SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
_____________________
FORM 10-K
_____________________
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended June 30, 2010
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 whether the registrant (1) has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(Section 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
Yes ___ 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, 2009 based on the closing price of $1.57 per share on such
date as reported on the NASDAQ System, was approximately $7.5 million. The other
outstanding classes do not have a readily determinable market value.
As of September 30, 2010, 5,100,815 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
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-positional(R) 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 have introduced 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, billing and collection 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.
An important 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 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
was 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. Revenues, however, recognized from the sale of
Upright(R) MRI scanners decreased in fiscal 2010 by 52.7% over fiscal 2009 from
approximately $16.6 million in fiscal 2009 to approximately $7.9 million in
fiscal 2010 under present market conditions. The following chart shows the
revenues attributable to our different model scanners for the fiscal years ended
June 30, 2009 and June 30, 2010. Note that we recognize revenue on a percentage
of completion basis. Accordingly, revenue is recognized as each sub-assembly of
a scanner is manufactured. Consequently the revenues for a fiscal period do not
necessarily relate to orders placed in that period.
Model Revenues Recognized
Fiscal 2009 Fiscal 2010
----------- -----------
Upright(R) $16,617,352 $7,855,087
Fonar 360(TM) $ 0 $ 0
Other $ 558,065 $1,201,220
"Other" revenue includes upgrades and deinstallations of scanners.
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.
Of these 10 centers, 9 are equipped with Upright(R) MRI scanners. In the second
half of fiscal 2010, HMCA intensified its marketing efforts, among other things,
hiring additional marketers and supervisory personnel. Our objective is to
increase HMCA's revenues not only for the sake of promoting HMCA's profitability
but to provide sufficient revenues to support both segments of our business
during times when MRI scanner sales are weak.
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.
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 are
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. 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.
The predecessors of the Upright(R) MRI and Fonar 360(TM) were FONAR's QUAD(TM)
scanner, Ultimate(TM) 7000 scanner and Beta(TM) scanner. The Beta(TM) 3000
scanner utilized a permanent magnet. The Beta(TM) 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 2010, sales of our Upright(R) MRI scanners accounted for
approximately 24.7% of our total revenues and 37.9% of our medical equipment
revenues, as compared to 41.8% of total revenues and 56.4% of medical equipment
revenues in fiscal 2009. These results reflect the decrease in our sales of
scanners.
During fiscal 2010 and fiscal 2009, 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 2010. 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. We continue to use
independent manufacturer's representatives and distributors for foreign markets.
None of Fonar's competitors are entitled to make the Fonar Upright(R) MRI
scanner.
Fonar's Website includes interactive product information for reaching customers.
Fonar exhibited its new products at the annual meeting of the Radiological
Society of North America ("RSNA") in Chicago from November 1995 through 2007 and
will consider attending RSNA meetings in future years.
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 the 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".
Recognition of the importance of Fonar Upright(R) MRI continues to grow.
Medserena, of Germany, announced in August, 2010 the purchase of its fourth
Upright(R) Multi-Position(TM) MRI. CEO Matthais Schulz said, "The large number
of requests coming from our physicians in Germany are arising because of the
special medical need for FONAR's unique technology. This is in spite of an
intensely active MRI market in Germany, where there are already many
conventional lie-down MRIs installed."
Even high-field 3.0 Tesla MRI scanners cannot overshadow the importance of
Fonar's unique technology. In August, 2010, a distinguished board-certified
radiologist in Florida, the owner/operator of two multi-modality imaging centers
equipped with MRIs, ordered a Fonar Upright(R) MRI. He initially considered
purchasing a 3.0 Tesla lie-down MRI, but decided instead to buy the Fonar
Upright(R) Multi-Position(TM) MRI when he became aware of its many unique
imaging capabilities.
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 inquiries 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(R) 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(R) MRI. Advertisements directed to this audience have appeared in the
Journal of the American Medical Association.
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(R) 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.
Also, our advertising for HMCA also serves as advertising for Fonar MRI
scanners. We have increased internet awareness of our product by driving patient
traffic to the Upright(R) scanning centers we manage by installing Websites for
every location. 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, 2010, 11.9% of the Company's revenues were generated by
foreign sales, as compared to 13.2% for fiscal 2009.
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 $11.1 million in fiscal 2010 and $10.5 million
in fiscal 2009. 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.
RESEARCH AND DEVELOPMENT
During the fiscal year ended June 30, 2010, we incurred expenditures of
$2,773,704, $315,362 of which was capitalized, on research and development, as
compared to $4,085,177, $491,707 of which was capitalized during the fiscal year
ended June 30, 2009.
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 28, 2010 was approximately $14.9
million, as compared to $25.7 million at September 26, 2009. 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, 2010, 164 patents have
been issued to Fonar, and approximately 30 patents are 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 terms of the patents in
Fonar's portfolio extend to various times.
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 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 2010 fiscal year, the revenues HMCA recognized from the MRI
facilities increased to $11.1 million, notwithstanding economic conditions and
in contrast to the decline in revenues recognized from scanner sales. For the
2009 fiscal year, the revenues HMCA recognized from the MRI facilities were
$10.3 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 only MRI facilities, HMCA sold its
business of managing physical therapy and rehabilitation practices on July 28,
2005 to Health Plus Management Services, L.L.C.
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 office and 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
assist in obtaining favorable pricing for office and 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 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 and in
fiscal 2010 increased to $696,000 in the aggregate. 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 the Georgia facility, fees are charged by HMCA based on
the number of procedures performed. These fees are subject to adjustment on an
annual basis, based on mutual agreement. The per procedure charges to the
Georgia facility during fiscal 2010 was $350 per MRI scan. The fees for the
three sites in Florida owned by Dr. Damadian are flat monthly fees ranging from
$113,000 to $195,000 per month. 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.
REIMBURSEMENT
HMCA's clients receive reimbursements for their MRI scans through Medicare,
Medicaid, managed care and private insurance.
Medicare. The Medicare program provides reimbursement for hospitalization,
physician, diagnostic and certain other services to eligible persons 65 years of
age and over and certain other individuals. Providers are paid by the federal
government in accordance with regulations promulgated by the Department of
Health and Human Services, HSS, and generally accept the payment with nominal
deductible and co- insurance amounts required to be paid by the service
recipient, as payment in full. Hospital inpatient services are reimbursed under
a prospective payment system. Hospitals receive a specific prospective payment
for inpatient treatment services based upon the diagnosis of the patient.
Under Medicare's prospective payment system for hospital outpatient services, or
OPPS, a hospital is paid for outpatient services on a rate per service basis
that varies according to the ambulatory payment classification group, or APC, to
which the service is assigned rather than on a hospital's costs. Each year the
Centers for Medicare and Medicaid Services, or CMS, publishes new APC rates that
are determined in accordance with the promulgated methodology.
Services provided in non-hospital based freestanding facilities, such as
independent diagnostic treatment facilities, are paid under the Medicare
Physician Fee Schedule, or MPFS. All of HMCA's clients are presently in this
category of independent diagnostic treatment facilities. The MPFS is updated on
an annual basis. Several years ago, CMS reduced the reimbursement for certain
diagnostic procedures performed together on the same day. They did so by
modifying Medicare to pay 100% of the technical component of the higher priced
procedure and 75% for the technical component of each additional procedure for
procedures involving contiguous body parts within a family of codes when
performed in the same session. Under the recently enacted healthcare reform
legislation, the Patient Protection and Affordable Care Act or, PPACA, CMS
further reduced the payment for contiguous body parts within the same session
from 75% to 50% for the technical component of CT, MRI and ultrasound services,
effective July 1, 2010. These reductions in payment by CMS may adversely impact
our financial condition and results of operations since they result in lower
reimbursement for the services of our clients. In fact, on June 25, 2010, CMS
issued the proposed MPFS for 2011. Under the proposed rule, CMS is now proposing
to apply this payment reduction to the technical component of all studies of
these three imaging modalities that are performed on a patient in the same
session, even if they are non-contiguous.
We have experienced reimbursement reductions for radiology services provided to
Medicare beneficiaries, including reductions pursuant to the Deficit Reduction
Act, or DRA. The DRA, which became effective in 2007, set reimbursement for the
technical component for imaging services (excluding diagnostic and screening
mammography) in non-hospital based freestanding facilities at the lesser of OPPS
or the MPFS.
Medicare reimbursement rates under the MPFS are calculated in accordance with a
statutory formula. As a result, for calendar years 2008, 2009 and 2010, CMS
published regulations decreasing the fee schedule rates by 10.1% 5.4% and 21.2%
respectively. In each instance, Congress enacted legislation preventing the
decreases from taking effect and in fact on June 25, 2010, the "Preservation of
Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010"
prevented the rate reduction and also established a 2.2% payment rate increase
to the MPFS retroactive from June 1 through Nov. 30, 2010. Under the proposed
MPFS for 2011, however, CMS proposes to reduce rates in 2011 by an additional
6.1%. This cut does not account for the 2010 legislative changes to the MPFS and
would be added to the 21.2% cut that was previously delayed. We anticipate that
CMS will continue to release regulations for decreases in fee schedule rates
under the MPFS unless and until the statutory formula is changed through
enactment of new legislation. We do not know if Congress will continue to enact
legislation to prevent future decreases under the statutory formula, but if
Congress failed to act, there could be significant decreases to the MPFS.
On Nov. 25, 2009, CMS released the 2010 MPFS final rule (the "Final Rule") which
updated the payment policies and rates for the MPFS, for calendar year 2010. In
addition to other changes to the physician payment formulae, the MPFS reduces
payment rates for services using equipment costing more than $1.0 million by
increasing the usage assumptions from the current 50% usage rate to a 90% usage
rate. This change in the usage rate was to be phased in over a four year period
and primarily impacted MRI and CT services. The Final Rule was superseded,
however, by passage of PPACA, but only with respect to the usage assumptions.
All other CMS issued updates for 2010 remain in effect. Under PPACA, beginning
Jan. 1, 2011, the usage rate assumption for diagnostic imaging equipment priced
at more than $1 million will be set at 75% for 2011 and subsequent years.
In addition to the foregoing changes to the usage assumptions, CMS' 2010
regulatory changes to the MPFS also included a downward adjustment to services
primarily involving the technical component rather than the physician work
component, by adjusting downward malpractice payments for these services. The
reductions will affect the services we provide, primarily impacting radiology
and other diagnostic tests. As noted above, the changes to the MPFS will be
transitioned over a four-year period such that beginning in 2013, CMS will fully
implement the revised payment rates. This change to the MPFS, could have an
adverse effect on our financial condition and results of operations. For our
fiscal year ended June 30, 2010, Medicare revenues represented approximately
17.3% of the revenues for HMCA's clients. The impact of the new MPFS will
increase over the four-year transition period unless mitigated by future
legislation (either currently proposed or pledged by Congress and the federal
government administration).
Many of PPACA's provisions will not take effect for months or several years,
while others are effective immediately. Many provisions also will require the
federal government and individual state governments to interpret and implement
the new requirements. In addition, PPACA remains the subject of significant
debate, and proposals to repeal, block or amend the law have been introduced in
Congress and many state legislatures. Finally, a number of state attorneys
general have filed legal challenges to PPACA seeking to block its implementation
on constitutional grounds. Because of the many variables involved, we are unable
to predict how many of the legislative mandates contained in PPACA will be
implemented or in what form, whether any additional or similar changes to
statutes or regulations (including interpretations), will occur in the future,
or what effect any future legislation or regulation would have on our business.
Medicaid. The Medicaid program is a jointly-funded federal and state program
providing coverage for low-income persons. In addition to federally-mandated
basic services, the services offered and reimbursement methods vary from state
to state. In many states, Medicaid reimbursement is patterned after the Medicare
program; however, an increasing number of states have established or are
establishing payment methodologies intended to provide healthcare services to
Medicaid patients through managed care arrangements. In fiscal 2010,
approximately 2.8% of the revenues of HMCA's clients were attributable to
Medicaid.
