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, 2008
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from _____________ to _____________
Commission File No. 0-10248
___________________________
FONAR CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 11-2464137
(State of incorporation) (IRS Employer Identification Number)
110 Marcus Drive, Melville, New York 11747
(Address of principal executive offices) (Zip Code)
(631) 694-2929
(Registrant's telephone number, including area code)
____________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.0001 per share
Securities registered pursuant to Section 12(g) of the Act:
None
________________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes ____ No ___X___ Indicate by check
mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes ____ No ___X___
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ___X___ No _______
Indicate by check mark if disclosure of delinquent filers, pursuant to Item 405
of Regulation S-K, {section}229.405 of this Chapter, is not contained, and will
not be contained, to the best of the registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this 10-K or
any amendment to the Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of "large accelerated filer", "accelerated filer and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ____ Accelerated filer ____
Non-accelerated filer ____ Smaller reporting company ___X___
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes ____ No ____
The aggregate market value of the shares of Common Stock held by non-affiliates
as of December 31, 2007 based on the closing price of $5.20 per share on such
date as reported on the NASDAQ System, was approximately $25 million. The other
outstanding classes do not have a readily determinable market value.
As of September 15, 2008, 4,904,275 shares of Common Stock, 158 shares of Class
B Common Stock, 382,513 shares of Class C Common Stock and 313,451 shares of
Class A Non-voting Preferred Stock of the registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
PART I
ITEM 1. BUSINESS
GENERAL
Fonar Corporation, sometimes referred to as the "Company" or "Fonar", is a
Delaware corporation which was incorporated on July 17, 1978. Our address is 110
Marcus Drive, Melville, New York 11747 and our telephone number is 631-694-
2929. Fonar also maintains a WEB site at www.Fonar.com. Fonar provides copies of
its filings with the Securities and Exchange Commission on Forms 10-K, 10-Q and
8-K and amendments to these reports to stockholders on request.
We conduct our business in two segments. The first, conducted directly through
Fonar, is referred to as our medical equipment segment. The second, conducted
through our wholly owned subsidiary Health Management Corporation of America, is
referred to as the physician management and diagnostic services segment.
MEDICAL EQUIPMENT SEGMENT
Fonar is engaged in the business of designing, manufacturing, selling and
servicing magnetic resonance imaging, also referred to as "MRI" or "MR",
scanners which utilize MRI technology for the detection and diagnosis of human
disease. Fonar's founders built the first scanner in 1977 and Fonar introduced
the first commercial MRI scanner in 1980. Fonar is the originator of the iron-
core non-superconductive and permanent magnet technology.
Fonar's iron frame technology made Fonar the originator of "open" MRI scanners.
We introduced the first "open" MRI in 1980. Since that time we have concentrated
on further application of our "open" MRI, introducing most recently the
Upright(R) Multi-Position(TM) MRI scanner (also referred to as the "Upright(R)"
or "Stand-Up(R)" MRI scanner) and the Fonar 360(TM) MRI scanner.
The product we are now most vigorously promoting is our Upright(R) MRI. The
Upright(R) MRI is unique in the industry in that it allows patients to be
scanned in a fully weight-bearing condition, such as standing, sitting or
bending in any position that causes symptoms. This means that an abnormality or
injury, such as a slipped disk can be visualized where it may not be visualized
with the patient lying down. We are introducing the name "Upright(R)" as an
alternative to "Stand-UP(R)" because of the multiplicity of positions in which
the patient may be scanned where the patient is not standing.
PHYSICIAN MANAGEMENT AND DIAGNOSTIC SERVICES SEGMENT
Health Management Corporation of America, which we sometimes refer to as "HMCA",
was formed by Fonar in March 1997 as a wholly-owned subsidiary in order to
enable us to expand into the business of providing comprehensive management
services to medical providers. HMCA provides management services, administrative
services, office space, equipment, repair, maintenance service and clerical and
other non-medical personnel to medical providers. Since July 28, 2005, following
the sale of HMCA's physical therapy and rehabilitation business, HMCA has
elected to provide its services solely to diagnostic imaging centers.
See Note 20 to the Consolidated Financial Statements for separate financial
information respecting our medical equipment and physician and diagnostic
management services segments.
FORWARD LOOKING STATEMENTS.
