2008.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
NOTE 14 - OTHER CURRENT LIABILITIES
Included in other current liabilities are the following:
June 30,
--------------------------
2009 2008
------------ ------------
Royalties $ 622,780 $ 622,780
Accrued salaries, commissions and
payroll taxes 882,038 900,934
Accrued interest 901,286 876,389
Litigation accruals 193,349 193,349
Sales tax payable 2,433,773 2,543,795
Legal and other professional fees 674,501 633,659
Accounting fees 480,000 502,594
Insurance premiums 30,336 409,928
Penalty - Sales tax 682,500 632,500
Penalty - 401k plan 250,000 250,000
Purchase scanner 440,000 -
Other 869,479 750,335
------------ ------------
$ 8,460,042 $ 8,316,263
============ ============
NOTE 15 - COMMITMENTS AND CONTINGENCIES
Leases
------
The Company rents its operating facilities and certain equipment, pursuant to
operating lease agreements expiring at various dates through December 2013. The
leases for certain facilities contain escalation clauses relating to increases
in real property taxes as well as certain maintenance costs.
In May 2002, HMCA entered into a sub-lease agreement (as amended in January
2003) with an entity owned by a relative of Raymond V. Damadian. The sub-lease
agreement expired on May 31, 2008. As of June 1, 2008, the sub-lease tenant
occupied the entire space and paid the monthly rent of $ 39,064 on a month to
month basis. On December 3, 2008, HMCA terminated the lease on these premises
and surrendered the property. Rental income under the sub-lease agreement for
the years ended June 30, 2009 and 2008 amounted to $0 and $99,371, respectively.
In March 2008, HMCA entered into a s sub-lease agreement with a third party. The
sub-lease agreement expired on April 30, 2009. Rental income under the sub-
lease agreement for the year ended June 30, 2009 amounted to $131,724. The
rental income is included in the consolidated statements of operations under
costs related to management and other fees - unrelated medical practices.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
NOTE 15 - COMMITMENTS AND CONTINGENCIES (Continued)
Future minimum operating lease commitments consisted of the following at June
30, 2009:
Facilities
And
Equipment
Year Ending (Operating
June 30, Lease)
----------- ------------
2010 $ 1,994,523
2011 1,999,245
2012 2,069,268
2013 2,051,651
2014 1,571,779
Thereafter 2,367,668
-----------
Total minimum obligations $12,054,134
Rent expense for operating leases approximated $1,796,000 and $3,078,000 for the
years ended June 30, 2009 and 2008, respectively.
License Agreements
------------------
The Company had a license agreement which requires the Company to pay a royalty
on the Company's future sales of certain MRI imaging apparatus. Royalty expense
charged to operations for the years ended June 30, 2009 and 2008 approximated $0
and $67,000, respectively. In April 2008, the licensor commenced an action in
Superior Court, New Castle County, Delaware for the outstanding royalties of
$666,734 plus interest and other costs. The Company answered the complaint
raising affirmative defenses including duress, failure of consideration and
violation of United States Antitrust Laws. As of June 30, 2009, the Company has
accrued $710,461 for royalties and interest. During September 2009, the Company
has entered into an understanding regarding this matter with the licensor. The
understanding calls for an initial payment of $25,000 followed by monthly
payments of $7,520 until the debt is paid.
In July 2000, the Company entered into a non-exclusive sales representative
agreement with an unrelated third party. The agreement requires the third party
to sell at least two Fonar MRI scanners or if it does not, pay an amount equal
to the Company's gross margin on the unsold MRI scanners. The Company received
the gross margin payment on two scanners of $1,158,478 in November 2007 and is
included in revenues for the year ended June 30, 2008. The Company received the
gross margin payment on one scanner of $585,493 in November 2008 and applied a
previously received deposit for two other gross margin payments for a total of
$1,755,493 which was included in revenue for the year ended June 30, 2009. As of
April 2009, this agreement has expired.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
NOTE 15 - COMMITMENTS AND CONTINGENCIES (Continued)
Employee Benefit Plans
----------------------
The Company has a non-contributory 401(k) Plan (the "401(k) Plan"). The 401(k)
Plan covers all non-union employees who are at least 21 years of age with no
minimum service requirements. There were no employer contributions to the Plan
for the years ended June 30, 2009 and 2008. (see Other Matters below)
The stockholders of the Company approved the 2000 Employee Stock Purchase Plan
("ESPP") at the Company's annual stockholders' meeting in April 2000. The ESPP
provides for eligible employees to acquire common stock of the Company at a
discount, not to exceed 15%. This plan has not been put into effect as of June
30, 2009.
Litigation
----------
The Company is subject to legal proceedings and claims arising from the ordinary
course of its business, including personal injury, customer contract and
employment claims. In the opinion of management, the aggregate liability, if
any, with respect to such actions, will not have a material adverse effect on
the consolidated financial position or results of operations of the Company.
Stipulation Agreements
----------------------
The Company has entered into stipulation agreements with a number of its
creditors that in the aggregate totals $763,511 as of June 30, 2009. The monthly
payments total $98,808.
The amounts to be paid over the next two years are as follows:
Year Ending
June 30,
-----------
2010 $ 579,343
2011 184,168
--------
763,511
========
NASDAQ Notice of Non-compliance
-------------------------------
The Company's stockholder's deficiency was $4.2 million as of June 30, 2008 and
$2.9 million as of June 30, 2009. NASDAQ had granted the Company an extension to
October 5, 2009 to evidence compliance with the minimum stockholders' equity
requirement or minimum net income requirement for continued listing on the
NASDAQ Capital Market. The Company's common stock continues to be listed pending
its filing of its Form 10-K for fiscal 2009 to demonstrate compliance with one
or more of the continued listing requirements. The Company believes that it is
in compliance with the minimum net income requirement of NASDAQ Capital Market.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
NOTE 15 - COMMITMENTS AND CONTINGENIES (Continued)
Other Matters
-------------
In March 2007, the Company and New York State taxing authorities conducted a
conference to discuss a sales tax matter to determine if certain sales
transactions are subject to sales tax withholdings. In fiscal 2007, the Company
recorded a provision of $250,000 to cover any potential tax liability including
interest. This matter was settled in May of 2009 with no payment required by the
Company. The Company reversed the accrual for this matter in the quarter ended
June 30, 2009.
The Company is also delinquent in filing sales tax returns for certain states,
for which the Company has transacted business. The Company has recorded tax
obligations of $2,062,000 plus interest and penalties of approximately
$1,377,000. The Company is in the process of determining is regulatory
requirements in order to become compliant.
The Company has determined they may not be in compliance with the Department of
Labor and Internal Revenue Service regulations concerning the requirements to
file Form 5500 to report activity of its 401K Employee Benefit Plan and Flex
Plan. The filings do not require the Company to pay tax, however they may be
subject to penalty for non-compliance. The Company has recorded provisions for
any potential penalties totaling $250,000. The Company has engaged outside
counsel to handle such matters to determine the necessary requirements to ensure
compliance. Such non-compliance could impact the eligibilty of the plan. At this
time the outcome cannot be determined.