Managed Care and Private Insurance. Health Maintenance Organizations, or HMO's,
Preferred Provider Organizations, or PPOs, and other managed care organizations
attempt to control the cost of healthcare services by a variety of measures,
including imposing lower payment rates, preauthorization requirements, limiting
services and mandating less costly treatment alternatives. Managed care
contracting is competitive and reimbursement schedules are at or below Medicare
reimbursement levels. Some managed care organizations have reduced or otherwise
limited, and other managed care organizations may reduce or otherwise limit,
reimbursement in response to reductions in government reimbursement. These
reductions could have an adverse impact on our financial condition and results
of operations. These reductions have been, and any future reductions may be,
similar to the reimbursement reductions proposed by CMS, Congress and the
current federal government administration. The development and expansion of
HMOs, PPOs and other managed care organizations within our core markets could
have a negative impact on utilization of our services in certain markets and/or
affect the revenues per procedure we can collect, since such organizations will
exert greater control over patients' access to diagnostic imaging services, the
selection of the provider of such services and the reimbursement thereof.
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
The healthcare industry is highly regulated and changes in laws and regulations
can be significant. Changes in the law or new interpretation of existing laws
can have a material effect on our permissible activities, the relative costs
associated with doing business and the amount of reimbursement by government and
other third-party payors.
Federal False Claims Act: The federal False Claims Act and, in particular, the
False Claims Act's "qui tam" or "whistleblower" provisions allow a private
individual to bring actions in the name of the government alleging that a
defendant has made false claims for payment from federal funds. After the
individual has initiated the lawsuit, the government must decide whether to
intervene in the lawsuit and to become the primary prosecutor. If the government
declines to join the lawsuit, the individual may choose to pursue the case
alone, although the government must be kept apprised of the progress of the
lawsuit, and may intervene later. Whether or not the federal government
intervenes in the case, it will receive the majority of any recovery. If the
litigation is successful, the individual is entitled to no less than 15%, but no
more than 30%, of whatever amount the government recovers that is related to the
whistleblower's allegations.
When an entity is determined to have violated the federal False Claims Act, it
must pay three times the actual damages sustained by the government, plus
mandatory civil penalties of between $5,500 to $11,000 for each separate false
claim, as well as the government's attorneys' fees. Liability arises when an
entity knowingly submits, or causes someone else to submit, a false claim for
reimbursement to the federal government. The False Claims Act defines the term
"knowingly" broadly, though simple negligence will not give rise to liability
under the False Claims Act. Examples of the other actions which may lead to
liability under the False Claims Act:
Failure to comply with the many technical billing requirements applicable
to our Medicare and Medicaid business.
Failure to comply with the prohibition against billing for services ordered
or supervised by a physician who is excluded from any federal healthcare
program, or the prohibition against employing or contracting with any
person or entity excluded from any federal healthcare program.
Failure to comply with the Medicare physician supervision requirements for
the services we provide, or the Medicare documentation requirements
concerning physician supervision.
The Fraud Enforcement and Recovery Act of 2009 expanded the scope of the False
Claims Act by, among other things, broadening protections for whistleblowers and
creating liability for knowingly retaining a government overpayment, acting in
deliberate ignorance of a government overpayment or acting in reckless disregard
of a government overpayment. The recently enacted healthcare reform bills in the
form of the Patient Protection and Affordable Care Act, as amended by the Health
Care and Education Reconciliation Act of 2010 (collectively, "PPACA") expanded
on changes made by the 2009 Fraud Enforcement and Recovery Act with regard to
such "reverse false claims." Under PPACA, the knowing failure to report and
return an overpayment within 60 days of identifying the overpayment or by the
date a corresponding cost report is due, whichever is later, constitutes a
violation of the False Claims Act. HMCA and its clients have never been sued
under the False Claims Act and believe they are in compliance with the law.
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
We are subject to federal and state laws which govern financial and other
arrangements between healthcare providers. These include the federal
anti-kickback statute which, among other things, prohibits the knowing and
willful solicitation, offer, payment or receipt of any remuneration, direct or
indirect, in cash or in kind, in return for or to induce the referral of
patients for items or services covered by Medicare, Medicaid and certain other
governmental health programs. Under PPACA, knowledge of the anti-kickback
statute or the specific intent to violate the law is not required. Violation of
the anti-kickback statute may result in civil or criminal penalties and
exclusion from the Medicare, Medicaid and other federal healthcare programs, and
according to PPACA, now provides a basis for liability under the False Claims
Act. In addition, it is possible that private parties may file "qui tam" actions
based on claims resulting from relationships that violate the anti-kickback
statute, seeking significant financial rewards. Many states have enacted similar
statutes, which are not limited to items and services paid for under Medicare or
a federally funded healthcare program. Neither HMCA nor its clients engage in
this practice.
In fiscal 2010, approximately 17.3% of the revenues of HMCA's clients were
attributable to Medicare and 2.8% were attributable to Medicaid. In fiscal 2009,
approximately 16.8% of the revenues of HMCA's clients were attributable to
Medicare and 1.5% 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.
Health Insurance Portability and Accountability Act
In 1996, Congress passed the Health Insurance Portability and Accountability
Act, or HIPAA. Although the main focus of HIPAA was to make health insurance
coverage portable, HIPAA has become a short-hand reference to new standards for
electronic transactions and privacy and security obligations imposed on
providers and others who handle personal health information. HIPAA requires
healthcare providers to adopt standard formats for common electronic
transactions with health plans, and to maintain the privacy and security of
individual patients' health information. A violation of HIPAA's standard
transactions, privacy and security provisions may result in criminal and civil
penalties, which could adversely affect our financial condition and results of
operations.
Civil Money Penalty Law and Other Federal Statutes
The Civil Money Penalty, or CMP, law covers a variety of practices. It provides
a means of administrative enforcement of the anti-kickback statute, and
prohibits false claims, claims for medically unnecessary services, violations of
Medicare participating provider or assignment agreements and other practices.
The statute gives the Office of Inspector General of the HHS the power to seek
substantial civil fines, exclusion and other sanctions against providers or
others who violate the CMP prohibitions.
In addition, in 1996, Congress created a new federal crime: healthcare fraud and
false statements relating to healthcare matters. The healthcare fraud statute
prohibits knowingly and willfully executing a scheme to defraud any healthcare
benefit program, including private payors. A violation of this statute is a
felony and may result in fines, imprisonment or exclusion from government
sponsored programs such as the Medicare and Medicaid programs.
We believe that our operations comply with the CMP law and the healthcare fraud
and false statements statutes.
Certificates of Need: Some states require hospitals and certain other healthcare
facilities and providers to obtain a certificate of need, or CON, or similar
regulatory approval prior to establishing certain healthcare operations or
services, incurring certain capital projects and/or the acquisition of major
medical equipment including MRI and PET/CT systems. We are not operating in any
such states.
Patient Protection and Affordable Care Act
On March 23, 2010, President Obama signed into law healthcare reform legislation
in the form of PPACA. The implementation of this law will likely have a profound
impact on the healthcare industry. Most of the provisions of PPACA will be
phased in over the next four years and can be conceptualized as a broad
framework not only to provide health insurance coverage to millions of
Americans, but to fundamentally change the delivery of care by bringing together
elements of health information technology, evidence-based medicine, chronic
disease management, medical "homes," care collaboration and shared financial
risk in a way that will accelerate industry adoption and change. There are also
many provisions addressing cost containment, reductions of Medicare and other
payments and heightened compliance requirements and additional penalties, which
will create further challenges for providers. We are unable to predict the full
impact of PPACA at this time due to the law's complexity and current lack of
implementing regulations or interpretive guidance. Moving forward, we believe
that the federal government will likely have greater involvement in the
healthcare industry than in prior years.
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, 2010
approximately 35.7% of our clients' receipts were from patients covered by no-
fault insurance and approximately 5.9% of our client's receipts were from
patients covered by workers' compensation programs. For the fiscal year ended
June 30, 2009, approximately 39.6% of HMCA's clients' receipts were from
patients covered by no-fault insurance and approximately 6.7% of HMCA's clients'
receipts were from patients covered by workers' compensation programs. In the
event that changes in these laws alter the fee structures or methods of
providing service, or impose additional or different requirements, HMCA could be
required to modify its business practices and services in ways that could be
more costly to HMCA or in ways that decrease the revenues which HMCA receives
from its clients.
HMCA believes that it and its clients are in compliance with applicable Federal,
State and local laws. HMCA does not believe that such laws will have any
material effect on its business.
EMPLOYEES
As of July 1, 2010, we employed 238 persons on a full-time and part-time basis.
Of such employees, 7 were engaged in marketing and sales, 17 in research and
development, 25 in production, 36 in customer support services, 27 in
administration, 89 on site at facilities and offices, 19 performing billing and
collection functions managed by HMCA and 18 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 $1,239,979, 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. Fonar plans to vacate 29,000 square feet of space in a building
adjacent to its principal offices as part of its continuing efforts to cut
costs, thereby saving an additional $249,694 annually (excluding savings on
utilities, taxes and other related expenses). Management believes that the
premises will be adequate for its current needs. HMCA already has consolidated
its headquarters with those of Fonar as part of Fonar's cost cutting program.
HMCA maintains leased office premises for its clients at the clients' sites
having an aggregate annual rental rate of approximately $875,000 under leases
having various terms.
ITEM 3. LEGAL PROCEEDINGS
On or about June 30, 2010, one of Fonar's customers, Golden Triangle Company,
commenced an action against Fonar and certain individual defendants employed or
formerly employed by Fonar, in the United States District Court for the Eastern
District of New York based on the alleged wrongful failure of Fonar to deliver a
scanner in Kuwait. The claim alleges various causes of action including breach
of contract, fraud, conspiracy to defraud and conversion. Golden Triangle
Company v. Fonar Corporation et al, CV10-2933. The plaintiff seeks relief in the
amount of $5,000,000. Fonar believes that the plaintiff's claims are without
merit and is seeking to make a motion to dismiss the complaint.
In addition, we are party to five additional less significant actions in which
the customers are seeking to obtain a return of their deposits for MRI scanners.
EAB Leasing Corp et al v. Farolan, District Court of Hidalgo County, Texas
($169,500), Upright MRI of Chicago, LLC v. Fonar, Circuit Court of Cook County,
Illinois ($310,000), Matt Malek Madison v. Fonar, U.S. District Court, Northern
District of California ($300,000), Jack Shapiro v. Fonar Corporation, Supreme
Court, Nassau County, New York ($500,000 although the actual deposit was
$323,000), and Anchorage Neurological Associates, Inc., Superior Court of
Alaska, Third Judicial District at Anchorage ($155,000). Fonar's down payments
are generally non-refundable, but in some instances, where specified conditions
are met, Fonar will refund a down payment. In the Farolan case, the Court
granted Fonar's motion for summary judgment, but the plaintiff is pursuing
additional proceedings. In the Upright MRI of Chicago case, the down payment was
specifically stated to be non-refundable and the case is proceeding. In the
Madison case, the Court recently granted summary judgment to Madison for the
deposit and prejudgment interest. We strongly disagree with the decision and are
considering our options. In the Shapiro case, Shapiro, who was also a sales
representative for Fonar, and Fonar are attempting to negotiate a settlement. In
the Anchorage Neurological case, which was commenced on October 7, 2010, Fonar
had agreed to refund the $155,000 down payment if the plaintiff were unable to
negotiate a satisfactory lease with its current landlord to accommodate the MRI
scanner. Anchorage demanded the down payment, but declined to provide any
specifics concerning the matter.