Certain statements made in this Annual Report on Form 10-K are "forward-looking
statements", within the meaning of the Private Securities Litigation Reform Act
of 1995, regarding the plans and objectives of Management for future operations.
Such statements involve known and unknown risks, uncertainties and other factors
that may cause our actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. These forward-looking statements are
based on current expectations that involve numerous risks and uncertainties. Our
plans and objectives are based, in part, on assumptions involving the expansion
of business. These assumptions involve judgments with respect to, among other
things, future economic, competitive and market conditions and future business
decisions, all of which are difficult or impossible to predict accurately and
many of which are beyond our control. Although we believe that our assumptions
underlying the forward-looking statements are reasonable, any of the assumptions
could prove inaccurate and, therefore, there can be no assurance that the
forward-looking statements included in this Annual Report will prove to be
accurate. In light of the significant uncertainties inherent in our
forward-looking statements, the inclusion of such information should not be
regarded as a representation by us or any other person that our objectives and
plans will be achieved.
RECENT DEVELOPMENTS AND OVERVIEW.
Our products and works-in-progress are intended to significantly improve our
competitive position. Our current products are the Upright(R) MRI and the Fonar
360(TM).
The Upright(R) MRI permits, for the first time, MRI diagnoses to be made in the
weight-bearing state. The Upright(R) MRI is the only MRI scanner which allows
patients to be scanned while standing, sitting or reclining, either horizontally
or at an angle. This means that an abnormality or injury, such as a slipped
disk, will be able to be scanned under full weight-bearing conditions and, more
often than not, in the position in which the patient experiences pain. A patient
handling system built into the floor brings the patients to the desired height
in the scanner. An adjustable bed allows the patients to stand, sit or lie on
their backs, sides or stomachs at any angle. The Upright(R) MRI may also be
useful for MRI guided interventional procedures.
More recently a new application of the Fonar Upright(R) technology is in the
evaluation and diagnosis of patients with the Arnold-Chiari syndrome believed to
affect from 200,000 to 500,000 Americans. In this syndrome brain stem
compression and entrapment of the brain at the base of the skull in the foramen
magnum, which is the circular bony opening at the base of the skull where the
spinal cord exits the skull. Classic symptoms of the Chiari syndrome include the
"drop attack", where the erect patient unexpectedly experiences an explosive
rush or nervous discharge at the base of the brain which rushes down the body to
the extremities, causing the patient to collapse in a transient neuromuscular
paralysis which then subsides when the patient is in a horizontal position.
The Fonar Upright(R) MRI has recently demonstrated its key value on two patients
with Chiari syndrome establishing that the conventional lie- down MRI scanners
cannot make an adequate evaluation of their pathology since the patient's
pathology is most visible and symptoms are most acute when the patient is
upright. It is critical to have an image of the patient in an upright position
so that the neurosurgeons can fully evaluate the extent of the brain stem
compression which is occurring so they can choose the most appropriate surgical
approach for the operative repair.
Another milestone in the sale and utilization of Fonar's Upright(R) technology
is the sale in September, 2006 of an Upright(R) MRI scanner to the largest
orthopedic hospital in the Netherlands, the St. Maartenskliniek. St.
Maartenskliniek has over 300 in- patient beds and an extensive outpatient clinic
program that diagnosis and treats 25,000 patients with orthopedic problems
annually. In placing their order, St. Maartenskliniek announced from the point
of view of their internationally recognized "Spine Center" that "once Fonar made
available upright weight-bearing MRI imaging technology, owning one for the St.
Maartenskliniek "Spine Center" was not optional but mandatory. For our hospital
to continue to engage in spine surgery without it, once this new technology
became available, was unacceptable. Once the means were available to make
certain we were getting the complete picture of the patient's spine pathology
before undertaking surgery, so that we could be certain we were not performing
surgery based on a wrong diagnosis and running the risk of doing the wrong
surgery, we did not regard the utilization of this new technology, from our
patient's perspective as optional. It was mandatory."
We are vigorously promoting sales of the Upright(R) MRI which we regard as our
most promising product. The market for the Upright(R) shows strong progress.