The Company management fees are dependent on collection by the PCs of fees from
reimbursements from Medicare, Medicaid, private insurance, no fault and workers'
compensation carriers, self-pay and other third-party payors. The health care
industry is experiencing the effects of the federal and state governments' trend
toward cost containment, as government and other third-party payors seek to
impose lower reimbursement and utilization rates and negotiate reduced payment
schedules with providers. The cost- containment measures, consolidated with the
increasing influence of managed-care payors and competition for patients, have
resulted in reduced rates of reimbursement for services provided by the Company
from time to time. The Company's future revenues and results of operations may
be adversely impacted by future reductions in reimbursement rates.
In 2009, the Obama administration announced its intentions for healthcare reform
in the United States. The plan includes providing healthcare coverage for some
40 million uninsured Americans. The plan calls for, among other things, more
vigilant control of healthcare utilization, including diagnostic imaging
services. The use of radiology benefit managers, or RBMs, has increased in
recent years. It is common practice for health insurance carriers to contract
with RBMs to manage utilization of diagnostic imaging procedures for their
insureds. In many cases, this leads to lower utilization of imaging procedures
based on a determination of medical necessity. The efficacy of RBMs is still a
highly controversial topic. The Company cannot predict whether the current
administration's healthcare plan and the use of RBMs will negatively impact its
business, but it is possible that the Company's financial position and results
of operations could be negatively affected by increased utilization of RBMs.
While the Company has prepared certain estimates of the impact of the above
discussed changes and proposed changes, it is not possible to fully quantify
their impact on its business. There can be no assurance that the impact of these
changes will not be greater than estimated or that any future health care
legislation or reimbursement changes will not adversely affect the Company's
business.
NOTE 16 - OTHER INCOME
Other income consists of:
For the Years Ended June 30,
----------------------------
2009 2008
------------- -----------
(Loss) Income from investment $ (129,228) $ 5,000
Litigation settlement ( 17,500) -
Other income 557,385 124,368
------------- -----------
$ 410,657 $129,368
============= ===========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
NOTE 17 - SUPPLEMENTAL CASH FLOW INFORMATION
During the years ended June 30, 2009 and 2008, the Company paid $308,332 and
$214,394 for interest, respectively. During the years ended June 30, 2009 and
2008, the Company paid $35,931 and $0 for income taxes, respectively.
NOTE 18 - ADVANCES AND NOTES TO RELATED MEDICAL PRACTICES
Canarsie MRI Associates ("Canarsie"), a joint venture partnership, of which MRI
Specialties, Inc. ("Specialties") is an owner. In addition, during fiscal 2001,
Canarsie purchased a QUAD MRI scanner from the Company, for a purchase price of
$850,000, payable as follows: (1) $400,000 downpayment (received April 2001);
(2) $450,000 in 84 equal monthly installments, including interest at 6%,
pursuant to a promissory note to be executed upon acceptance of the scanner.
Timothy Damadian, the son of Raymond V. Damadian, is the sole stockholder,
Director and President of Specialties. The balance due under this note as of
June 30, 2009 is $0. Interest income on this note for the years ended June 30,
2009 and 2008 amounted to $487 and $3,852, respectively.
The Company had advanced a former subsidiary, Tallahassee Magnetic Resonance
Imaging, P.A., $546,183. This balance was evidenced by a promissory note and is
payable as follows: $546,183 in 40 monthly installments commencing September
2007, including interest at 6%. The balance due under this note as of June 30,
2009 was $253,643. Interest income on this note for the years ended June 30,
2009 and 2008 amounted to $20,818 and $29,949, respectively.
The maturities of advances and notes to related medical practices over the next
two years are as follows:
Years Ending
June 30,
------------
2010 $164,611
2011 89,032
--------
$253,643
========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
NOTE 19 - SEGMENT AND RELATED INFORMATION
The Company provides segment data in accordance with the provisions of SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information".
The Company operates in two industry segments - manufacturing and the servicing
of medical equipment and management of diagnostic imaging services.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. All intersegment sales are market-
based. The Company evaluates performance based on income or loss from
operations.
Summarized financial information concerning the Company's reportable segments is
shown in the following table:
Management of
FONAR Diagnostic
Medical Imaging
Equipment Centers Totals
-------------- -------------- --------------
Fiscal 2009:
------------
Net revenues from external
Customers $ 29,468,501 $ 10,253,932 $ 39,722,433
Intersegment net revenues $ 999,167 $ - $ 999,167
Income (loss) from operations $ 27,484 $ ( 731,421) $( 703,937)
Depreciation and amortization $ 1,106,230 $ 673,596 $ 1,779,826
Compensatory element of stock
Issuances $ 4,061 $ - $ 4,061
Total identifiable assets $ 17,302,361 $ 11,056,854 $ 28,359,215
Capital expenditures $ 826,938 $ 24,145 $ 851,083
Fiscal 2008:
-----------
Net revenues from external
Customers $ 23,525,197 $ 12,043,636 $ 35,568,833
Intersegment net revenues $ 889,167 $ - $ 889,167
Loss from operations $(14,133,689) $ (2,793,102) $(16,926,791)
Depreciation and amortization $ 1,851,746 $ 941,846 $ 2,793,592
Compensatory element of stock
Issuances $ 360 $ - $ 360
Total identifiable assets $ 19,203,367 $ 16,022,266 $ 35,225,633
Capital expenditures $ 943,197 $ 110,635 $ 1,053,832
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
NOTE 19 - SEGMENT AND RELATED INFORMATION (Continued)
Export Product Sales
--------------------
The Company's areas of operations are principally in the United States. The
Company had export sales of medical equipment amounting to 25.4% and 0.0% of
product sales revenues to third parties for the years ended June 30, 2009 and
2008, respectively.
The foreign product sales, as a percentage of product sales to unrelated
parties, were made to customers in the following countries:
For the Years Ended June 30,
----------------------------
2009 2008
------ ------
Kuwait (0.5)% (0.5)%
Holland 3.4 -
Germany 7.2 -
Greece (0.4) 0.5
Canada 8.7 -
Australia 7.0 -
------------
25.4% 0.0%
============
Foreign Service and Repair Fees
-------------------------------
The Company's areas of service and repair are principally in the United States.
The Company had foreign revenues of service and repair of medical equipment
amounting to 8.1% and 7.8% of consolidated net service and repair fees for the
years ended June 30, 2009 and 2008, respectively. The foreign service and repair
fees, as a percentage of total service and repair fees, were provided
principally to the following countries:
For the Years Ended June 30,
-----------------------------
2009 2008
------ ------
Spain 1.7% 1.6%
Puerto Rico 1.0 1.3
Switzerland 0.9 1.0
Germany 0.0 1.0
England 2.1 1.2
Holland 1.3 .7
Scotland 1.0 1.0
Canada 0.1 -
------ ------
8.1% 7.8%
====== ======
The Company does not have any material assets outside of the United States.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
NOTE 20 - LIFE INSURANCE
During the year ended June 30, 2009, the Company borrowed $1,344,901 against the
cash surrender value of a whole life insurance policy on the life of the
Company's Chief Executive Officer.