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 2008 5.45 2.38
April - June 2008 4.20 2.21
July - September 2008 2.43 1.35
October - December 2008 3.49 0.66
January - March 2009 1.38 0.62
April - June 2009 3.92 0.82
July - September 2009 2.47 1.60
October - December 2009 4.60 1.55
January - March 2010 3.81 1.19
April - June 2010 2.24 1.40
July - September 30 2010 1.94 1.31
On September 30, 2010, we had approximately 4,376 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 3,860 stockholders of
record of our Class A Non-voting Preferred Stock.
At the present time, the only class of our securities for which there is a
market is the Common Stock.
We paid cash dividends in fiscal 1998 and the first three quarters of fiscal
1999 on monies we received from the enforcement of our patents. Except for these
dividends, we have not paid any cash dividends. Except for these dividends, we
expect that we will retain earnings to finance the development and expansion of
our business.
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 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, 2010 and June 30, 2009, 34.1% and 28.4%,
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 in the case of one scanner
located in Georgia at the rate of $350 per MRI scan. The fees for the sites
owned by Dr. Damadian in Florida are flat monthly fees ranging from $113,000 to
$195,000. 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. During fiscal 2010, these fees ranged from $79,000 per month to
$183,000 per month.
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, 2010, 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 2010 COMPARED TO FISCAL 2009
In fiscal 2010, we experienced a net loss of $3.0 million on revenues of $31.8
million, as compared to a net income of $1.1 million on revenues of $39.7
million for fiscal 2009. This represents a decrease in revenues of 19.9%.
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. Decreased unrelated party
product sales of 47.3% was the principal factor accounting for the decreased
revenues of the Company. Related management fees increased by 30.0%. In
addition, total costs and expenses decreased by 14.9%. Our consolidated
operating results worsened by $1.9 million to an operating loss of $2.6 million
for fiscal 2010 as compared to an operating loss of $704,000 for fiscal 2009.
Discussion of Operating Results of Medical Equipment Segment
Fiscal 2010 Compared to Fiscal 2009
------------------------------------------------------------
Revenues attributable to our medical equipment segment decreased by 29.7% to
$20.7 million in fiscal 2010 from $29.5 million in fiscal 2009, with product
sales revenues decreasing 47.3% from $17.2 million in fiscal 2009 to $9.1
million in fiscal 2010. Service revenue, however, increased by 5.2%, from $10.5
million in fiscal 2009 to $11.1 million in fiscal 2010. The decrease in revenues
was attributable to a decrease in sales of our Upright(R) MRI to unrelated
parties, offset by an increase in service and repair fees.
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 "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".
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 decreased by 47.3% in fiscal 2010 from $17.2
million in fiscal 2009 to $9.1 million in fiscal 2010. There were no product
sales to related parties in fiscal 2010 or 2009.
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.
The operating results for the medical equipment segment decreased by $1.1
million from an income of $27,000 in fiscal 2009 to a loss of $1.1 million in
fiscal 2010. This decrease is attributable most significantly to a decrease in
our scanner sales offset by a smaller decrease in our total costs and expenses.
We recognized revenues of $7.9 million from the sale of our Upright(R) MRI
scanners in fiscal 2010 While in fiscal 2009, we recognized revenues of $16.6
million from the sale of Upright(R) MRI scanners.
None of our revenues for fiscal 2010 and fiscal 2009 were attributable to sales
to related parties.
License and royalty revenue in fiscal 2010 decreased to $585,000 million as
compared to $1.8 million in fiscal 2009. The license has expired and
consequently we expect no license and royalty revenue in 2011.
Research and development expenses, net of capitalized costs, decreased by 31.6%
to $2.5 million in fiscal 2010 as compared to $3.6 million in fiscal 2009. Our
expenses for fiscal 2010 represented continued research and development of
Fonar's scanners, Fonar's new hardware and software product, Sympulse(R) 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 2010 Compared to Fiscal 2009
-------------------------------------------------------------------------------
Revenues attributable to the Company's physician and diagnostic services
management segment, HMCA, increased by 8.1% to $11.1 million in fiscal 2010 from
$10.3 million in fiscal 2009. The increase in revenues was primarily due to the
renegotiation of some of the management contracts between HMCA and its clients.
Presently, 9 of the 10 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 increased from $7.3 million or 71.2% of
related revenues for the year ended June 30, 2009 to $8.3 million, or 75.0% of
related revenue for the year ended June 30, 2010. The increased revenues
resulted from these increased marketing efforts.
Operating results of this segment decreased from an operating loss of $731,000
in fiscal 2009 to operating loss of $1.5 million in fiscal 2010. We attribute
the decrease to an increase in our cost of revenues greater than our increase in
revenues.
Discussion of Certain Consolidated Results of Operations
Fiscal 2010 Compared to Fiscal 2009
--------------------------------------------------------
Interest and investment income decreased in 2010 compared to 2009. We recognized
interest income of $260,216 in 2010 as compared to $346,506 in fiscal 2009,
representing a decrease of 24.9%.
Interest expense of $387,902 was recognized in fiscal 2010, as compared to
$333,229 in fiscal 2009, representing a increase of 14.1%.
While revenue decreased by 19.9%, selling, general and administrative expenses,
decreased by 11.1% to $11.9 million in fiscal 2010 from $13.4 million in fiscal
2009.
Compensatory element of stock issuances also increased from approximately $4,000
in fiscal 2009 to $99,000 in fiscal 2010. 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, even though there was an increase
in the use of bonus stock in fiscal 2010.
The higher provision for bad debts of $1.4 million in fiscal 2010 as compared to
$1.3 million in fiscal 2009, reflected an increase in reserves of certain
indebtedness in fiscal 2010 by our physician and diagnostic services management
segment. In fiscal 2010, 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.
Revenue from service and repair fees increased from $10.5 million in fiscal 2009
and to $11.1 million in fiscal 2010 as scanners previously under warranty
entered into service agreements with HMCA.
Continuing our tradition as the originator of MRI, we remain committed to
maintaining our position as the leading innovator of the industry through
investing in research and development. In fiscal 2010 we continued our
investment in the development of our new MRI scanners, together with software
and upgrades, with an investment of $2,773,704 in research and development,
$315,362 of which was capitalized, as compared to $4,085,177, $491,707 of which
was capitalized, in fiscal 2009. The research and development expenditures were
approximately 11.9% of revenues attributable to our medical equipment segment,
and 7.7% of total revenues, in 2010 and 12.2% of medical equipment segment
revenues, and 9.0% of total revenues in fiscal 2009. This represented a 31.6%
decrease in research and development expenditures in fiscal 2010 as compared to
fiscal 2009, necessitated by our cost cutting programs. Notwithstanding the
decrease in research and development expenditures, in connection with our
overall cost cutting programs, we remain fully committed to developing new
features, software and upgrades to improve its products.
The physician and diagnostic services management segment, HMCA, revenues
increased, from $10.3 in fiscal 2009 to $11.1 million in fiscal 2010. This is
primarily attributable to the renegotiating of several management contracts
between HMCA and its clients.
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. 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.
In October, 2009 an additional discount of $350,000 was given and the note was
paid in full. The note was repaid by Mountain Crest Ventures, of which a
principal member is a related party.
In fiscal 2009 and 2010, 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.
Certain third-party payors have proposed and implemented changes in the methods
and rates of reimbursement that have had the effect of substantially decreasing
reimbursement for diagnostic imaging services that HMCA's clients provide. To
the extent reimbursement from third- party payors is reduced, it will likely
have an adverse impact on the rates they pay us, as they would need to reduce
the management fees they pay HMCA to offset such decreased reimbursement rates.
Furthermore, many commercial health care insurance arrangements are changing, so
that individuals bear greater financial responsibility through high deductible
plans, co-insurance and higher co-payments, which may result in patients
delaying or foregoing medical procedures. We expect that any further changes to
the rates or methods of reimbursement for services, which reduce the
reimbursement per scan of our clients may partially offset the increases in scan
volume we are working to achieve for our clients, and indirectly will result in
a decline in our revenues.
In 2009, the Obama administration announced its intentions for healthcare reform
in the United States. Legislation adopting healthcare reform was passed in 2010.
On March 23, 2010, President Obama signed into law healthcare reform legislation
in the form of the Patient Protection and Affordable Care Act, or PPACA. The
implementation of this law will likely have a profound impact on the healthcare
industry. Most of the provisions of PPACA will be phased in over the next four
years and can be conceptualized as a broad framework not only to provide health
insurance coverage to millions of Americans, but to fundamentally change the
delivery of care by bringing together elements of health information technology,
evidence-based medicine, chronic disease management, medical "homes," care
collaboration and shared financial risk in a way that will accelerate industry
adoption and change. There are also many provisions addressing cost containment,
reductions of Medicare and other payments and heightened compliance requirements
and additional penalties, which will create further challenges for providers. We
are unable to predict the full impact of PPACA at this time due to the law's
complexity and current lack of implementing regulations or interpretive
guidance. Moving forward, we believe that the federal government will likely
have greater involvement in the healthcare industry than in prior years.
In addition, 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. We cannot predict whether the healthcare legislation
or the use of RBMs will negatively impact our business, but it is possible that
our financial position and results of operations could be negatively affected.
At the present time healthcare reform has not directly affected our business,
but we believe uncertainty as to the ultimate impact of healthcare reform,
taxes, and the state of the economy have hurt our scanner sales.
There can be no assurance that the impact of health care legislation or possible
reimbursement changes will not adversely affect our business.
As a result of our loss for the year, Fonar does not expect to meet NASDAQ's
criteria for continued listing and anticipates that NASDAQ will commence
delisting proceedings. Fonar will attempt to avoid delisting and seek additional
time to come into compliance or an exemption if possible. If Fonar cannot
maintain its NASDAQ listing it will seek to qualify for inclusion in other
trading markets.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and marketable securities increased by 6.3% from $1.2
million at June 30, 2009 to $1.3 million at June 30, 2010.
Marketable securities approximated $28,000 as of June 30, 2010, as compared to
$23,000 as of June 30, 2009.
Cash used in operating activities for fiscal 2010 approximated $1.5 million.
Cash used in operating activities was attributable to a decrease in cost and
estimated earnings in excess of billings on uncompleted contracts of $1.2
million and a decrease in billings in excess of costs and estimated earnings on
uncompleted contracts of $717,000, offset by the net loss of $3.0 million and an
decrease in customer advances of $4.4 million.
Cash provided by investing activities for fiscal 2010 approximated $1.2 million.
The principal uses of cash from investing activities were purchases of property
and equipment of $24,000, costs of capitalized software development of $204,000
and costs of patents and copyrights of $196,000. The principal source of cash
provided by investing activities was the proceeds from note receivables of $1.6
million.
Cash provided in financing activities for fiscal 2010 approximated $418,000. The
principal sources of cash in financing activities were proceeds from the long
term debt of $580,000 and proceeds of $76,000 from repayment of notes receivable
by employee stockholders, offset by the repayment of borrowings and capital
lease obligations of $238,000.
Total liabilities decreased by 12.4% during fiscal 2010, from approximately
$31.2 million at June 30, 2009 to approximately $27.4 million at June 30, 2010.
The decrease in total liabilities reflected principally an increase in billings
in excess of costs and estimated earnings on uncompleted contracts of 35.4% from
$2.0 million at June 30, 2009 to $2.7 million at June 30, 2010 offset by a
decrease in customer advances of 47.9% from $9.2 million at June 30, 2009 to
$4.8 million at June 30, 2010, resulting from our decreased backlog.
As at June 30, 2010, our obligations included approximately $2.6 million in
various state sales taxes.
At June 30, 2010, however, we had a working capital deficit of approximately
$10.0 million as compared to a working capital deficit of $10.8 million at June
30, 2009 and a stockholders' deficiency of $5.9 million at June 30, 2010 as
compared to a stockholders' deficiency of $2.9 million at June 30, 2009. For the
year ended June 30, 2010, we realized a net loss of $3.0 million, which included
non-cash charges of approximately $3.7 million.