Revenues recognized from the sale of Upright(R) MRI scanners increased in fiscal
2008 by 1.5% over fiscal 2007 from approximately $11.0 million in fiscal 2007 to
approximately $11.2 million in fiscal 2008 and by 5.6% in fiscal 2007 from
approximately $10.5 million in fiscal 2006. The following chart shows the
revenues attributable to our different model scanners for the fiscal years ended
June 30, 2006, June 30, 2007 and June 30, 2008. Note that we recognize revenue
on a percentage of completion basis. Accordingly, revenue is recognized as each
sub-assembly of a scanner is manufactured. Consequently the revenues for a
fiscal period do not necessarily relate to orders placed in that period.
Revenues Recognized
---------------------------------------
Model Fiscal 2006 Fiscal 2007 Fiscal 2008
------------- ----------- ----------- -----------
Upright(R) $10,452,069 $11,041,251 $11,203,688
Fonar 360(TM) $ 383,589 $ 62,379 $ 0
Other $ 0 $ 0 $ 0
The Fonar 360(TM) includes the Open Sky(TM) MRI. We received our first order for
a Fonar 360(TM) scanner in the first quarter of fiscal 2005. The magnet frame is
incorporated into the floor, ceiling and sidewalls of the scan room and is open.
Consequently, physicians and family members can walk inside the magnet to
approach the patient. The Open Sky(TM) version of the Fonar 360(TM) is
decoratively designed so that it is incorporated into the panoramic landscape
that decorates the walls of the scan room. The ability of the Fonar 360(TM) to
give physicians direct 360 degree access to patients and the availability of MRI
compatible interventional instruments such as needles, catheters, probes,
scalpels and forceps, will also enable the Fonar 360(TM) to be used for image
guided interventions.
Fonar's showcase installation of the first Fonar 360(TM) MRI scanner was
completed at the Oxford Nuffield Orthopedic Center in Oxford, United Kingdom.
Oxford-Nuffield had two objectives in the choice of the Fonar 360(TM) MRI. The
first was to have an open mid-field MRI imaging scanner to meet their medical
imaging needs. The second was to have an open scanner that would enable direct
image guided surgical intervention. The Oxford-Nuffield scanner is carrying a
full diagnostic imaging load daily.
Additionally, development of the works in progress Fonar 360(TM) MRI image
guided interventional technology is actively progressing. Fonar software
engineers have completed and installed their 2nd generation tracking software at
Oxford-Nuffield which is designed to enable the surgeons to insert needles into
the patient and accurately advance them under direct visual image guidance to
the target tissue, such as a tumor, so that therapeutic agents can be injected.
Health Management Corporation of America ("HMCA"), a wholly-owned subsidiary of
Fonar, currently is managing 10 diagnostic imaging centers located principally
in New York and Florida.
MEDICAL EQUIPMENT SEGMENT
PRODUCTS
Fonar's principal products are the Upright(R) MRI and the Fonar 360(TM).
The Upright(R) MRI is a whole-body open MRI system that enables positional MRI
(pMRI(TM)) applications, such as weight-bearing MRI studies. Operating at a
magnetic field strength of 0.6 Tesla, the scanner is a powerful, diagnostically
versatile and cost-effective open MRI that provides a broad range of clinical
capabilities and a complete set of imaging protocols. Patients can be scanned
standing, bending, sitting, upright at an intermediate angle or in any of the
conventional recumbent positions. This multi-positional MRI system accommodates
an unrestricted range of motion for flexion, extension, lateral bending, and
rotation studies of the cervical (upper)and lumbar (lower) spine. Previously
difficult patient scanning positions can be achieved using the system's
MRI-compatible, three-dimensional, motorized patient handling system. Patients,
lying horizontally, are placed into the magnet in the conventional manner. The
system's lift and tilt functions then deliver the targeted anatomical region to
the center of the magnet. The ceiling and floor are recessed to accommodate the
full vertical travel of the table. True image orientation is assured, regardless
of the rotation angle, via computer read- back of the table's position. Spines
and extremities can be scanned in weight- bearing states; brains can be scanned
with patients either standing or sitting.