NOTE 21 - DUE TO RELATED MEDICAL PRACTICES
In June of 2009, an entity owned by the Company's Chairman of the Board,
Tallahassee Scanning Services PA, sold its Upright MRI scanning system to the
Company for $550,000 in exchange for 35 monthly payments of $18,769 to be made
over a three year period, commencing October 18, 2009 including interest at
10.41% per annum. The Company used this scanning system to fulfill a sales order
with an unrelated customer.
NOTE 22 - SALE OF CONSOLIDATED SUBSIDIARY AND INVESTMENT
Sale of Consolidated Subsidiary
-------------------------------
On September 30, 2008, the Company sold its 92.3% interest (to a related party)
in an entity that provided management services to a diagnostic center in
Bensonhurst, NY. The Company continues to manage other diagnostic centers in the
New York region.
The related third party purchased all assets and assumed all liabilities of the
diagnostic center which included cash, the management fee receivable, furniture
and fixtures and other miscellaneous assets. The purchase price for the 92.3%
interest was $2,307,500 all of which was paid in cash at the time of closing.
The following is the calculation of the gain on sale of the 92.3% interest in a
consolidated subsidiary:
Selling Price - Net cash paid: $ 2,307,500
Assets and liabilities sold:
Cash $ 14,487
Management fee receivable - net 917,406
Property and equipment - net 733
Other assets 34,245
Accounts payable (16,412)
Minority interest (91,155)
----------
Subtotal 859,304
Gain on sale of consolidated subsidiary $1,448,196
===========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
NOTE 22 - SALE OF INVESTMENT AND CONSOLIDATED SUBSIDIARY (Continued)
Sale of Investment
------------------
On July 31, 2007, the Company sold its 20% equity interest in an unconsolidated
entity (management company for a diagnostic center) to an unrelated third party.
The selling price was $629,195. The Company realized a gain on the sale of the
equity interest of $571,161.
The gain was calculated as follows:
Selling Price: $ 629,195
Less: Closing costs ( 58,034)
----------
Selling Price - Net 571,161
Basis 0
---------
Gain on sale of investment $ 571,161
=========
Sale of Consolidated Subsidiary
-------------------------------
On July 31, 2007, the Company sold its 50% interest (to an unrelated third
party) in an entity which provided management services to a diagnostic center in
Orlando, FL. The Company continues to manage other diagnostic centers in the
Florida region.
The unrelated third party purchased all assets and assumed all liabilities of
the diagnostic center which included cash, the management fee receivable,
furniture and fixtures and other miscellaneous assets. The purchase price under
the for the 50% interest was $4,499,768 and after closing costs the amount
received was $4,256,372.
The following is the calculation of the gain on sale of the 50% interest in a
consolidated subsidiary:
Selling Price: $ 4,499,768
Less: Closing costs (243,396)
------------
Selling Price - Net: $ 4,256,372
Assets sold:
Cash $ 114,238
Management fee receivable 1,166,100
Property and equipment - net 22,673
Other Assets 14,759
Minority Interest (456,373)
------------
Subtotal 861,397
------------
Gain on sale of consolidated subsidiary $ 3,394,975
============
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
NOTE 23 - QUARTERLY FINANCIAL DATA (UNAUDITED)
(000's omitted, except per share data)
For the Quarters Ended
-------------------------------------------------------
September 30, December 31, March 31, June 30,
2008 2008 2009 2009 Total
------------- ------------ --------- -------- ---------
Total Revenues - Net $ 6,784 $ 11,290 $ 11,256 $10,392 $ 39,722
Total Costs and Expenses 8,632 10,589 10,494 10,711 40,426
Net (Loss) Income ( 450) 781 730 60 1,121
Basic Net (Loss)
Income Per Share $ (0.09) $ 0.16 $ 0.14 $ 0.01 $ 0.21
For the Quarters Ended
-------------------------------------------------------
September 30, December 31, March 31, June 30,
2007 2007 2008 2008 Total
------------- ------------ --------- -------- ---------
Total Revenues - Net $ 8,669 $ 10,680 $ 8,071 $ 8,149 $ 35,569
Total Costs and Expenses 12,775 14,556 10,792 14,373 52,496
Net Loss ( 209) (3,838) (2,695) (6,766) (13,508)
Basic and Diluted Net
Loss Per Share $ (0.04) $ (0.78) $ (0.55) $ (1.38) $ (2.76)
Income (loss) per share from operations for each quarter was computed
independently using the weighted-average number of shares outstanding during the
quarter. However, income (loss) per share for the year was computed using the
weighted-average number of shares outstanding during the year. As a result, the
sum of the income (loss) per share for the four quarters may not equal the full
year income (loss) per share.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
NOTE 24 - ALLOWANCE FOR DOUBTFUL ACCOUNTS
The following represents a summary of allowance for doubtful accounts for the
years ended June 30, 2009 and 2008, respectively:
Balance Balance
Description June 30, 2008 Additions Deductions June 30, 2009
------------------------------ ------------- ------------- ------------- -------------
Receivables from equipment
sales and service contracts $ 2,020,208 (1) $441,951 $ 68,833 $ 2,393,326
Management fee receivable 3,958,733 (1)1,185,000 50,388 5,093,345
Management fee receivable from
Related medical practices 2,413,483 (1) (915,000) 403,665 1,094,818
Medical receivables 769,000 (1) 574,500 - 1,343,500
Advance and notes to related
Parties 264,791 - - 264,791
Notes receivable 65,000 - - 65,000
Balance Balance
Description June 30, 2007 Additions Deductions June 30, 2008
------------------------------ ------------- ------------- ------------- -------------
Receivables from equipment sales
and service contracts $ 1,952,830 (1)$ 169,820 $102,442 $ 2,020,208
Management fee receivable 2,110,306 (1)1,848,427 - 3,958,733
Management fee receivable from
Related medical practices 2,093,180 (1) 320,303 - 2,413,483
Medical receivables 190,000 (1) 579,000 - 769,000
Advance and notes to related
Parties 364,791 - 100,000 264,791
Note receivable - (1) 65,000 - 65,000
(1) Included in provision for bad debts.
NOTE 25 - SUBSEQUENT EVENTS
The Company has evaluated subsequent events through October 5, 2009, which is
the date the Company filed its Annual Report on Form 10-K for fiscal 2009 with
the Securities and Exchange Commission. There are no further subsequent events
for disclosure.
FONAR CORPORATION AND SUBSIDIARIES
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no disagreements with our independent registered public
accounting firm or other matters requiring disclosure under Regulation S-K, Item
304(b).