Our principal source of liquidity has been derived from revenues, as well as by
cash provided by the sale of certain assets.
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. The
note was repaid in full by Mountain Crest Ventures, of which a related party is
a member.
Our business plan includes an 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. We have also intensified our
marketing activities through the hiring of additional marketers for HMCA's
clients and increasing their commissions.
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 $10.5 million for the year ended June 30, 2009 and $11.1
million for the year ended June 30, 2010.
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, 2011. 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 2011.
Capital expenditures for fiscal 2010 approximated $24,000. Capitalized software
costs were approximately $204,000, and capitalized patent costs were
approximately $196,000.
Fonar has not committed to making capital expenditures in the 2011 fiscal year.
The accompanying financial statements have been prepared in accordance with
accounting principals 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,
2010. 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, 2011.
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, 2010 and 2009
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30, 2010 and 2009
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
For the Years Ended June 30, 2010 and 2009
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30, 2010 and 2009
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, 2010 and 2009, and
the related consolidated statements of operations, comprehensive loss,
stockholders' deficiency and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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, 2010 and 2009, 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, 2010 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 uncertainity.
/s/ Marcum, LLP
New York, New York
October 13, 2010
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
------
June 30,
--------------------------
2010 2009
------------ ------------
Current Assets:
Cash and cash equivalents $ 1,299,493 $ 1,225,619
Marketable securities 27,613 22,652
Accounts receivable - net of allowances for
doubtful accounts of $2,289,049 and $2,393,326
at June 30, 2010 and 2009, respectively 4,820,541 5,391,822
Medical receivables - net of allowances for
doubtful accounts of $1,622,000 and $1,343,500
at June 30, 2010 and 2009, respectively 25,225 374,225
Management fee receivable - net of allowances for
doubtful accounts of $5,808,345 and $5,093,345
at June 30, 2010 and 2009, respectively 2,568,526 3,273,756
Management fee receivable - related medical
practices - net of allowances for doubtful
accounts of $1,129,818 and $1,094,818 at
June 30, 2010 and 2009, respectively 1,921,983 2,196,580
Costs and estimated earnings in excess of
billings on uncompleted contracts 277,384 1,475,706
Inventories 2,826,211 3,172,397
Current portion of advances and notes to related
medical practices 83,423 164,611
Current portion of note receivable - net of
allowances for doubtful accounts of $115,000
and $65,000 at June 30, 2010 and at
June 30, 2009, respectively 271,796 517,934
Prepaid expenses and other current assets 552,800 472,397
----------- -----------
Total Current Assets 14,674,995 18,287,699
Property and Equipment - Net 2,108,556 2,892,380
Advances and Notes to Related Medical Practices -
net of allowances for doubtful accounts of
$264,791 at June 30, 2010 and at June 30, 2009 - 89,032
Notes Receivable - 1,778,626
Other Intangible Assets - Net 4,291,419 4,920,241
Other Assets 553,875 391,237
------------ ------------
Total Assets $ 21,628,845 $ 28,359,215
============ ============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES
-----------
June 30,
--------------------------
2010 2009
------------ ------------
Current Liabilities:
Current portion of long-term debt and capital
leases $ 579,436 $ 277,494
Current portion of long-term debt - related party 87,835 79,509
Accounts payable 3,191,960 3,518,609
Other current liabilities 8,065,069 8,460,042
Unearned revenue on service contracts 5,219,547 5,526,006
Customer advances 4,813,327 9,237,921
Billings in excess of costs and estimated
earnings on uncompleted contracts 2,743,398 2,026,441
------------ ------------
Total Current Liabilities 24,700,572 29,126,022
------------ ------------
Long-Term Liabilities:
Accounts payable 62,622 184,168
Due to related medical practices 527,891 643,135
Long-term debt and capital leases, less
current portion 1,566,622 759,211
Long-term debt, less current
portion - related party 72,341 160,176
Other liabilities 474,763 427,365
------------ ------------
Total Long-Term Liabilities 2,704,239 2,174,055
------------ ------------
Total Liabilities 27,404,811 31,300,077
------------ ------------
Commitments, Contingencies and Other Matters
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
STOCKHOLDERS' DEFICIENCY
------------------------
June 30,
--------------------------
2010 2009
------------ ------------
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, 2010 and 2009 $ 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, 2010 and 2009, respectively;
issued - 4,985,850 and 4,917,918 shares
at June 30, 2010 and 2009, respectively;
outstanding - 4,974,207 and 4,906,275
shares at June 30, 2010 and 2009, respectively 497 491
Class B common stock (10 votes per share) -
$.0001 par value; authorized - 800,000
shares; issued and outstanding - 158 shares
at June 30, 2010 and 2009 - -
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, 2010 and 2009 38 38
Paid-in capital in excess of par value 172,379,863 172,280,600
Accumulated other comprehensive loss (18,489) (20,995)
Accumulated deficit (177,271,349) (174,258,607)
Notes receivable from employee stockholders (191,167) (267,030)
Treasury stock, at cost - 11,643 shares
of common stock at June 30, 2010 and 2009 (675,390) (675,390)
------------ ------------
Total Stockholders' Deficiency (5,775,966) (2,940,862)
------------ ------------
Total Liabilities and Stockholders'
Deficiency $ 21,628,845 $ 28,359,215
============ ============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30,
---------------------------
2010 2009
------------ ------------
Revenues
Product sales - net $ 9,056,307 $ 17,175,417
Service and repair fees - net 10,864,927 10,345,091
Service and repair fees - related parties - net 220,000 192,500
Management and other fees 7,302,216 7,342,614
Management and other fees - related
medical practices - net 3,786,612 2,911,318
License fees and royalties 585,493 1,755,493
------------ ------------
Total Revenues - Net 31,815,555 39,722,433
------------ ------------
Costs and Expenses
Costs related to product sales 7,248,756 10,758,201
Costs related to service and repair fees 3,026,598 3,992,557
Costs related to service and repair fees
- related parties 61,284 74,293
Costs related to management and other fees 5,320,756 4,507,587
Costs related to management and other fees
- related medical practices 2,962,826 2,790,745
Research and development 2,458,342 3,593,470
Selling, general and administrative,
inclusive of compensatory element of
stock issuances of $99,269 and $4,061
for the years ended June 30,
2010 and 2009, respectively 11,939,223 13,423,066
Provision for bad debts 1,378,500 1,286,451
------------ ------------
Total Costs and Expenses 34,396,285 40,426,370
------------ ------------
Loss from Operations (2,580,730) (703,937)
Other Income and (Expenses):
Interest expense (313,416) (333,229)
Interest expense - related parties (74,486) -
Investment income 249,290 325,688
Interest income - related parties 10,926 20,818
Other income - net 45,674 399,662
Loss on note receivable (350,000) -
Gain on sale of consolidated subsidiary - 1,448,196
------------ ------------
(Loss) Income Before Provision For
Income Taxes (3,012,742) 1,157,198
Provision for Income Taxes - 35,931
------------ ------------
Net (Loss) Income $ (3,012,742) $ 1,121,267
============ ============
Net Income Available to Class C
Common Stockholders N/A $ 21,181
============ ============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30,
---------------------------
2010 2009
------------ ------------
Net (Loss) Income Available to Common Stockholders $ (3,012,742) $ 1,032,717
============ ============
Basic Net (Loss) Income Per Common Share
Available to Common Stockholders $(0.61) $ 0.21
============ ============
Diluted Net (Loss) Income Per Common Share
Available to Common Stockholders $(0.61) $ 0.21
============ ============
Basic and Diluted Income Per Share - Common C N/A 0.06
============ ============
Weighted Average Basic Shares Outstanding 4,932,044 4,904,358
============ ============
Weighted Average Diluted Shares Outstanding 4,932,044 5,031,862
============ ============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
FOR THE YEAR ENDED JUNE 30, 2010
Class A
Non-Voting Common Stock
Preferred -------------------
Stock Shares Amount
---------- --------- --------
Balance - June 30, 2009 $ 31 4,906,275 $ 491
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 - 67,932 6
Payments on notes receivable
from employee stockholders - - -
---------- --------- --------
Balance - June 30, 2010 $ 31 4,974,207 $ 497
========== ========= ========
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
FOR THE YEAR ENDED JUNE 30, 2010
Paid-in
Class B Class C Capital in
Common Common Excess of
Stock Stock Par Value
--------- --------- ------------
Shares
---------
Balance - June 30, 2009 158 $ 38 $172,280,600
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 - - 99,263
Payments on notes receivable from employee
stockholders - - -
--------- --------- ------------
Balance - June 30, 2010 158 $ 38 $172,379,863
========= ========= ============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
FOR THE YEAR ENDED JUNE 30, 2010
Notes
Receivable Accumulated
From Other
Treasury Employee Comprehensive
Stock Stockholders Loss
----------- ------------ -------------
Balance - June 30, 2009 $ (675,390) $ (267,030) $ (20,995)
Net loss - - -
Other comprehensive loss, net of tax:
Unrealized gains on securities
arising during the year, net of tax - - 2,506
Stock issued to employees under stock
bonus plans - - -
Payments on notes receivable from
employee stockholders - 75,863 -
----------- ------------ -------------
Balance - June 30, 2010 $ (675,390) $ (191,167) $ (18,489)
=========== ============ =============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
FOR THE YEAR ENDED JUNE 30, 2010
Accumulated Comprehensive
Deficit Total Income (Loss)
-------------- ------------ -------------
Balance - June 30, 2009 $(174,258,607) $(2,940,862) $ -
Net loss (3,012,742) (3,012,742) (3,012,742)
Other comprehensive loss, net of tax:
Unrealized gains on securities
arising during the year,
net of tax - 2,506 2,506
Stock issued to employees under
stock bonus plans - 99,269 -
Payments on notes receivable from
employee stockholders - 75,863 -
-------------- ------------ -------------
Balance - June 30, 2010 $(177,271,349) $(5,775,966) $(3,010,236)
============== ============ =============
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 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 - 2,000 1
Payments on notes receivable
from employee stockholders - - -
---------- --------- --------
Balance - June 30, 2009 $ 31 4,906,275 $ 491
========== ========= ========
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 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 - - 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 loss - - -
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 STATEMENTS OF CASH FLOWS
For the Years Ended June 30,
---------------------------
2010 2009
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (3,012,742) $ 1,121,267
Adjustments to reconcile net (loss)
income to net cash used in
Operating activities:
Depreciation and amortization 1,445,065 1,733,499
Abandoned patents written off 391,415 46,327
Provision for bad debts 1,378,500 1,286,451
Compensatory element of stock
issuances 99,269 4,061
Gain on sale of consolidated
subsidiary - (1,448,196)
Loss on note receivable 350,000 -
(Increase) decrease in operating
assets, net:
Accounts, management fee and
medical receivable 435,498 (642,004)
Notes receivable 180,012 508,306
Costs and estimated earnings in excess
of billings on uncompleted contracts 1,198,322 (1,469,421)
Inventories 346,186 83,518
Prepaid expenses and other current assets (80,403) 338,375
Other assets (162,638) 166,032
Advances and notes to related
parties medical practices 170,220 223,724
Increase (decrease) in operating
liabilities, net:
Accounts payable (448,195) (132,713)
Other current liabilities (13,390) 476,140
Customer advances (4,424,594) (5,038,390)
Billings in excess of costs and estimated
earnings on uncompleted contracts 716,957 (3,746,845)
Other liabilities 47,398 (145,283)
Due to related medical practices (115,244) 545,472
------------ ------------
NET CASH USED IN
OPERATING ACTIVITIES (1,498,364) (6,089,680)
----------- -----------
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30,
---------------------------
2010 2009
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Sales of marketable securities $ (2,455) $ 1,097,244
Purchases of property and equipment (24,339) (28,076)
Costs of capitalized software development (203,644) (491,707)
Proceeds from note receivable 1,580,862 2,000,000
Proceeds from cash surrender
value of life insurance - 1,344,901
Cost of patents (195,851) (331,300)
Proceeds from sale of consolidated
subsidiary - 2,293,013
------------ ------------
NET CASH PROVIDED BY
INVESTING ACTIVITIES 1,154,573 5,884,075
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt 580,000 258,000
Repayment of borrowings and capital lease
obligations (238,198) (279,399)
Repayment of notes receivable from
employee stockholders 75,863 127,111
------------ ------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 417,665 105,712
------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 73,874 (99,893)
CASH AND CASH EQUIVALENTS - BEGINNING OF
YEAR 1,225,619 1,325,512
------------ ------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 1,299,493 $ 1,225,619
============ ============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
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, 2010,
HMCA manages 10 diagnostic imaging facilities located in the states of New York,
Georgia and Florida.