Recently, this capability of the Fonar Upright(R) technology has demonstrated
its key value on patients with the Arnold-Chiari syndrome, which is believed to
affect 200,000 to 500,000 Americans. In this syndrome, brain stem compression
and subsequent severe neurological symptoms occur in these patients, when
because of weakness in the support tissues within the skull, the brain stem
descends and is compressed at the base of the skull in the foramen magnum, which
is the circular bony opening at the base of the skull where the spinal cord
exits the skull. Conventional lie-down MRI scanners cannot make an adequate
evaluation of the pathology since the patient's pathology is most visible and
the symptoms most acute when the patient is scanned in the upright
weight-bearing position.
The Upright(R) MRI has also demonstrated its value for patients suffering from
scoliosis. Scoliosis patients have been typically subjected to routine x-ray
exams for years and must be imaged upright for an adequate evaluation of their
scoliosis. Because the patient must be standing for the exam, an x-ray machine
has been the only modality that could provide that service. The Upright(R) MRI,
is the only MRI scanner which allows the patient to stand during the MRI exam.
Fonar has developed a new RF receiver and scanning protocol that for the first
time allows scoliosis patients to obtain diagnostic pictures of their spines
without the risks of x- rays. A recent study by the National Cancer Institute
(2000)of 5,466 women with scoliosis reported a 70% increase in breast cancer
resulting from 24.7 chest x-rays these patients received on the average in the
course of their scoliosis treatment.
The Upright(R) MRI is exceptionally open, making it the most non- claustrophobic
whole-body MRI scanner. Patients can walk into the magnet, stand or sit for
their scans and then walk out. From the patient's point of view, the magnet's
front-open and top-open design provides an unprecedented degree of comfort
because the scanner allows the patient an unobstructed view of the scanner room
from inside the magnet, and there is nothing in front of one's face or over
one's head. The only thing in front of the patient's face during the scan is a
very large (42") panoramic TV (included with the scanner) mounted on the wall.
The bed is tilted back five degrees to stabilize a standing patient. Special
coil fixtures, a patient seat, Velcro straps, and transpolar stabilizing bars
are available to keep the patient comfortable and motionless throughout the
scanning process.
Full-range-of-motion studies of the joints in virtually any direction will be
possible, an especially promising feature for sports injuries. Full range of
motion cines, or movies, of the lumbar spine will be achieved under full body
weight.
The Upright(R) MRI will also be useful for MRI guided interventional procedures
as the physician would have unhindered access to the patient with no
restrictions in the vertical direction.
This easy-entry, mid-field-strength scanner should be ideal for trauma centers
where a quick MRI screening within the first critical hour of treatment will
greatly improve patients' chances for survival and optimize the extent of
recovery.
The Fonar 360(TM) is an enlarged room sized magnet in which the floor, ceiling
and walls of the scan room are part of the magnet frame. This is made possible
by Fonar's patented Iron-Frame(TM) technology which allows our engineers to
control, contour and direct the magnet's lines of flux in the patient gap where
wanted and almost none outside of the steel of the magnet where not wanted.
Consequently, this scanner allows 360 degree access to the patient, and
physicians and family members are able to enter the scanner and approach the
patient.
The Fonar 360(TM) is presently marketed as a diagnostic scanner and is sometimes
referred to as the Open Sky(TM) MRI. In its Open Sky(TM) capacity, the Fonar
360(TM) serves as an open patient- friendly scanner which allows 360 degree
access to the patient on the scanner bed.
To optimize the patient-friendly character of the Open Sky(TM) MRI, the walls,
floor, ceiling and magnet poles are decorated with landscape murals. The patient
gap is twenty inches and the magnetic field strength is 0.6 Tesla.
We also expect to enable the Fonar 360(TM) to function as an MRI guided
interventional scanner, for the purpose of performing intra-operative,
interventional and therapeutic procedures with MR compatible instrumentation. In
this capacity, the enlarged room sized magnet and 360 degree access to the
patient afforded by the Fonar 360(TM) would permit full-fledged support teams to
walk into the magnet and perform MRI guided interventions on the patient inside
the magnet. Most importantly, the exceptional quality of the MRI image and its
exceptional capacity to exhibit tissue detail on the image, by virtue of the
nuclear resonance signal's extraordinary capacity to create image contrast, can
then be obtained very near real time to guide the physician during the MRI
guided intervention. Thus MRI compatible instruments, needles, catheters,
endoscopes and the like can be introduced directly into the human body and
guided to the malignant lesion or other pathology by means of the MRI image.