ITEM 9A(T). CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rule 13(a)-15(e)) are controls
and other procedures that are designed to ensure that information required to be
disclosed by a public company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by a public company in the
reports that it files or submits under the Exchange Act is accumulated and
communicated to the company's management, including its principal executive and
principal financial officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required disclosure. Disclosure
controls and procedures include many aspects of internal control over financial
reporting.
Based on their evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures were
effective at June 30, 2009.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rule 13a-15(f) under the Exchange
Act. Internal control over financial reporting refers to a process designed by,
or under the supervision of, our Chief Executive Officer and Chief Financial
Officer and effected by our Board, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles, including those policies and
procedures that:
* pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of our
assets;
* provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally
accepted accounting principles, and that our receipts and expenditures are
being made only in accordance with authorizations of our management and
directors; and
* provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have
a material effect on our consolidated financial statements.
It should be noted, however, that because of its inherent limitations, internal
control over financial reporting cannot provide absolute assurance of the
prevention or detection of misstatements. In addition, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In connection with the preparation of this Annual Report on Form 10-K for the
year ended June 30, 2009, management, with the participation of our Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of our disclosure controls and procedures and internal controls over financial
reporting, pursuant to Rule 13a-15 under the Exchange Act, based on criteria for
effective internal control over financial reporting described in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on their evaluation, our Chief
Executive Officer and Financial Officer have concluded that our internal control
over financial reporting was effective as of June 30, 2009.
This Annual Report on Form 10-K does not include an attestation report of Marcum
LLP, our independent registered public accounting firm, regarding internal
control over financial reporting. Management's report was not subject to
attestation by our registered public accounting firm pursuant to temporary rules
of the SEC that permit us to provide only management's report on this Annual
Report on Form 10-K.
There was no changes in our internal controls or in other factors that could
significantly affect these controls, during our fourth quarter ended June 30,
2009, that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
FONAR CORPORATION AND SUBSIDIARIES
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Directors serve from the date of their election until the next annual meeting of
stockholders and until their successors are elected and qualify. With the
exception of Dr. Raymond V. Damadian, who does not receive any fees for serving
as a director, each director receives $20,000 per annum for his or her service
as a director. Officers serve at the discretion of the Board of Directors.
A majority of our board of directors is composed of independent directors:
Robert J. Janoff, Charles N. O'Data and Robert Djerejian. These three
individuals also serve as the three members of the audit committee, which is a
standing committee of board of directors having a charter describing its
responsibilities. Mr. O'Data has been designated as the audit committee
financial expert. His relevant experience is described in his biographical
information. We have adopted a code of ethics applicable to, among other
personnel, our principal executive officer, principal financial officer,
controllers and persons performing similar functions. The code is designed to
deter wrongdoing and to promote: 1. honest and ethical conduct, including the
ethical handling of actual or apparent conflicts of interest between personal
and professional relationships; 2. full, fair, accurate, timely and
understandable disclosure in reports and documents that we file or submit to the
Securities and Exchange Commission and in other public communications we make;
3. compliance with applicable governmental laws, rules and regulations; 4. the
prompt internal reporting of violations of the code to an appropriate person or
persons identified in the code and 5. accountability for adherence to the code.
We will provide a copy of the code to any person who requests a copy. A person
may request a copy by writing to Fonar Corporation, 110 Marcus Drive, Melville,
New York 11747, to the attention of the Legal Department or Investor Relations.
The officers and directors of the Company are set forth below:
Raymond V. Damadian, M.D. 73 President, Treasurer,
Chairman of the Board
and a Director
Claudette J.V. Chan 71 Director and Secretary
Robert J. Janoff 82 Director
Charles N. O'Data 73 Director
Robert Djerejian 78 Director
Raymond V. Damadian, M.D. has been the Chairman of the Board and President of
Fonar since its inception in 1978 and Treasurer since February, 2001. Dr.
Damadian was employed by the State University of New York, Downstate Medical
Center, New York, as an Associate Professor of Biophysics and Associate
Professor of Internal Medicine from 1967 until September 1979. Dr. Damadian
received an M.D. degree in 1960 from Albert Einstein College of Medicine, New
York, and a B.S. degree in mathematics from the University of Wisconsin in 1956.
In addition, Dr. Damadian conducted post-graduate work at Harvard University,
where he studied extensively in the fields of physics, mathematics and
electronics. Dr. Damadian is the author of numerous articles and books on the
nuclear magnetic resonance effect in human tissue, which is the theoretical
basis for the Fonar MRI scanners. Dr. Damadian is a 1988 recipient of the
National Medal of Technology and in 1989 was inducted into the National
Inventors Hall of Fame, for his contributions in conceiving and developing the
application of magnetic resonance technology to medical applications including
whole body scanning and diagnostic imaging. Dr. Damadian is the President,
Treasurer and director of HMCA.
Claudette J.V. Chan has been a Director of Fonar since October 1987 and
Secretary of Fonar since January 2008. Mrs. Chan was employed from 1992 through
1997 by Raymond V. Damadian, M.D. MR Scanning Centers Management Company and
since 1997 by HMCA, as "site inspector," in which capacity she is responsible
for supervising and implementing standard procedures and policies for MRI
scanning centers. From 1989 to 1994 Mrs. Chan was employed by St. Matthew's and
St. Timothy's Neighborhood Center, Inc., as the director of volunteers in the
"Meals on Wheels" program, a program which cares for the elderly. In
approximately 1983, Mrs. Chan formed the Claudette Penot Collection, a retail
mail-order business specializing in women's apparel and gifts, of which she was
the President until she stopped operating the business in approximately 1989.
Mrs. Chan practiced and taught in the field of nursing until 1973, when her son
was born. She received a bachelor of science degree in nursing from Cornell
University in 1960. Mrs. Chan is the sister of Raymond V. Damadian.
Robert J. Janoff has been a Director of Fonar since February 1989. Mr. Janoff
has been a self-employed New York State licensed private investigator for more
than thirty-five years and was a Senior Adjustor in Empire Insurance Group for
more than 15 years until retiring from that position on July 1, 1997. Mr. Janoff
also served, from June 1985 to June 1991, as President of Action Data Management
Strategies, Ltd., a supplier of computer programs for use by insurance
companies. Mr. Janoff was a member of the Board of Directors of Harmony Heights
of Oyster Bay, New York for over 25 years, which is a nonprofit residential
school for girls with learning disabilities.
Charles N. O'Data has been a Director of Fonar since February 1998. From 1968 to
1997, Mr. O'Data was the Vice President for Development for Geneva College, a
liberal arts college located in western Pennsylvania. In that capacity, he acted
as the College's chief investment officer. His responsibilities included
management of the College's endowment fund and fund raising. In July 1997, Mr.