Liquidity and Going Concern
---------------------------
At June 30, 2010, the Company had a working capital deficit of approximately
$10.0 million and stockholders' deficiency of approximately $5.8 million. For
the year ended June 30, 2010, the Company incurred a net loss of approximately
$3.0 million, which included non-cash charges of approximately $3.7 million. The
Company has funded its cash flow deficit for the year ended June 30, 2010
through $1.6 million of proceeds from the collection of principal on a note
receivable.
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. The
Company's subsidiary, Health Management Corporation ("HMCA") will focus its
efforts to market the scanning services of its customers (related and non-
related professional corporations or "PCs") and to expand the number of PCs for
which it performs management services. 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.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
NOTE 1 - DESCRIPTION OF BUSINESS AND LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Going Concern (Continued)
---------------------------
In January 2010, the Company implemented substantial cost reductions, which
included a reduction in personnel and significant reductions in the remaining
employees' compensation and other costs.
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("US GAAP") 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.
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.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investment in Marketable Securities
-----------------------------------
The Company accounts for its investments using Financial Accounting Standards
Board ("FASB"), Accounting Standard Codification ("ASC") Topic 820, "Fair Value
Measurements and Disclosures". 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,
2010 and 2009, all securities covered by Topic 820 were designated as available
for sale. Accordingly, these securities are stated at fair market value, with
unrealized gains and losses reported in comprehensive income (loss). Realized
gains and losses on sales of investments, as determined on a specific
identification basis, are included in investment income in the accompanying
consolidated statements of operations.
Inventories
-----------
Inventories consist of purchased parts, components and supplies, as well as
work-in-process, and are stated at the lower of cost determined on the first-in,
first-out method or market.
Property and Equipment
----------------------
Property and equipment procured in the normal course of business is stated at
cost. Property and equipment purchased in connection with an acquisition is
stated at its estimated fair value, generally based on an appraisal. Property
and equipment is being depreciated for financial accounting purposes using the
straight-line method over the shorter of their estimated useful lives, generally
five to seven years, or the term of a capital lease, if applicable. Leasehold
improvements are being amortized over the shorter of the useful life or the
remaining lease term. Upon retirement or other disposition of these assets, the
cost and related accumulated depreciation of these assets are removed from the
accounts and the resulting gains or losses are reflected in the results of
operations. Expenditures for maintenance and repairs are charged to operations.
Renewals and betterments are capitalized. Maintenance and repair expenses
totaled approximately $282,000 and $228,000 for the years ended June 30, 2010
and 2009, respectively.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Other Intangible Assets
-----------------------
1) Capitalized Software Development Costs
Capitalization of software development costs begins upon the establishment of
technological feasibility. Technological feasibility for the Company's computer
software is generally based upon achievement of a detail program design free of
high risk development issues and the completion of research and development on
the product hardware in which it is to be used. The establishment of
technological feasibility and the ongoing assessment of recoverability of
capitalized computer software development costs require considerable judgment by
management with respect to certain external factors, including, but not limited
to, technological feasibility, anticipated future gross revenue, estimated
economic life and changes in software and hardware technology. Prior to reaching
technological feasibilty those costs are expensed as incurred and included in
research and development.
Amortization of capitalized software development costs commences when the
related products become available for general release to customers. Amortization
is provided on a product by product basis. The annual amortization is the
greater of the amount computed using (a) the ratio that current gross revenue
for a product bear to the total of current and anticipated future gross revenue
for that product, or (b) the straight-line method over the remaining estimated
economic life of the product.
The Company periodically performs reviews of the recoverability of such
capitalized software development costs. At the time a determination is made that
capitalized amounts are not recoverable based on the estimated cash flows to be
generated from the applicable software, any remaining capitalized amounts are
written off.
2) Patents and Copyrights
Amortization is calculated on the straight-line basis over a period ranging from
15 to 17 years.
Long-Lived Assets
-----------------
The Company periodically assesses the recoverability of long-lived assets,
including property and equipment and intangibles, when there are indications of
potential impairment, based on estimates of undiscounted future cash flows. The
amount of impairment is calculated by comparing anticipated discounted future
cash flows with the carrying value of the related asset. In performing this
analysis, management considers such factors as current results, trends, and
future prospects, in addition to other economic factors.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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, 2010, 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 $79,000 to $195,000. 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.
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
$415,000 and $261,000 for the years ended June 30, 2010 and 2009, respectively.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Shipping Costs
--------------
The Company's shipping and handling costs are included under costs related to
product sales.
Income Taxes
------------
Deferred tax assets and liabilities are determined based on the difference
between the financial statement carrying amounts and tax basis 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.
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 ASC
topic 260-10, "Participating Securities and the Two-Class Method". 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. These participating convertible securities were not
included in the computation of basic EPS for the year ended June 30, 2010
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
195,896 as of June 30, 2010. 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, 2010
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings (Loss) Per Share (Continued)
-------------------------
June 30, 2010 June 30, 2009
------------- ---------------------------------
Class C
Common Common
Total Stock Stock
---------- ---------- -------
Basic
-----
Numerator:
Net (loss) income
available to common
stockholders $ (3,012,742) $1,053,898 $1,032,717 $21,181
============= ========== ========== =======
Denominator:
Weighted average
shares outstanding 4,932,044 4,904,358 382,513
============= ========== =======
Basic (loss) income per
common share available to
common stockholders $ (0.61) $ 0.21 $ 0.06
============= ========== =======
Diluted
-------
Denominator:
Weighted average
shares outstanding 4,932,044 4,904,358 4,904,358 382,513
Stock options - - - -
Convertible C Stock - 127,504 127,504 -
------------- ---------- ---------- -------
Total Denominator for
diluted earnings per share 4,932,044 5,031,862 5,031,862 382,513
============= ========== ========== =======
Diluted income (loss)
per common share available
to common stockholders $(0.61) $0.21 $0.06
============= ========== =======
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, 2010
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, 2010, the Company had cash on deposit of approximately $856,000 in excess of
federally insured limits of $250,000.
Related Parties: Net revenues from related parties accounted for approximately
13% and 8% of the consolidated net revenues for the years ended June 30, 2010
and 2009, respectively. Net management fee receivables from the related medical
practices accounted for approximately 19% and 20% of the consolidated accounts
receivable for the years ended June 30, 2010 and 2009, respectively.
Fair Value of Financial Instruments
-----------------------------------
The financial statements include various estimated fair value information at
June 30, 2010 and 2009, as required by ASC topic 820, "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, 2010
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
Accounting Standards Codification ("ASC") topic 820 (formerly Statement of
Financial Accounting Standards ("SFAS") No. 157, "Fair Value Measurements").
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. ASC topic 820 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 ASC topic 820 on July 1,
2008, as required for its financial assets and financial liabilities. However,
the FASB deferred the effective date of ASC topic 820 for one year as it relates
to fair value measurement requirements for nonfinancial assets and nonfinancial
liabilities that are not recognized or disclosed at fair value on a recurring
basis. The adoption of the provisions of ASC topic 820 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 ASC topic 820 for its nonfinancial assets and nonfinancial
liabilities will have on the Company's consolidated financial statements.
In December 2007, the FASB issued ASC topic 810 (formerly SFAS No. 160),
"Noncontrolling Interests in Consolidated Financial Statements - An Amendment of
ARB No. 51". ASC topic 810 establishes accounting and reporting standards for
the noncontrolling interest in a subsidiary (previously referred to as minority
interests). ASC topic 810 also requires that a retained noncontrolling interest
upon the deconsolidation of a subsidiary be initially measured at its fair
value. Upon adoption of ASC topic 810, 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. ASC topic 810 is effective for
fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. ASC topic 810 requires retroactive adoption of the
presentation and disclosure requirements for existing minority interests. All
other requirements of ASC topic 810 shall be applied prospectively. The Company
adopted ASC topic 810 for our fiscal year beginning July 1, 2009, and the
adoption did not have any material impact on the Company's consolidated
financial position, results of operations or cash flows.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
--------------------------------
In October 2008, the FASB issued ASC topic 820 (formerly FASB Staff Position No.
FAS 157-3), "Determining the Fair Value of a Financial Asset in a Market That Is
Not Active", which clarifies the application of ASC topic 820 when the market
for a financial asset is inactive. Specifically, ASC topic 820 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 ASC
topic 820 is effective immediately and did not have a material impact on the
Company's consolidated financial statements.
In June 2008, the FASB issued ASC topic 815 (formerly Emerging Issue Task Force
07-5), "Determining Whether an Instrument (or an Embedded Feature) is Indexed to
an Entity's Own Stock". ASC topic 815 provides framework for determining whether
an instrument is indexed to an entity's own stock. ASC topic 815 is effective
for fiscal years beginning after December 15, 2008. The adoption of ASC topic
815 did not have a material impact on its consolidated financial position and
results of operations.
In April 2009, the FASB issued ASC topic 270 (formerly FAS 107-1 and APB 28-1),
Interim Disclosures about Fair Value of Financial Instruments. 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. ASC topic 270 is effective for interim reporting periods ending after
June 15, 2009. The adoption of this standard did not 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.
In February 2010, the FASB amended ASC 855, "Subsequent Events-Amendments to
Certain Recognition and Disclosure Requirements". This amends the subtopic that
requires an SEC filer to evaluate subsequent events through the date that the
financial statements are issued, and no longer requires disclosure of the date
through which subsequent events have been evaluated. This alleviates potential
conflicts between the Subtopic 855-10 and the SEC's requirements.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
--------------------------------
In June 2009, the FASB issued ASC topic 105 (formerly SFAS No. 168), "The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles". ASC topic 105 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. ASC topic 105
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. ASC topic 105 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 ASC topic 350 (formerly FSP FAS 142-3),
"Determination of the Useful Life of Intangible Assets". ASC topic 350 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). ASC topic 350 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. ASC topic 350 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 ASC 860 (formerly SFAS No. 166), "Accounting for
Transfers of Financial Assets" - an amendment of FASB Statement No. 140, ASC 860
requires additional disclosures concerning a transferor's continuing involvement
with transferred financial assets. ASC 860 eliminates the concept of a
"qualifying special-purpose entity" and changes the requirements for
derecognizing financial assets. ASC 860 is effective for fiscal years beginning
after November 15, 2009. The Company is currently evaluating the impact that the
adoption of ASC 860 will have on its consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
--------------------------------
In June 2009, the FASB issued ASC 810 (formerly 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. ASC 810
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. ASC 810 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 FASB reached final consensus on a new revenue recognition
standard, ASC topic 815 (formerly EITF Issue No. 08-1), "Revenue Arrangements
with Multiple Deliverables". ASC topic 815 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 ASC topic 815 on its
consolidated financial statements.