Surgically inoperable lesions could be accessed through MRI guided catheters and
needles making it possible to deliver the treatment agent directly to the
targeted tissue.
The first Fonar 360(TM) MRI scanner, installed at the Oxford-Nuffield Orthopedic
Center in Oxford, United Kingdom, is now carrying a full diagnostic imaging
caseload. In addition, however, development of the works in progress Fonar
360(TM) MRI image guided interventional technology is actively progressing.
Fonar software engineers have completed and installed their 2nd generation
tracking software at Oxford-Nuffield which is designed to enable the surgeons to
insert needles into the patient and accurately advance them, under direct visual
image guidance, to the target tissue, such as a tumor, so that therapeutic
agents can be injected.
With current treatment methods, such as chemotherapy taken by mouth, the therapy
must always be restricted in the doses that can be applied to the malignant
tissue because of the adverse effects on the healthy tissues. Thus
chemotherapies must be limited at the first sign of toxic side effects. The same
is the case with radiation therapy. Fonar expects that with the Fonar 360(TM)
treatment agents may be administrated directly to the malignant tissue through
small catheters or needles, thereby allowing much larger doses of chemotherapy,
x-rays, laser ablation, microwave and other anti-neoplastic agents to be applied
directly and exclusively to the malignant tissue with more effective results.
Since the interventional procedure of introducing a treatment needle or catheter
under image guidance will be minimally invasive, the procedure can be readily
repeated should metastases occur elsewhere, with minimum impact on the patient
beyond a straightforward needle injection. The presence of the MRI image during
treatment would enable the operator to make assessments during treatment whether
the treatment is being effective.
In addition to the patient comfort and new applications, such as MRI directed
interventions, made possible by our scanners' open design, the Upright(R) and
Fonar 360(TM) scanners are designed to maximize image quality through an optimal
combination of signal-to-noise (S/N) and contrast-to-noise (C/N) ratios. The
technical improvements realized in these scanners' design over their
predecessors also include increased image- processing speed and diagnostic
flexibility.
MRI directed interventions are made possible by the scanners' ability to supply
images to a monitor positioned next to the patient, enabling the operator to
view in process an interventional procedure from an unlimited number of angles.
The openness of Fonar's scanners would enable a physician to perform a wide
range of interventional procedures inside the magnet.
In the case of breast imaging the access by a physician permits an image guided
biopsy to be performed easily which is essential once suspicious lesions are
spotted by any diagnostic modality. In addition to being far superior to x-ray
in detecting breast lesions because of the MRI's ability to create the soft
tissue contrast needed to see them, where x-ray is deficient in its ability to
generate the needed contrast between cancer and normal tissue, there is not the
painful compression of the breast characteristic of X-ray mammography.
The Upright(R) MRI and Fonar 360(TM) scanners share much of the same fundamental
technology and offer the same speed, precision and image quality. Fonar's
scanners initiated the new market segment of high-field open MRI in which the
Fonar Upright(R) MRI is one of the market leaders. High-field open MRIs operate
at significantly higher magnetic field strengths and, therefore, produce more of
the MRI image-producing signal needed to make high-quality MRI images (measured
by signal-to-noise ratios, S/N).
The Upright(R) MRI and Fonar 360(TM) scanners utilize a 6000 gauss (0.6 Tesla
field strength) iron core electromagnet. The greater field strength of the 6000
gauss magnet, as compared to lower field open MRI scanners that operate at 3,000
gauss (0.3 Tesla) when enhanced by the electronics already utilized by Fonar's
scanners, produces images of higher quality and clarity. Fonar's 0.6 Tesla open
scanner magnets are among the highest field "open MRI" magnets in the industry.
The Upright(R) MRI and Fonar 360(TM) scanners are designed to maximize image
quality through an optimal combination of signal-to-noise (S/N) and
contrast-to-noise (C/N) ratios. The technical improvements realized in the
scanners' design over their lower field predecessors also include increased
image-processing speed and diagnostic flexibility.
Several technological advances have been engineered into the Upright(R) MRI and
Fonar 360(TM) scanners for extra improvements in S/N, including: new high-S/N
Organ Specific(TM) receiver coils; new advanced front-end electronics featuring
high-speed, wide-dynamic-range analog-to-digital conversion and a miniaturized
ultra-low-noise pre-amplifier; high-speed automatic tuning, bandwidth-optimized
pulse sequences, multi- bandwidth sequences, and off-center FOV imaging
capability.