O'Data retired from Geneva College after 36 years of service to assume a
position of National Sales Executive for SC Johnson Company's Professional
Markets Group, a unit of SC Johnson Wax, and specialized in healthcare and
education sales, a position he held until the spring of 1999. In his capacity
with SC Johnson he was responsible for sales to the nation's three largest Group
Purchasing Organizations which included some 4,000 hospitals. Mr. O'Data
presently acts as an independent financial consultant to various entities. Mr.
O'Data served on the board of the Medical Center, Beaver, Pennsylvania, now a
part of Heritage Valley Health System, a 500 bed acute care facility, for 22
years, three as its Chair. Mr. O'Data also served on the board of the Hospital
Council of Western Pennsylvania, a shared-services and group purchasing
organization covering seven states. He founded The Beaver County Foundation, a
Community Foundation, in 1992, and serves as its President. Mr. O'Data is listed
as a finance associate in the Middle States Association, Commission on Higher
Education. The commission is the formal accrediting body for higher education in
the eastern region of the country. In this capacity he evaluates the financial
aspects of educational organizations. Mr. O'Data is a graduate of Geneva
College, where he received a B.S. degree in Economics in 1958.
Robert Djerejian has been a Director for Fonar since June 2002. Since 1996 he
has served as a senior consultant for Haines, Lundberg & Waehler International
(HLW International), an architectural, engineering, planning interior design
firm, which among other hi-tech specialties designs hospitals and laboratories.
Prior to that time he was the Senior Managing Partner of HLW International for a
period of 22 years where he received numerous design awards including the
National Honor Award from the Endowment for the Arts and The Design Excellence
Award from the NY Society of the American Institute of Architects. During his
management of the firm he brought the firm to international prominence with
offices in London, Shanghai and Saudi Arabia. He currently consults to private
clientele in design management in planning, design and construction services.
Mr. Djerejian is an Emeritus member of the Board of Trustees of Pratt Institute
since 1992, where he chaired the Nominations Committee and was the Vice Chairman
of the Executive Committee. He served as a Board Member coordinating the joint
venture of Corcoran College of Art & Design in Washington DC with Pratt
Institute as one of the founding directors forming the Delaware College of Art
and Design. He is a member of the American institute of Architects and the NY
Society of Architects. Mr. Djerejian is a graduate of Pratt Institute School of
Architecture, where he received his B.A. in Architecture in 1955.
ITEM 11. EXECUTIVE COMPENSATION.
With the exception of the Chief Executive Officer, the compensation of the
Company's executive officers is based on a combination of salary and bonuses
based on performance. The Chief Executive Officer's compensation consists of a
salary.
The Chief Executive Officer's salary varies only slightly and is by his own
decision relatively low. It is not expected to increase materially in the near
future. At such time as we become consistently and sufficiently profitable or
there is a reconsideration of our compensation policy, the compensation payable
to the Chief Executive Officer may be reconsidered. As presently existing, the
Chief Executive Officer's compensation package includes no understandings with
respect to bonuses, options or other incentives; as such, it is not subject to
our general policy later discussed.
The Board of Directors does not have a compensation Committee. Dr. Raymond V.
Damadian, President, Chief Executive Officer and Chairman of the Board, controls
over 50% of the voting power of our capital stock. Dr. Damadian is the only
executive officer who is a member of the Board of Directors. Dr. Damadian
participates in the determination of executive compensation for our officers.
The Board of Directors has established an audit committee. The members of the
committee are Robert J. Janoff, Charles N. O'Data and Robert Djerejian.
Our compensation policy includes a combination of salary, commissions, bonuses,
stock bonuses and stock options, designed to incentivize our employees. There is
no universal plan applicable to all of our employees. The fixed and variable
components of our employees' compensation tend to be individualized, based on a
combination of the employees' performance, responsibilities and position, our
assessment of how best to motivate a person in such a position and the needs and
preferences of the particular employees, as negotiated between employees and
their supervisors or management.
There is set forth in the following Summary Compensation Table the compensation
provided by us during fiscal 2008 to our Chief Executive Officer, who also
serves as our acting Principal Financial Officer. There is set forth in the
following Outstanding Equity Awards Table and Director Compensation Table the
required information.
The Company paid premiums for life insurance on its Chief Executive Officer. The
insurance policies are owned by a life insurance trust. The cash surrender value
of the life insurance policies in the approximate amount of $1.2 million was
contributed to capital during the first fiscal quarter of fiscal 2007 pursuant
to a split dollar agreement.
FONAR CORPORATION AND SUBSIDIARIES
--------------------------------------------------------------------------------
I. SUMMARY COMPENSATION TABLE
Name and all All Other Total
Other Principal Salary Bonus Compensation Compensation
Position Year ($) ($) ($) ($)
(a) (b) (c) (d) (i) (j)
--------------- ---- ---------- ----- ------------ ------------
Raymond V. 2009 $72,285.12 - - $72,285.12
Damadian, 2008 $90,087.83 - - $90,087.83
PEO 2007 $90,162.36 - - $90,162.36
PFO
--------------------------------------------------------------------------------
II. OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
Name Number of Option Option
Securities Exercise Expiration
Underlying Price Date
Unexercised ($)
Options (#)
Exercisable
(a) (b) (c)
-------------------- ----------- ------- --------
Raymond V. Damadian, 463 28.125 12/26/10
PEO/PFO
--------------------------------------------------------------------------------
III. DIRECTOR COMPENSATION
Name Fees Earned or Total
Paid in Cash ($) ($)
(a) (b) (c)
-------------------- ---------------- -----------
Raymond V. Damadian 0 0
Claudette J.V. Chan $20,160.00 $20,160.00
Robert J. Janoff $20,000.24 $20,000.24
Charles N. O'Data $20,000.24 $20,000.24
Robert Djerejian $19,999.98 $19,999.98
FONAR CORPORATION AND SUBSIDIARIES
EMPLOYEE COMPENSATION PLANS
Equity Compensation Plan Information as of June 30, 2009
(a) (b) (c)
Plan category Number of securities Weighted-average Number of securities
to be issued upon exercise price of remaining available
exercise of outstanding options, for future issuance
outstanding options, warrants and rights under equity
warrants and rights compensation plans
(excluding securities
reflected in column (a)
-------------- -------------------- -------------------- -----------------------
Equity
compensation
plans approved
by security
holders 96,014 $ 30.69 130,943
Equity
compensation
plans not
approved
by security
holders - N/A -
Total
==================== ==================== =======================
96,014 30.69 130,943
Fonar's 1997 Nonstatutory Stock Option Plan, adopted on May 9, 1997 terminated
on May 8, 2007. Of the options granted under this plan, 77,062 remain
outstanding.