In September 2009, the EITF reached final consensus on a new revenue recognition
standard, ASC topic 350 (formerly EITF Issue No. 09-3), "Applicability of AICPA
Statement of Position 97-2 to Certain Arrangements That Contain Software
Elements". ASC topic 350 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 ASC
topic 350 on its consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
--------------------------------
In January 2010, the FASB issued Accounting Standards Update No. 2010-6,
Improving Disclosures about Fair Value Measurements. The Update provides
amendments to FASB ASC 820-10 that require entities to disclose separately the
amounts of significant transfers in and out of Level 1 and Level 2 fair value
measurements and describe the reasons for the transfers. In addition the Update
requires entities to present separately information about purchases, sales,
issuances, and settlements in the reconciliation for fair value measurements
using significant unobservable inputs (Level 3). The disclosures related to
Level 1 and Level 2 fair value measurements are effective for the Company in
2010 and the disclosures related to Level 3 fair value measurements are
effective for the Company in 2011. The Update requires new disclosures only, and
will have no impact on the Company's condensed consolidated financial position,
results of operations, or cash flow.
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, 2010 and 2009 was $25,225
and $374,225, respectively. As of June 30, 2010 and June 30, 2009, the Company's
allowance for doubtful accounts totaled $1,622,000 and $1,343,500, respectively,
on these receivables.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
NOTE 4 - MARKETABLE SECURITIES
The following is a summary of marketable securities at June 30, 2010 and 2009:
June 30, 2010
------------------------------------------
Unrealized Fair Market
Cost Loss Value
------------ ------------ ------------
Equities - other $ 46,102 $ (18,489) $ 27,613
============ ============ ============
June 30, 2009
------------------------------------------
Unrealized Fair Market
Cost Loss Value
------------ ------------ ------------
Equities - other $ 43,647 $ ( 20,995) $ 22,652
============ ============ ============
All marketable securities are deemed to be available for sale.
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 42% and 46%,
respectively, of the PCs' 2010 and 2009 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 12% and 7%, of the consolidated net
revenues for the years ended June 30, 2010 and 2009, respectively.
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 into a guaranty agreement, pursuant to which they
cross guaranteed all management fees which are payable to the Company, which
have arisen under each individual management agreement.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
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, 2010 and 2009
is as follows:
As of June 30,
--------------------------
2010 2009
----------- -----------
Costs incurred on
uncompleted contracts $ 6,115,699 $10,140,938
Estimated earnings 3,659,324 7,349,914
----------- -----------
9,775,023 17,490,852
Less: Billings to date 12,241,037 18,041,587
----------- -----------
$(2,466,014) $( 550,735)
=========== ===========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
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,
--------------------------
2010 2009
----------- -----------
Costs and estimated earnings
in excess of billings on
uncompleted contracts $ 277,384 $ 1,475,706
Less: Billings in excess
of costs and estimated
earnings on uncompleted 2,743,398 2,026,441
contracts
----------- -----------
$(2,466,014) $( 550,735)
=========== ===========
2) Customer advances consist of the following:
As of June 30, 2010
-----------------------------------------
Related
Total Parties Other
----------- ----------- -----------
Total advances $17,054,364 $ - $17,054,364
Less: Advances on contracts
under construction 12,241,037 - 12,241,037
----------- ----------- -----------
$ 4,813,327 $ - $ 4,813,327
=========== =========== ===========
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
=========== =========== ===========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
NOTE 7 - INVENTORIES
Inventories included in the accompanying consolidated balance sheets consist of:
As of June 30,
--------------------------
2010 2009
----------- -----------
Purchased parts, components
and supplies $ 1,774,958 $ 2,065,528
Work-in-process 1,051,253 1,106,869
----------- -----------
$ 2,826,211 $ 3,172,397
=========== ===========
NOTE 8 - PROPERTY AND EQUIPMENT
Property and equipment, at cost, less accumulated depreciation and amortization,
at June 30, 2010 and 2009, is comprised of:
As of June 30,
--------------------------
2010 2009
----------- -----------
Diagnostic equipment under
capital leases $ 633,675 $ 633,675
Diagnostic equipment 1,641,808 2,878,528
Research, development and
demonstration equipment 9,605,961 9,605,961
Machinery and equipment 3,583,929 3,583,929
Furniture and fixtures 1,995,636 2,066,833
Equipment under capital leases 1,504,123 1,504,123
Leasehold improvements 4,785,102 4,981,658
Building 939,614 939,614
----------- -----------
24,689,848 26,194,321
Less: Accumulated depreciation
and amortization 22,581,292 23,301,941
----------- -----------
$ 2,108,556 $ 2,892,380
=========== ===========
Depreciation and amortization of property and equipment for the years ended June
30, 2010 and 2009 was $808,163 and $1,067,496, respectively.
Equipment under capital leases has a net book value of $3,532 and $135,597 at
June 30, 2010 and 2009, respectively.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
NOTE 9 - OTHER INTANGIBLE ASSETS
Other intangible assets, net of accumulated amortization, at June 30, 2010 and
2009 are comprised of:
As of June 30,
--------------------------
2010 2009
----------- -----------
Capitalized software development
costs $ 6,301,702 $ 6,098,057
Patents and copyrights 3,975,327 4,170,892
----------- -----------
10,277,029 10,268,949
Less: Accumulated amortization 5,985,610 5,348,708
----------- -----------
$4,291,419 $ 4,920,241
=========== ==========
Information related to the above intangible assets for the years ended June 30,
2010 and 2009 is as follows:
2010 2009
----------- -----------
Balance - Beginning of Year $ 4,920,241 $ 4,809,564
Amounts capitalized 399,495 823,007
Abandon patents written off (391,415) (46,327)
Amortization (636,902) (666,003)
----------- -----------
Balance - End of Year $ 4,291,419 $ 4,920,241
=========== ===========
Amortization of patents and copyrights for the years ended June 30, 2010 and
2009 amounted to $134,001 and $147,530, respectively. The Company also recorded
a write off of abandon patents in the amount of $391,415 and $46,327 for the
years ended June 30, 2010 and June 30, 2009, respectively.
Amortization of capitalized software development costs for the years ended June
30, 2010 and 2009 was $502,901 and $518,473, respectively.
The estimated amortization of patents and copyrights and capitalized software
development costs for the five years ending June 30, 2015 and thereafter is as
follows:
For the Capitalized
Years Patents Software
Ending and Development
June 30, Total Copyrights Costs
----------- ----------- ----------- -----------
2011 $ 602,232 $ 148,074 $ 454,158
2012 531,003 159,737 371,266
2013 473,134 175,871 297,263
2014 425,860 192,005 233,855
2015 389,093 200,072 189,021
Thereafter 1,870,097 1,516,137 353,960
----------- ----------- ----------- -----------
$4,291,419 $2,391,896 $1,899,523
=========== =========== ===========
The weighted average amortization period for other intangible assets is 9.3
years and has no expected residual value.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
NOTE 10 - NOTES RECEIVABLE
Notes receivable as of June 30, 2010 and 2009 consist of the following:
As of June 30,
2010 2009
----------- -----------
Note Receivable -
Sale of assets (a) $ - $ 2,037,100
Note Receivable - (b) 65,000 65,000
Note Receivable - (c) 185,686 259,460
Note Receivable 136,110 -
----------- -----------
Total Notes Receivable 386,796 2,361,560
Allowance (115,000) (65,000)
----------- -----------
Net Notes Receivable $ 271,796 $ 2,296,560
=========== ===========
Current Portion $ 271,796 $ 517,934
Long-Term Portion $ - $ 1,778,626
a) On October 27, 2009, the Company entered into an agreement with Mountain
Crest Ventures LLC to assign the promissory note from Health Plus for the Asset
Purchase Agreement. The Company received $1,580,862, which represented the
remaining principal balance (after principal payments of $106,238) less a
discount of $350,000. Mountain Crest Ventures LLC retains all rights under the
original promissory note to collect all remaining payments due. The Company
recorded the $350,000 loss in the financial statements for the year ended June
30, 2010.
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 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, 2010 and 2009 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. This note was revised January 2010
requiring 2 payments of principal and interest of $8,500 due January 29, 2010
and February 26, 2010 followed by a payment of $210,000 due March 31, 2010. An
allowance for doubtful accounts of $50,000 was recorded during the year ended
June 30, 2010.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
NOTE 11 - ADVANCES AND NOTES TO RELATED MEDICAL PRACTICES
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,
2010 was $83,423 and is due in the next year. Interest income on this note for
the years ended June 30, 2010 and 2009 amounted to $10,926 and $20,818,
respectively.
NOTE 12 - CAPITAL STOCK
Common Stock
------------
Cash dividends payable on the common stock shall, in all cases, be on a per
share basis, one hundred twenty percent (120%) of the cash dividend payable on
shares of Class B common stock and three hundred sixty percent (360%) of the
cash dividend payable on a share of Class C common stock.
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, 2010 and 2009.
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.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
NOTE 12 - CAPITAL STOCK (Continued)
Class A Non-Voting Preferred Stock (Continued)
----------------------------------
The Class A non-voting preferred stock is entitled to a special dividend equal
to 3-1/4% of first $10 million, 4-1/2% of next $20 million and 5-1/2% on amounts
in excess of $30 million of the amount of any cash awards or settlements
received by the Company in connection with the enforcement of five of the
Company's patents in its patent lawsuits, less the revised special dividend
payable on the common stock with respect to one of the Company's patents.
The Class A non-voting preferred stock participates on an equal per share basis
with the common stock in any dividends declared and ranks equally with the
common stock on distribution rights, liquidation rights and other rights and
preferences (other than the voting rights).
Options
-------
The Company has stock option plans, which provide for the awarding of incentive
and non-qualified stock options to employees, directors and consultants who may
contribute to the success of the Company. The options granted vest either
immediately or ratably over a period of time from the date of grant, typically
three or four years, at a price determined by the Board of Directors or a
committee of the Board of Directors, generally the fair value of the Company's
common stock at the date of grant. The options must be exercised within ten
years from the date of grant.
FONAR's 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, 2010, 24,390 options were forfeited, therefore of
the options granted under this plan 52,672 remain outstanding.
FONAR's 2002 Incentive Stock Option Plan (the "FONAR 2002 Plan"), adopted on
July 1, 2002, is intended to qualify as an incentive stock option plan under
Section 422A of the Internal Revenue Code of 1954, as amended. The FONAR 2002
Plan permits the issuance of stock options covering an aggregate of 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, 2010, 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, 2010, 3,390 options were forfeited, therefore 15,562
shares remain outstanding.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
NOTE 12 - CAPITAL STOCK (Continued)
Options (Continued)
-------
FONAR's 2005 Incentive Stock Option Plan (the "FONAR 2005 Plan"), adopted on
February 16, 2005, is intended to qualify as an incentive stock option plan
under Section 422A of the Internal Revenue Code of 1954, as amended. The FONAR
2005 Plan permits the issuance of stock options covering an aggregate of 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, 2010, 80,000 shares of common
stock of FONAR were available for future grant under this Plan.
Stock option activity and weighted average exercise prices under these plans and
grants for the years ended June 30, 2010 and 2009 were as follows:
Weighted
Average Aggregate
Number of Exercise Intrinsic
Options Price Value
----------- ----------- -----------
Outstanding, June 30, 2008 97,401 30.66 -
Granted - - -
Exercised - - -
Forfeited / Expired ( 1,387) 28.77 -
----------- ----------- -----------
Outstanding, June 30, 2009 96,014 30.69 -
Granted - - -
Exercised - - -
Forfeited / Expired ( 27,780) 26.27 -
----------- ----------- -----------
Outstanding, June 30, 2010 68,234 29.63 -
=========== =========== ===========
Exercisable at:
June 30, 2009 96,014 $30.69
June 30, 2010 68,234 $29.63
The range of exercise prices for options outstanding as of June 30, 2010 was as
follows:
Weighted
Average
Number of Remaining
Options Contractual
Range of Exercise Price Outstanding Life in Years
----------------------- ----------- -------------
$25.00 - $28.13 51,181 0.8
$29.00 - $37.50 13,242 2.5
$46.88 3,811 1.1
-----------
68,234
===========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
NOTE 12 - 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 year ended June 30, 2009 was as follows:
Weighted
Average Aggregate
Number of Exercise Intrinsic
Options Price Value
----------- ----------- -----------
Outstanding, June 30, 2008 660,000 $1.00 -
Expired (660,000) -
----------- ----------- -----------
Outstanding, June 30, 2009 - - -
=========== ===========
Exercisable at: 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,
2010, no shares of common stock of FONAR were available for future grant under
this plan. 67,932 shares were issued during the year ended June 30, 2010.