In addition to the signal-to-noise ratio, however, the factor that must be
considered when it comes to image quality is contrast, the quality that enables
reading physicians to clearly distinguish adjacent, and sometimes minute,
anatomical structures from their surroundings. This quality is measured by
contrast-to-noise ratios (C/N). Unlike S/N, which increases with increasing
field strength, relaxometry studies have shown that C/N peaks in the mid-field
range and actually falls off precipitously at higher field strengths. The
Upright(R) MRI and Fonar 360(TM) scanners operate squarely in the optimum C/N
range.
The Upright(R) MRI and Fonar 360(TM) provide various features allowing for
versatile diagnostic capability. For example, SMART(TM) scanning allows for
same-scan customization of up to 63 slices, each slice with its own thickness,
resolution, angle and position. This is an important feature for scanning parts
of the body that include small- structure sub-regions requiring finer slice
parameters. There is also Multi- Angle Oblique(TM) (MAO) imaging, and oblique
imaging.
The console for these scanners includes a mouse-driven, multi-window interface
for easy operation and a 19-inch, 1280 x 1024-pixel, 20-up, high-resolution
image monitor with features such as electronic magnifying glass and real-time,
continuous zoom and pan.
Prior to the introduction of the Upright(R) MRI and Fonar 360(TM) QUAD(TM)
scanner, the Ultimate(TM) 7000 scanner and the Beta(TM) scanner. The Beta(TM)
3000 scanner utilized a permanent magnet and the Beta(TM) earlier Fonar's
products included the 3000M scanner utilized an iron core electromagnet. All of
our current and earlier model scanners create cross-sectional images of the
human body.
During fiscal 2008, sales of our Upright(R) MRI scanners accounted for
approximately 31.5% of our total revenues and 47.6% of our medical equipment
revenues, as compared to 33.2% of total revenues and 51.9% of medical equipment
revenues in fiscal 2007 and 31.6% of total revenues and 53.0% of medical
equipment revenues in fiscal 2006. These sales show the market penetration being
achieved by the Upright(R) MRI scanner.
During fiscal 2008, we had no revenues attributable to sales of our Fonar
360(TM) scanner. During fiscal 2007 sales of our Fonar 360(TM) scanner accounted
for 0.2% of total revenues and 0.3% of medical equipment revenues and during
fiscal 2006 sales of our Fonar 360(TM) scanner accounted for 1.2% of total
revenues and 1.9% of medical equipment revenues.
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 2005, we expect to continue our
focus on the Upright(R) MRI in the immediate future, notwithstanding the losses
incurred in fiscal 2007 and fiscal 2008. We are optimistic that the Fonar
360(TM) and our other products and works in progress will also contribute to
increased product sales.
The materials and components used in the manufacture of our products (circuit
boards, computer hardware components, electrical components, steel and plastic)
are generally available at competitive prices. We have not had difficulty
acquiring such materials.
WORKS-IN-PROGRESS
All of our products and works-in-progress seek to bring to the public MRI
products that are expected to provide important advances against serious
disease.
MRI takes advantage of the nuclear resonance signal elicited from the body's
tissues and the exceptional sensitivity of this signal for detecting disease.
Much of the serious disease of the body occurs in the soft tissue of vital
organs. The principal diagnostic modality currently in use for detecting
disease, as in the case of x-ray mammography, are diagnostic x-rays. X-rays
discriminate soft tissues, such as healthy breast tissue and cancerous tissue
poorly, because the x-ray particle traverses the various soft tissues almost
equally thereby causing target films to be nearly equally exposed by x-rays
passing through adjacent soft tissues and creating healthy and cancerous shadows
on the film that differ little in brightness. The image contrast between
cancerous and healthy breast tissue is poor, making the detection of breast
cancers by the x-ray mammogram less than optimal and forcing the mammogram to
rely on the presence or absence of microscopic stones called
"microcalcifications" instead of being able to "see" the breast cancer itself.