Fonar's 2002 Incentive Stock Option Plan, adopted on July 1, 2002, is intended
to qualify as an incentive stock option plan under Section 422A of the Internal
Revenue Code of 1954, as amended. The 2002 Incentive Stock Option Plan permits
the issuance of stock options covering an aggregate of 100,000 shares of Common
Stock of Fonar. The options have an exercise price equal to the fair market
value of the underlying stock on the date the option is granted, are
nontransferable, are exercisable for a period not exceeding ten years and expire
upon the voluntary termination of employment. The 2002 Stock Option Plan will
terminate on June 30, 2012. As of June 30, 2009, options to purchase 50,943
shares of Common Stock of Fonar were available for future grant under the plan.
Of the options granted under this plan 18,952 remain outstanding.
Fonar's 2005 Incentive Stock Option Plan, adopted on February 15, 2005, is
intended to qualify as an incentive stock option plan under Section 422A of the
Internal Revenue code of 1954, as amended. The Plan permits the issuance of
stock options covering an aggregate of 80,000 shares of common stock of Fonar.
The options have an exercise price equal to the fair market value of the
underlying stock on the date the option is granted, are non-transferable, are
exercisable for a period not exceeding ten years, and expire upon the voluntary
termination of employment. The Plan will terminate on February 14, 2015. As of
June 30, 2009, 80,000 shares of common stock of Fonar were available for future
grant under this plan.
Fonar adopted its 2007 Stock Bonus Plan, on August 7, 2007. This Plan permits
Fonar to issue an aggregate of 100,000 shares of common stock of Fonar as bonus
or compensation. As of June 30, 2009, 67,932 shares were available for issuance.
FONAR CORPORATION AND SUBSIDIARIES
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the number and percentage of shares of Fonar's
securities held by each director, by each person known by us to own in excess of
five percent of Fonar's voting securities and by all officers and directors as a
group as of September 10, 2009.
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,
Treasurer, CEO,
5% + Stockholder
Common Stock 120,302 2.45%
Class C Stock 382,447 99.98%
Class A Preferred 19,093 6.09%
Claudette Chan
Director and Secretary
Common Stock 106 *
Class A Preferred 32 *
Robert J. Janoff
Director
Common Stock 2,899 *
Class A Preferred 79 *
Charles N. O'Data
Director
Common Stock 28 *
Robert Djerejian
Director
Common Stock 0 *
All Officers and Directors
as a Group (5 persons)
Common Stock 123,335 2.51%
Class C Stock 382,447 99.98%
Class A Preferred 19,204 6.13%
___________________________
* Less than one percent
1. Address provided for each beneficial owner owning more than Five percent of
the voting securities of Fonar.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Background.
Between 1990 and 1996, Raymond V. Damadian, M.D. MRI Scanning Centers Management
Company, also referred to as "RVDC", a Delaware corporation of which Dr.
Damadian was the sole stockholder, director and President, purchased and leased
scanners from Fonar to establish a network of professional corporations
operating MRI scanning centers, also referred to as the "Centers", in New York,
Florida, Georgia and other locations. Dr. Raymond V. Damadian is the Chairman,
President and principal stockholder of Fonar and was also the owner, director
and President of each of these professional corporations. RVDC provided the
necessary management and the scanners to the Centers, although in certain
situations, a Center would acquire the scanner directly from Fonar.
ACQUISITION OF RVDC.
Effective June 30, 1997, Fonar's wholly-owned subsidiary, Health Management
Corporation of America, also referred to as "HMCA", formerly known as U.S.
Health Management Corporation, acquired RVDC by purchasing all of the issued and
outstanding shares of RVDC from Dr. Damadian for 400 shares of the Common Stock
of Fonar. The transactions can be rescinded by Dr. Damadian, however, in the
event of a change of control in Fonar or the bankruptcy of Fonar. There is no
time limit on the right to rescind. In connection with the transaction, Fonar
granted RVDC a nonexclusive royalty free license to Fonar's patents and
software. These licenses may be terminated by Fonar in the event of the
bankruptcy of RVDC or a change in control of RVDC.
AGREEMENTS WITH HMCA.
Effective July 1, 1997, new management agreements were entered into by the
Centers and HMCA. Since that time certain of the original Centers have been
closed and new Centers opened. Each new Center also entered into a management
agreement with HMCA.
Pursuant to the management agreements, HMCA is providing comprehensive
management and administrative services and office facilities, including billing
and collection of accounts, payroll and accounts payable processing, supplies
and utilities to the Centers. Under the management agreements, HMCA provides
service through Fonar for the scanners at the Centers. In total, 10 MRI Centers
have management agreements with HMCA.
At the end of fiscal 2007, Dr. Damadian sold all of his stock in the MRI Centers
located in New York State. The new owner is one of the radiologists who has been
reading and interpreting scans performed at those facilities, Dr. Robert A.
Diamond. In connection with the sale, HMCA entered into new management
agreements with the MRI Centers under which HMCA performs essentially the same
services for the MRI Centers as prior to the sale. The fees charged, however,
are flat fees charged on a monthly basis.
Dr. Damadian remains the owner of three MRI Centers in Florida and one in
Georgia. The fees payable to HMCA for its services to these MRI Centers are
based on the number of procedures performed, ranging between $300 and $400 per
procedure.
During the fiscal years ended June 30, 2009 and June 30, 2008 the net revenues
received by HMCA from the MRI Centers owned by Dr. Damadian were approximately
$2.9 million and $3.7 million respectively.
During April 2009, Fair Haven Services, Inc. loaned the Company $258,000. The
loan bears interest at a rate of 10% per annum and is payable in 36 installments
with the final payment due April 30, 2012. Dr Damadian is the President and sole
stockholder of Fair Haven Services, Inc.
In June 2009, Tallahassee Scanning Services, P.A. an entity owned by Dr
Damadian, sold its Upright MRI scanning system to the Company for $550,000
payable in 35 monthly installments beginning on October 18, 2009.
OTHER TRANSACTIONS
Robert Janoff, a director of the Company, was a limited partner in a partnership
in which we had a 92% partnership interest. The partnership manages an MRI
scanning center in Bensonhurst, Brooklyn, New York and was party to a service
contract at an annual rate of $110,000 on its scanner for the period of July 1,
2007 through June 30, 2008. We sold our interest in the partnership at the end
of September, 2008.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit Fees
The aggregate fees billed by Marcum LLP for the audit of our annual consolidated
financial statements for the fiscal year ended June 30, 2009 and the reviews of
the financial statements included in our Forms 10-Q for the fiscal year ended
June 30, 2009 were $554,571. An audit of internal controls was not required this
year.
The aggregate fees billed by Marcum LLP for the audit of our annual financial
statements for the fiscal year ended June 30, 2008 and our internal controls,
and the reviews of the financial information included in our Forms 10-Q for the
fiscal year ended June 30, 2008 were $676,576.
Audit Related Fees
No fees were billed by Marcum LLP for the fiscal years ended June 30, 2009 or
June 30, 2008 for services related to the audit or review of our financial
statements that are not included under the caption "Audit Fees".
No fees were billed by Marcum LLP for the fiscal years ended June 30, 2009 or
June 30, 2008 for designing, operating, supervising or implementing any of our
financial information systems or any hardware or software systems for our
financial information.