On April 23, 2010, the Board approved the 2010 Stock Bonus Plan. The plan
entitles the Company to reserve 2,000,000 shares of common stock. On August 10,
2010, the Company filed Form S-8 to register the 2,000,000 shares.
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, 2010
NOTE 13 - LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASES
Long-term debt, notes payable and capital leases consist of the following:
June 30,
---------------------------
2010 2009
------------ ------------
Capital lease requiring monthly payments of $13,623,
including interest at a rate of 10.51% per annum
through July 2010. The lease was restructured in July
2008, requiring twelve monthly payments of $6,923
followed by 31 monthly payments of $9,585 through
January 2012, including interest at a rate of 11.82%.
The lease is collateralized by the related equipment. $ 181,033 $ 254,989
Notes payable of $580,000 entered into in order to
pay back a customer deposit of $580,000 requiring
aggregate monthly payments of $20,106, including
interest at a rate of 15% per annum through June
2013. Amount due to a related party is $80,000. 580,000 -
Note payable requiring monthly payments of interest
at a rate of 7% until May 2009 followed by 240
monthly payments of $4,472 through October 2026. The
loan is collateralized by the related building. 519,203 535,684
Note payable requiring monthly payments of $12,150,
including interest at a rate of 5% per annum through
August 2014 and a final payment of $5,091 in
September 2014. 659,992 -
Note payable requiring monthly payments of $8,325,
including interest at a rate of 10% per annum through
April 2012. The loan is from a related party. 160,176 239,685
Other (including capital leases for property and
equipment). 205,830 246,032
------------ ------------
2,306,234 1,276,390
Less: Current portion 667,271 357,003
------------ ------------
$ 1,638,963 $ 919,387
============ ============
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
NOTE 13 - LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASES (Continued)
The maturities of long-term debt over the next five years and thereafter are as
follows:
Years Ending
June 30,
------------
2011 $ 667,271
2012 492,371
2013 370,412
2014 250,686
2015 89,815
Thereafter 435,679
------------
$ 2,306,234
============
NOTE 14 - INCOME TAXES
Effective January 1, 2007, the Company adopted the provisions of ASC topic 740
(formerly FASB Interpretation No. 48/FASB Statement No. 109, "Accounting for
Uncertainty in Income Taxes"). ASC topic 740 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 ASC topic 740.
In accordance with ASC topic 740, 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 2005.
Upon the adoption and as of June 30, 2010, 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.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
NOTE 14 - INCOME TAXES (Continued)
The Company recognized a deferred tax asset of $757,525 and a deferred tax
liability of $757,525 as of June 30, 2010, primarily relating to net operating
loss carryforwards of approximately $166,360,000 available to offset future
taxable income through 2030. 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.
Components of the current provision (benefit from) for income taxes are as
follows:
Years Ended June 30,
----------------------------
2010 2009
------------ ------------
Current:
Federal $ - $ -
State - 35,931
------------ ------------
$ - $ 35,931
============ ============
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
NOTE 14 - INCOME TAXES (Continued)
A reconciliation of the federal statutory income tax rate to the Company's
effective tax rate as reported is as follows:
Years Ended June 30,
--------------------
2010 2009
--------- ---------
Taxes at federal statutory Rate (34.0)% 34.0%
State and local income Taxes
(benefit), net of Federal benefit
Permanent differences (Decrease) (6.0) 6.0
increase in the valuation 1.1 4.1
allowance and true ups 38.9 (41.0)
--------- ---------
Effective income tax rate 0.0% 3.1%
========= =========
As of June 30, 2010, the Company has net operating loss ("NOL") carryforwards of
approximately $166,360,000 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 22,706,000
2028 10,710,000
2030 1,887,000
------------
$166,360,000
============
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
NOTE 14 - INCOME TAXES (Continued)
The Company has, for federal income tax purposes, research and development tax
credit carryforwards aggregating $4,078,750, 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
2030 19,349
------------
$4,078,750
============
In addition, for New York State income tax purposes, the Company has tax credit
carryforwards, aggregating approximately $1,098,000, which are accounted for
under the flow-through method. The tax credit carryforwards expire during the
years ending June 30, 2012 to June 30, 2030.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
NOTE 14 - INCOME TAXES (Continued)
Significant components of the Company's deferred tax assets and liabilities at
June 30, 2010 and 2009 are as follows:
June 30,
-------------------------
2010 2009
----------- -----------
Deferred tax assets:
Allowance for doubtful accounts $ 4,453,601 $ 4,111,445
Non-deductible accruals 227,547 233,338
Net operating carryforwards 66,544,239 65,789,317
Tax credits 5,177,209 5,176,360
Inventory capitalization for
tax purposes - 39,320
Property and equipment and
depreciation 1,456,302 1,315,706
Other - 3,600
----------- -----------
77,858,898 76,669,086
Valuation allowance (77,101,373) (75,792,218)
Net deferred tax assets ----------- -----------
757,525 876,868
----------- -----------
Deferred tax liabilities:
Capitalized software development
Costs
(757,525) (876,868)
Gross deferred tax liabilities ----------- -----------
(757,525) (876,868)
Net deferred tax liabilities ----------- -----------
$ - $ -
=========== ===========
The net change in the valuation allowance for deferred tax assets increased by
approximately $1,309,000 during the year ended June 30, 2010 and decreased by
approximately $120,000 during the year ended June 30, 2009.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
NOTE 15 - OTHER CURRENT LIABILITIES
Included in other current liabilities are the following:
June 30,
----------------------------
2010 2009
------------ ------------
Royalties $ - $ 622,780
Accrued salaries,
commissions and
payroll taxes 637,856 882,038
Accrued interest 991,795 901,286
Litigation accruals 193,349 193,349
Sales tax payable 2,597,352 2,433,773
Legal and other
professional fees 736,622 674,501
Accounting fees 474,590 480,000
Insurance premiums 45,989 30,336
Penalty - Sales tax 817,353 682,500
Penalty - 401k plan 250,000 250,000
Purchase scanners 390,000 440,000
Rent 356,247 287,409
Other 573,916 582,070
----------- -----------
$ 8,065,069 $ 8,460,042
=========== ===========
NOTE 16 - COMMITMENTS AND CONTINGENCIES
Leases
------
The Company rents its operating facilities and certain equipment, pursuant to
operating lease agreements expiring at various dates through March 2016. The
leases for certain facilities contain escalation clauses relating to increases
in real property taxes as well as certain maintenance costs.
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, 2010
NOTE 16 - COMMITMENTS AND CONTINGENCIES (Continued)
Future minimum operating lease commitments consisted of the following at June
30, 2010:
Facilities
And
Equipment
Year Ending (Operating
June 30, Lease)
------------ ------------
2011 $ 2,115,057
2012 2,190,401
2013 2,200,164
2014 1,657,153
2015 1,443,857
Thereafter 1,096,807
------------
Total minimum obligations $10,703,439
============
Rent expense for operating leases approximated $2,162,000 and $1,796,000 for the
years ended June 30, 2010 and 2009, respectively.
License Agreements
------------------
The Company had a license agreement, which required the Company to pay a royalty
on the Company's future sales of certain MRI imaging apparatus. The licensor
claimed that the Company breached its contract and was owed certain amounts
under this agreement. During September 2009, the Company entered into an
understanding regarding this matter with the licensor. On February 12, 2010, the
Company signed a settlement agreement and release with this licensor in which
the Company will pay $711,448. The Company has agreed to pay this amount plus 5%
interest over a term beginning February 2010 to September 2014. The first
payment in February 2010 was in the amount of $15,000 and then beginning in
March 2010 the monthly payment amount is $12,150 with a final payment of $5,091
payable September 2014.
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 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. The
Company received the last gross margin payment of $585,493 in July 2009, which
has been included in revenue for the year ended June 30, 2010. As of April 2009,
this agreement has expired.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
NOTE 16 - 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, 2010 and 2009. (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, 2010.
Litigation
----------
On or about June 30, 2010, one of the Company's customers, Golden Triangle
Company, commenced an action against the Company and certain individual
defendants employed or formerly employed by the Company, in the United States
District Court for the Eastern District of New York based on the alleged
wrongful failure of the Company to deliver a scanner in Kuwait. The claim
alleges various causes of action including breach of contract, fraud, conspiracy
to defraud and conversion. Golden Triangle Company v. Fonar Corporation et al,
CV10-2933. The plaintiff seeks relief in the amount of $5,000,000. The Company
believes that the plaintiff's claims are without merit and is seeking to make a
motion to dismiss the complaint. However, there is no assurance that the
resolution of this action will not materially and adversely affect the Company's
business, financial position and results of operations or cash flows.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
NOTE 16 - COMMITMENTS AND CONTINGENCIES (Continued)
Litigation (Continued)
----------
In addition, the Company is party to five additional less significant actions in
which the customers are seeking to obtain a return of their deposits for MRI
scanners. EAB Leasing Corp et al v. Farolan, District Court of Hidalgo County,
Texas ($169,500), Upright MRI of Chicago, LLC v. Fonar, Circuit Court of Cook
County, Illinois ($310,000), Matt Malek Madison v. Fonar, U.S. District Court,
Northern District of California ($300,000), Jack Shapiro v. Fonar Corporation,
Supreme Court, Nassau County, New York ($500,000 although the actual deposit was
$323,000), and Anchorage Neurological Associates, Inc., Superior Court of
Alaska, Third Judicial District at Anchorage ($155,000). The Company's down
payments are generally non-refundable, but in some instances, where specified
conditions are met, the Company will refund a down payment. In the Farolan case,
the Court granted the Company's motion for summary judgment, but the plaintiff
is pursuing additional proceedings. In the Upright MRI of Chicago case, the down
payment was specifically stated to be non-refundable and the case is proceeding.
In the Madison case, the Court recently granted summary judgment to Madison for
the deposit and prejudgment interest. The Company strongly disagree with the
decision and are considering our options. In the Shapiro case, Shapiro, who was
also a sales representative for the Company, and the Company is attempting to
negotiate a settlement. In the Anchorage Neurological case, which was commenced
on October 7, 2010, the Company had agreed to refund the $155,000 down payment
if the plaintiff were unable to negotiate a satisfactory lease with its current
landlord to accommodate the MRI scanner, Anchorage demanded the down payment,
but declined to provide any specifics concerning the matter. However, there is
no assurance that the resolution of these actions will not materially and
adversely affect the company's business, financial position and results of
operations or cash flows.
In addition, the Company is subject to various other 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 $430,289 as of June 30, 2010. The monthly
payments total $46,193.
The amounts to be paid over the next two years are as follows:
Year Ending
June 30,
------------
2011 $ 367,667
2012 62,622
---------
$ 430,289
=========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
NOTE 16 - COMMITMENTS AND CONTINGENIES (Continued)
NASDAQ Notice of Non-compliance
-------------------------------
The Company's stockholder's deficiency was $5.8 million as of June 30, 2010 and
has a net loss of $3.0 for the year ended June 30, 2010. As a result of the
Company's failure to meet the minimum stockholders equity and net income
requirements of $2.5 million and $500,000, respectively. NASDAQ could delist the
Company's common stock from the NASDAQ small cap exchange.