If microcalcifications are not present to provide the missing contrast, then the
breast cancer goes undetected. They frequently are not present. The maximum
contrast available by x-ray with which to discriminate disease is 4%. Brain
cancers differ from surrounding healthy brain by only 1.6% while the contrast in
the brain by MRI is 25 times greater at 40%. X-ray contrasts among the body's
soft tissues are maximally 4%. Their contrast by MRI is 32.5 times greater
(130%).
On the other hand the soft tissue contrasts with which to distinguish cancers on
images by MRI are up to 180%. In the case of cancer these contrasts can be even
more marked making cancers readily visible and detectable anywhere in the body.
This is because the nuclear resonance signals from the body's tissues differ so
dramatically. Liver cancer and healthy liver signals differ by 180% for example.
Thus there is some urgency to bring to market an MRI based breast scanner that
can overcome the x-ray limitation and assure that mammograms do not miss serious
lesions. The added benefit of MRI mammography relative to x- ray mammography is
the elimination of the need for the patient to disrobe and the painful
compression of the breast typical of the x-ray mammogram. The patient is scanned
in her street clothes in MRI mammography. Moreover MRI mammogram scans the
entire chest wall including the axilla for the presence of nodes which the x-ray
mammogram cannot reach.
We view our 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.
Fonar's internal sales force is approximately 8 persons. Our internal sales
force handles the domestic market, although we also have two non-exclusive
domestic independent sales representatives. We continue to use independent
manufacturer's representatives and distributors for foreign markets. In addition
to its internal domestic sales force, Fonar and General Electric Medical
Systems, a division of General Electric Company, have entered into an
arrangement pursuant to which General Electric Medical Systems is an independent
manufacturer's representative for Fonar's Upright(R) MRI scanner in the domestic
market as well. Neither General Electric nor any of Fonar's other competitors,
however, are entitled to make the Upright(R) MRI scanner. In August 2007, Fonar
engaged the services of a second independent sales representative to focus on
spine surgeons or groups of spine surgeons pre-approved by Fonar who have a
pre-existing relationship with the sales representative.
Fonar's website includes an interactive product information desk for reaching
customers. We plan to commence a program for providing demonstrations of our
products to potential customers on an international basis.
Fonar has exhibited its new products at the annual meeting of the Radiological
Society of North America ("RSNA") in Chicago from November 1995 through 2007 and
plans to attend RSNA meetings in future years. The RSNA meeting is attended by
radiologists from all over the world. Most manufacturers of MRI scanners
regularly exhibit at this meeting.
Fonar has targeted orthopedic surgeons and neurosurgeons, particularly spine
surgeons, as important markets for the Upright(R) MRI. Accordingly, Fonar has
exhibited at the annual meetings of The American Academy of Orthopaedic Surgeons
(AAOS); the North American Spine Society (NASS); the American Association of
Neurological Surgeons (AANS); and the Congress of Neurological Surgeons (CNS).
In addition, in 2007, Fonar attended the Global Health Care Expansion Congress
and the Abu Dahabi International Surgical Conference abroad.
Fonar's success in targeting surgeons was most evident in the sale, in September
2006, of an Upright(R) MRI scanner to the largest orthopedic hospital in the
Netherlands, the St. Maartenskliniek in Nijmegen. In addition to being a key
sale to a prestigious hospital, the medical conclusions reached and stated by
the buyer and the buyer's intention to conduct research and publish articles
concerning the Upright(R) technology, are a vital component to Fonar's objective
to prove to the medical community at large, insurers, governmental agencies and
others the benefits, if not necessity of Upright(R) scanning. A Director of St.
Maartenskliniek and the Chairman of Spine Surgery stated that "We at St.
Maartenskliniek, the biggest orthopedic hospital in the Netherlands, are very
much looking forward to this new technology from Fonar which will enable us to
evaluate the spine anatomy in the fully weight bearing state and in multiple
positions. We expect these new multi-position capabilities to lead to more
accurate diagnosis and better surgery outcomes for patients. Once our active
research program has discovered the benefits of this new Fonar technology for
patients, we intend to publish the results in a lot of peer reviewed scientific
journals." The Chairman stated further "that once Fonar made available upright
weight-bearing MRI imaging technology, owning one for the St. Maartenskliniek
"Spine Center" was not optional but mandatory. For our hospital to continue to
engage in spine surgery without it, once this new technology became available,
was unacceptable".