Tax Fees
The aggregate fees billed by Marcum LLP for tax compliance, tax advice and tax
planning in the fiscal year ended June 30, 2009 were $206,335.
The aggregate fees billed by Marcum LLP for tax compliance, tax advice and tax
planning in the fiscal year ended June 30, 2008 were $163,918.
All Other Fees
The aggregate fees billed by Marcum LLP for all other services rendered by them
during the fiscal years ended June 30, 2009 and June 30, 2008 were $31,776 and
$29,035, respectively, which included services in connection with the
registration of securities, employee benefit plan audits and reviews and
procedures that we requested Marcum LLP to undertake to provide assurances on
matters not required by laws or regulations.
Since January 1, 2003, the audit committee has adopted policies and procedures
for pre-approving all non-audit work performed by the auditors. Specifically,
the committee must pre-approve the use of the auditors for all such services.
The audit committee has pre-approved all non-audit work since that time and in
making its determination has considered whether the provision of such services
was compatible with the independence of the auditors.
Our audit committee believes that the provision by Marcum LLP of services in
addition to audit services in fiscal 2009 and 2008 were compatible with
maintaining their independence.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
a) FINANCIAL STATEMENTS AND SCHEDULES
The following consolidated financial statements are included in Part II, Item 8.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as at June 30, 2009 and 2008.
Consolidated Statements of Operations for the Two Years Ended June 30, 2009
and 2008.
Consolidated Statements of Stockholders' Equity for the Two Years Ended
June 30, 2009 and 2008.
Consolidated Statements of Cash Flows for the Two Years Ended June 30, 2009
and 2008.
Notes to Consolidated Financial Statements.
Information required by schedules called for under Regulation S-X is either
not applicable or is included in the consolidated financial statements or notes
to the financial statements.
b) REPORTS ON FORM 8-K
Registrant's Report on Form 8-K containing the Company's Earnings Report
for Fiscal 2009. October 5, 2009, Commission File No. 000-10248.
c) EXHIBITS
3.1 Certificate of Incorporation, as amended, of the Registrant
incorporated by reference to Exhibit 3.1 to the Registrant's registration
statement on Form S-1,Commission File No. 33-13365.
3.2 Article Fourth of the Certificate of Incorporation, as amended, of the
Registrant incorporated by reference to Exhibit 4.1 to the Registrant's
registration statement on Form S-8, Commission File No. 33-62099.
3.3 Section A of Article Fourth of the Certificate of Incorporation, as
amended, of the Registrant incorporated by reference to Exhibit 4.3 to the
Registrant's registration statement on Form S-3, Commission File No. 333-63782.
3.4 Section A of Article Fourth of the Certificate of Incorporation, as
amended, of the Registrant incorporated by reference to Exhibit 3.3 of the
Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2003,
Commission File No. 0-10248.
3.5 By-Laws, as amended, of the Registrant incorporated by reference to
Exhibit 3.2 to the Registrant's registration statement on Form S-1, Commission
File No. 33-13365.
4.1 Specimen Common Stock Certificate incorporated by reference to Exhibit
4.1 to the Registrant's registration statement on Form S-1, Commission File No.
33-13365.
4.2 Specimen Class B Common Stock Certificate incorporated by reference to
Exhibit 4.2 to the Registrant's registration statement on Form S-1, Commission
File No. 33-13365.
4.3 Form of 4% Convertible Debentures due June 30, 2002 incorporated by
reference to Exhibit 4.1 of the Registrant's current report on Form 8-K filed on
June 11, 2001. Commission File No. 0-10248.
4.4 Form of Purchase Warrants incorporated by reference to Exhibit 4.2 of
the Registrant's current report on Form 8-K filed on June 11, 2001. Commission
File No. 0-10248.
4.5 Form of Callable Warrants incorporated by reference to Exhibit 4.3 of
the Registrant's current report on Form 8-K filed on June 11, 2001. Commission
File No. 0-10248.
4.6 Form of Replacement Callable Warrants incorporated by reference to
Exhibit 4.7 of the Registrant's registration statement on Form S- 3, Commission
File No. 333-10677.
4.7 Form of Amended and Restated Purchase Warrant for The Tail Wind Fund,
Ltd. incorporated by reference to Exhibit 4.7 of the Registrants registration
statement on Form S-3, Commission File No. 333-116908.
4.8 Form of Amended and Restated Purchase Warrant for Placement Agent and
Designees incorporated by reference to Exhibit 4.8 of the Registrant's
registration statement on Form S-3, Commission File No. 333- 116908.
10.1 License Agreement between the Registrant and Raymond V. Damadian
incorporated by reference to Exhibit 10 (e) to Form 10-K for the fiscal year
ended June 30, 1983, Commission File No. 0-10248.
10.2 1983 Nonstatutory Stock Option Plan incorporated by reference to
Exhibit 10 (a) to Form 10-K for the fiscal year ended June 30, 1983, Commission
File No. 0-10248, and amendments thereto dated as of March 7, 1984 and dated
August 22, 1984, incorporated by referenced to Exhibit 28 (a) to Form 10-K for
the year ended June 30, 1984, Commission File No. 0-10248.
10.3 1984 Incentive Stock Option Plan incorporated by reference to Exhibit
28 (c) to Form 10-K for the year ended June 30, 1984, Commission File No. 0-
10248.
10.4 1986 Nonstatutory Stock Option Plan incorporated by reference to
Exhibit 10.7 to Form 10-K for the fiscal year ended June 30, 1986, Commission
File No. 0-10248.
10.5 1986 Stock Bonus Plan incorporated by reference to Exhibit 10.8 to
Form 10-K for the fiscal year ended June 30, 1986, Commission File No. 0-10248.
10.6 1986 Incentive Stock Option Plan incorporated by reference to Exhibit
10.9 to Form 10-K for the fiscal year ended June 30, 1986, Commission File No.
0-10248.
10.7 Lease Agreement, dated as of August 18, 1987, between the Registrant
and Reckson Associates incorporated by reference to Exhibit 10.26 to Form 10-K
for the fiscal year ended June 30, 1987, Commission File No. 0-10248.
10.8 1993 Incentive Stock Option Plan incorporated by reference to Exhibit
28.1 to the Registrant's registration statement on Form S-8, Commission File No.
33-60154.
10.9 1993 Non-Statutory Stock Option Plan incorporated by reference to
Exhibit 28.2 to the Registrant's registration statement on Form S-8, Commission
File No. 33-60154.
10.10 1993 Stock Bonus Plan incorporated by reference to Exhibit 28.3 to
the Registrant's registration statement on Form S-8, Commission File No. 33-
60154.
10.11 1994 Non-Statutory Stock Option Plan incorporated by reference to
Exhibit 28.1 to the Registrant's registration statement on Form S-8, Commission
File No. 33-81638.