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 $2,202,000 plus interest and penalties of approximately
$1,687,000. 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. 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 amount is the Company's best estimate of
potential penalties. Management is unable to determine the outcome of this
uncertainty. 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.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
NOTE 17 - OTHER INCOME
Other income consists of:
For the Years Ended June 30,
----------------------------
2010 2009
--------- ----------
Income (loss) from investment $ 14,982 $ (129,228)
Litigation settlement 33,147 (17,500)
Other (expense) income (2,455) 546,390
--------- ----------
$ 45,674 $ 399,662
========= ==========
NOTE 18 - SUPPLEMENTAL CASH FLOW INFORMATION
During the years ended June 30, 2010 and 2009, the Company paid $195,269 and
$308,332 for interest, respectively. During the years ended June 30, 2010 and
2009, the Company paid $0 and $35,931 for income taxes, respectively.
NOTE 19 - DUE TO RELATED MEDICAL PRACTICES
In June 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 a
rate of 10.41% per annum. The Company used this scanning system to fulfill a
sales order with an unrelated customer. The balance of as of June 30, 2010 and
2009 was $435,179 and $550,000, respectively.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
NOTE 20 - SEGMENT AND RELATED INFORMATION
The Company provides segment data in accordance with the provisions of ASC topic
280, "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 2010:
-----------
Net revenues from external customers $ 20,726,727 $ 11,088,828 $ 31,815,555
Intersegment net revenues $ 930,000 $ - $ 930,000
Loss from operations $ (1,121,696) $ (1,459,034) $ (2,580,730)
Depreciation and amortization$ 915,344 $ 529,721 $ 1,445,065
Compensatory element of stock
issuances $ 99,270 $ - $ 99,270
Total identifiable assets $ 14,695,150 $ 6,933,695 $ 21,628,845
Capital expenditures $ 401,310 $ 22,524 $ 423,834
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
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
NOTE 20 - SEGMENT AND RELATED INFORMATION (Continued)
Export Product Sales
--------------------
The Company's areas of operations are principally in the United States. The
Company had export sales of medical equipment amounting to 32.4% and 25.4% of
product sales revenues to third parties for the years ended June 30, 2010 and
2009, 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,
----------------------------
2010 2009
------------ ------------
Kuwait (0.5)% (0.5)%
Holland 8.3 3.4
Germany (0.4) 7.2
Greece 8.3 (0.4)
Canada (0.1) 8.7
Australia - 7.0
Puerto Rico 0.4 -
Libya 16.4 -
------------ ------------
32.4% 25.4%
============ ============
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 7.8% and 8.1% of consolidated net service and repair fees for the
years ended June 30, 2010 and 2009, 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,
----------------------------
2010 2009
------------ ------------
Spain 1.6% 1.7%
Puerto Rico 1.1 1.0
Switzerland (0.1) 0.9
Germany 0.4 0.0
England 2.0 2.1
Holland 1.3 1.3
Scotland 1.0 1.0
Canada 0.5 0.1
------------ ------------
7.8% 8.1%
============ ============
The Company does not have any material assets outside of the United States.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
NOTE 21 - 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, 2010
NOTE 22 - QUARTERLY FINANCIAL DATA (UNAUDITED)
(000's omitted, except per share data)
For the Quarters Ended
------------------------------------------------------
Sept. 30, Dec. 31, March 31, June 30,
2009 2009 2010 2010 Total
--------- -------- --------- -------- --------
Total Revenues - Net $ 7,491 $ 8,213 $ 7,514 $ 8,598 $31,816
Total Costs and Expenses 8,913 9,480 7,489 8,514 34,396
Net (Loss) Income (1,741) (1,292) (8) 28 (3,013)
Basic Net (Loss)
Income Per Share $ (0.35) $ (0.26) $ (0.00) $ 0.01 $ (0.61)
For the Quarters Ended
------------------------------------------------------
Sept. 30, Dec. 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 and Diluted Net Loss
Per Share $ (0.09) $ 0.16 $ 0.14 $ 0.01 $ 0.21
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, 2010
NOTE 23 - ALLOWANCE FOR DOUBTFUL ACCOUNTS
The following represents a summary of allowance for doubtful accounts for the
years ended June 30, 2010 and 2009, respectively:
Balance Balance
June 30, June 30,
Description 2009 Additions Deductions 2010
----------------------------- ----------- ------------ ---------- ----------
Receivables from equipment
sales and service contracts $ 2,393,326 (1) $300,000 $404,277 $2,289,049
Management fee receivable 5,093,345 (1) 715,000 - 5,808,345
Management fee receivable from
related medical practices 1,094,818 (1) 35,000 - 1,129,818
Medical receivables 1,343,500 (1) 278,500 1,622,000
Advance and notes to
related parties 264,791 - - 264,791
Notes receivable 65,000 (1) 50,000 115,000
Balance Balance
June 30, June 30,
Description 2008 Additions Deductions 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
Note receivable 65,000 - - 65,000
(1) Included in provision for bad debts.
NOTE 24 - SUBSEQUENT EVENTS
The Company evaluates events that have occurred after the balance sheet date,
but before the consolidated financial statements are issued.
The Company amended its certificate of incorporation decreasing the number of
authorized shares of Common Stock from 30,000,000 to 8,500,000, Class B Common
Stock from 800,000 to 227,000, Class C Common Stock from 2,000,000 to 567,000,
Class A Non-voting Preferred Stock from 1,600,000 to 453,000 and Preferred Stock
from 2,000,000 to 567,000.
During the period from July 1, 2010 through September 30, 2010, the Company has
issued 126,608 shares of common stock to employees and consultants as
compensation valued at $188,060 under the 2010 Stock Bonus Plan.
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, 2010.
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, 2010, 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, 2010.
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,
2010, that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Directors serve from the date of their election until the next annual meeting of
stockholders and until their successors are elected and qualify. With the
exception of Dr. Raymond V. Damadian, who does not receive any fees for serving
as a director, each director receives $20,000 per annum for his or her service
as a director. Officers serve at the discretion of the Board of Directors.
A majority of our board of directors is composed of independent directors:
Robert J. Janoff, Charles N. O'Data and Robert Djerejian. These three
individuals also serve as the three members of the audit committee, which is a
standing committee of board of directors having a charter describing its
responsibilities. Mr. O'Data has been designated as the audit committee
financial expert. His relevant experience is described in his biographical
information. We have adopted a code of ethics applicable to, among other
personnel, our principal executive officer, principal financial officer,
controllers and persons performing similar functions. The code is designed to
deter wrongdoing and to promote: 1. honest and ethical conduct, including the
ethical handling of actual or apparent conflicts of interest between personal
and professional relationships; 2. full, fair, accurate, timely and
understandable disclosure in reports and documents that we file or submit to the
Securities and Exchange Commission and in other public communications we make;
3. compliance with applicable governmental laws, rules and regulations; 4. the
prompt internal reporting of violations of the code to an appropriate person or
persons identified in the code and 5. accountability for adherence to the code.
We will provide a copy of the code to any person who requests a copy. A person
may request a copy by writing to Fonar Corporation, 110 Marcus Drive, Melville,
New York 11747, to the attention of the Legal Department or Investor Relations.
The officers and directors of the Company are set forth below:
Raymond V. Damadian, M.D. 74 President, Treasurer,
Chairman of the Board
and a Director
Claudette J.V. Chan 72 Director and Secretary
Robert J. Janoff 83 Director
Charles N. O'Data 74 Director
Robert Djerejian 79 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 2010 to our Principal 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.
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. 2010 $57,358.12 - - $57,358.12
Damadian, 2009 $72,285.12 - - $72,285.12
PEO/ PFO 2008 $90,087.83 - - $90,087.83
-------------------------------------------------------------------------------
II. OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
-------------------------------------------------------------------------------
Name Number Option Option
Of Exercise Expiration
Securities Price Date
Underlying ($)
Unexercised
Options
(#)
Exercisable
(a) (b) (c)
---------- ----------- --------- -----------
Raymond V. 463 28.125 12/26/10
Damadian,
PEO/PFO
-------------------------------------------------------------------------------
III. DIRECTOR COMPENSATION
-------------------------------------------------------------------------------
Fees Earned
Or Paid in
Name Cash ($) Total ($)
(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
EMPLOYEE COMPENSATION PLANS
Equity Compensation Plan Information as of June 30, 2010
(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 68,234 $ 29.63 130,943
compensation
plans
approved by
security
holders
Equity
compensation
plans not - N/A -
approved by
security - - -
holders
============== ============ ============
Total 68,234 29.63 130,943
Fonar's 1997 Nonstatutory Stock Option Plan, adopted on May 9, 1997 terminated
on May 8, 2007. Of the options granted under this plan, 52,672 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, 2010, 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 15,562 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, 2010, 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, 2010, 0 shares were available for issuance.
Fonar adopted its 2010 Stock Bonus Plan, on June 28, 2010. This Plan permits
Fonar to issue an aggregate of 2,000,000 shares of common stock of Fonar as
bonus or compensation. As of June 30, 2010, 2,000,000 shares were available for
issuance.
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 30, 2010.
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 the Georgia MRI Center are
based on the number of procedures performed, at the rate of $350 per procedure.
The MRI Centers owned by Dr. Damadian in Florida pay flat rate monthly fees
ranging from $113,000 and $195,000 per month. These fees are renegotiable on an
annual basis.
During the fiscal years ended June 30, 2010 and June 30, 2009 the net revenues
received by HMCA from the MRI Centers owned by Dr. Damadian were approximately
$3.8 million and $2.9 million respectively.
During April 2009, Fair Haven Services, Inc. lent 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.
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, 2010 and the reviews of
the financial statements included in our Forms 10-Q for the fiscal year ended
June 30, 2010 were $379,165. 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, 2009 and our internal controls,
and the reviews of the financial information included in our Forms 10-Q for the
fiscal year ended June 30, 2009 were $573,885.
Audit Related Fees
No fees were billed by Marcum LLP for the fiscal years ended June 30, 2010 or
June 30, 2009 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, 2010 or
June 30, 2009 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, 2010 were $121,093.
The aggregate fees billed by Marcum LLP for tax compliance, tax advice and tax
planning in the fiscal year ended June 30, 2009 were $184,768.
All Other Fees
The aggregate fees billed by Marcum LLP for all other services rendered by them
during the fiscal years ended June 30, 2010 and June 30, 2009 were $59,294 and
$31,776, 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 2010 and 2009 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, 2010 and 2009.
Consolidated Statements of Operations for the Two Years Ended June 30, 2010
and 2009.
Consolidated Statements of Stockholders' Equity for the Two Years Ended
June 30, 2010 and 2009.
Consolidated Statements of Cash Flows for the Two Years Ended June 30, 2010
and 2009.
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 the first nine months of Fiscal 2010. May 18, 2010, Commission File No.
0-10248.
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.
10.36 2010 Stock Bonus Plan, incorporated by reference to Exhibit 99.1 to
the Registrant's registration statement on Form S-8, Commission File No.
333-168771.
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.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this amended report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FONAR CORPORATION
Dated: October 13, 2010
By:/s/Raymond V. 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 V. Damadian Chairman of the October 13, 2010
Raymond V. Damadian Board of Directors,
President, Director
Principal Executive
Officer and Acting
Principal Financial
Officer)
/s/Claudette J.V. Chan Secretary, October 13, 2010
Claudette J.V. Chan Director
/s/ Robert J. Janoff Director October 13, 2010
Robert J. Janoff
/s/ Charles N. O'Data Director October 13, 2010
Charles N. O'Data
/s/ Robert Djerejian Director October 13, 2010
Robert Djerejian