10.12 1994 Stock Bonus Plan incorporated by reference to Exhibit 28.2 to
the Registrant's registration statement on Form S-8, Commission File No. 33-
81638.
10.13 1995 Non-Statutory Stock Option Plan incorporated by reference to
Exhibit 28.1 to the Registrant's registration statement on Form S-8, Commission
File No. 33-62099.
10.14 1995 Stock Bonus Plan incorporated by reference to Exhibit 28.2 to
the Registrant's registration statement on Form S-8, Commission File No. 33-
62099.
10.15 1997 Non-Statutory Stock Option Plan incorporated by reference to
Exhibit 28.1 to the Registrant's registration statement on Form S-8, Commission
File No.: 333-27411.
10.16 1997 Stock Bonus Plan incorporated by reference to Exhibit 28.2 to
the Registrant's registration statement on Form S-8, Commission File No: 333-
27411.
10.17 Stock Purchase Agreement, dated July 31, 1997, by and between U.S.
Health Management Corporation, Raymond V. Damadian, M.D. MR Scanning Centers
Management Company and Raymond V. Damadian, incorporated by reference to Exhibit
2.1 to the Registrant's Form 8-K, July 31, 1997, commission File No: 0-10248.
10.18 Merger Agreement and Supplemental Agreement dated June 17, 1997 and
Letter of Amendment dated June 27, 1997 by and among U.S. Health Management
Corporation and Affordable Diagnostics Inc. et al., incorporated by reference to
Exhibit 2.1 to the Registrant's 8-K, June 30, 1997, Commission File No: 0-
10248.
10.19 Stock Purchase Agreement dated March 20, 1998 by and among Health
Management Corporation of America, Fonar Corporation, Giovanni Marciano, Glenn
Muraca et al., incorporated by reference to Exhibit 2.1 to the Registrant's 8-
K, March 20, 1998, Commission File No: 0-10248.
10.20 Stock Purchase Agreement dated August 20, 1998 by and among Health
Management Corporation of America, Fonar Corporation, Stuart Blumberg and Steven
Jonas, incorporated by reference to Exhibit 2 to the Registrant's 8-K, September
3, 1998, Commission File No. 0-10248.
10.21 2000 Stock Bonus Plan incorporated by reference to Exhibit 99.1 to
the Registrant's registration Statement on Form S-8, Commission File No.: 333-
66760.
10.22 2002 Stock Bonus Plan incorporated by reference to Exhibit 99.1 to
the Registrant's registration statement on Form S-8, Commission File No.: 333-
89578.
10.23 2002 Incentive Stock Option Plan incorporated by reference to Exhibit
99.1 to the Registrant's registration statement on Form S-8, Commission File
No.: 333-96557.
10.24 2003 Stock Bonus Plan incorporated by reference to Exhibit 99.1 to
the Registrant's registration statement on Form S-8, Commission File No: 333-
106626.
10.25 2003 Supplemental Stock Bonus Plan incorporated by reference to
Exhibit 99.1 to the Registrant's registration statement on Form S-8, Commission
File No: 333-106626.
10.26 2004 Stock Bonus Plan incorporated by reference to Exhibit 99.1 to
the Registrant's registration statement on Form S-8, Commission File No. 333-
112577.
10.27 2005 Stock Bonus plan incorporated by reference to Exhibit 99.1 to
the Registrant's registration statement on Form S-8, Commission File No.
333-122859.
10.28 2005 Supplemental Stock Bonus plan incorporated by reference to
Exhibit 99.1 to the Registrant's registration statement on Form S- 8, Commission
File No. 333-126658.
10.29 Purchase Agreement dated May 24, 2001 by and between the Registrant
and The Tail Wind Fund Ltd. incorporated by reference to Exhibit 10.1 to the
Registrant's current report on Form 8-K filed June 11, 2001. Commission File No.
0-10248.
10.30 Registration Rights Agreement dated May 24, 2001 by and among the
Registrant, The Tail Wind Fund Ltd. and Roan Meyers, Inc. incorporated herein by
reference to Exhibit 10.2 to the Registrant's current report on Form 8-K filed
June 11, 2001. Commission File No. 0-10248.
10.31 Amendment to Callable Warrant dated April 28, 2004 by and between The
Tail Wind Fund, Ltd. and the Registrant incorporated by reference to Exhibit
10.17 to the Registrant's registration statement on Form S-3, Commission File
No. 333-116908.
10.32 First Amendment to Purchase Warrant dated April 28, 2004 by and
between The Tail Wind Fund, Ltd. and the Registrant incorporated by reference to
Exhibit 10.18 to the Registrant's registration statement on Form S-3, Commission
File No. 333-116908.
10.33 Form of First Amendment to Purchase Warrant dated June 1, 2004 by and
between each of Roan/Meyers Associates, L.P. and its designees and the
Registrant, incorporated by reference to Exhibit 10.19 to the Registrant's
registration statement on Form S-3, Commission File No. 333- 116908.
10.34 Asset Purchase Agreement dated July 28, 2005 among Health Plus
Management Services, L.L.C., Health Management Corporation of America, Dynamic
Healthcare Management, Inc. and Fonar Corporation, incorporated by reference to
Exhibit 2 to the Registrant's Form 8-K, August 2, 2005, Commission File No. 0-
10248.
10.35 Partnership Interest Purchase Agreement dated September 29, 2008 by
and between Diagnostic Management, LLC and Raymond V. Damadian, M.D. MR Scanning
Centers Management Company, incorporated by reference to Exhibit 10.35 to Form
10-K for the fiscal year ended June 30, 2008. Commission File No. 0- 10248.
14.1 Code of Ethics, incorporated by reference to Exhibit 14.1 of
registrant's Form 10-K for the fiscal year ended June 30, 2004, Commission File
No.: 0-10248.
21.1 Subsidiaries of the Registrant. See Exhibits.
23.1 Independent Registered Public Accounting Firm's Report See Exhibits.
31.1 Section 302 Certification. See Exhibits.
32.1 Section 906 Certification. See Exhibits.
99.1 Press Release on Sale to Largest Orthopedic Hospital in the Netherlands,
incorporated by reference to Exhibit 99.1 of registrant's Form 10-K for the
fiscal year ended June 30, 2006, Commission File No.: 0-10248.
FONAR CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this amended report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FONAR CORPORATION
Dated: November 9, 2009
By: /s/ Raymond Damadian
Raymond V. Damadian, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
amended report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Raymond Damadian Chairman of the November 9, 2009
Raymond V. Damadian Board of Directors,
President, Director
Principal Executive
Officer and Acting
Principal Financial
Officer)
/s/ Claudette J.V. Chan Director and November 9, 2009
Claudette J.V. Chan Secretary
/s/ Robert J. Janoff Director November 9, 2009
Robert J. Janoff
/s/ Charles N. O'Data Director November 9, 2009
Charles N. O'Data
/s/ Robert Djerejian Director November 9, 2009
Robert Djerejian