We have launched an advertising campaign, directed at physicians. It has led to
many inquires about purchase and to some sales of the Upright(R) MRI scanner. In
order to increase Fonar's presence in the medical market and to tell the story
of the Upright(R) MRI with its Multi-Position(R) diagnostic capability well, the
campaign features two-page color advertisements. The advertising is directed at
three target audiences, and each of the three is being reached through the
leading medical journals that are addressed to that audience.
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 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 wonderful new modality to offer their referring physicians. The
advertisements are appeared in Radiology and Diagnostic Imaging.
3) All Physicians: This effort is 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. The
advertisements appear in the Journal of the American Medical Association, which
has a readership of over 350,000 physicians.
This advertising has featured a series of compelling messages. One advertisement
points 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 is 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, so the campaign uses testimonials from
surgeons and radiologists. 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. The latest advertisement features a
leading radiologist, telling why he bought 12 Fonar Upright(R) MRI scanners and
plans to buy more.
Most recently, we have commenced a telemarketing campaign for the purpose of
reaching prospective customers beyond the reach of our existing sales force so
they can be made aware of the medical benefits of Fonar's new Upright(R) MRI
imaging technology.
We have an extensive advertising effort on Google and Yahoo Search Marketing.
Enter relevant terms, such as "mri" or "mri for back pain", and an ad for Fonar
will very likely appear in the paid search listings on the right side of the
results page or along the top of it.
Also, our new advertising for HMCA also serves as advertising for Fonar MRI
scanners. We are increasing our focus on our HMCA business by increasing
internet awareness of the Upright(R) scanning centers that HMCA manages by
installing new Websites for every location and embarking on a new internet
advertising campaign. These websites and advertising give prospective customers
of Upright(R) MRI scanners a view of operating Upright(R) MRI centers and the
benefits of using an Upright(R) MRI scanner. The success of HMCA-managed sites
not only increases management fees to HMCA but encourages new sales for Fonar as
well.
We are directing our MRI marketing efforts to meet the demand for high field
open MRI scanners. Fonar plans to devote its principal efforts to marketing the
Upright(R) MRI, which is the only scanner in the industry that has the unique
capability of scanning patients under weight-bearing conditions and in various
positions of pain or other symptoms. In addition we will continue to market our
Fonar 360(TM) MRI scanners. 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. Recent
announcements in the press have reported the occurrence of MRI Scanner
explosions (5 scanners) 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 recently by the National Cancer Institute to cause a 70% increase in
the risk of breast cancer.
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, 2008, 2.4% of the Company's revenues were generated by
foreign sales, as compared to 7.3% and 10.1% for fiscal 2007 and 2006,
respectively.
We are seeking to promote foreign sales and have sold scanners in various
foreign countries. Foreign sales, however, have not yet proved to be a
significant source of revenue.
SERVICE AND UPGRADES FOR MRI SCANNERS
Our customer base of installed scanners has been and will continue to be an
additional source of income, independent of direct sales.
Income is generated from the installed base in two principal areas namely,
service and upgrades. Service and maintenance revenues from our external
installed base were approximately $11.0 million in fiscal 2008, $10.0 million in
fiscal 2007 and $8.6 million in fiscal 2006. We expect service revenues to
continue to increase as warranties expire on previously sold scanners, and the
customers then enter into service contracts.
We also anticipate that our new scanners will result in upgrades income in
future fiscal years. The potential for upgrades income, particularly in the form
of new patient supporting upright imaging fixtures and receiver coils,
originates in the versatility and productivity of the new Upright(R) Imaging
technology. New medical uses for MRI technology are constantly being discovered
and are anticipated for the Upright(R) Imaging technology as well. New features
can often be added to the scanner by the implementation of little more than
versatile new software packages. For example, software can be added to existing
MRI angiography applications to synchronize angiograms with the cardiac cycle.
By doing so the dynamics of blood vessel filling and emptying can be visualized
with movies. Such enhancements are attractive to end users because they extend
the useful life of the equipment and enable the user to avoid obsolescence and
the expense of having to purchase new equipment. At the present time, however,
upgrade revenue is not significant. We had no upgrade revenue in fiscal 2008 and
fiscal 2007 and approximately $82,000 in upgrade revenue in fiscal 2006.
Service and upgrade revenues are expected to increase as sales of scanners and
the size of the customer base increases.
RESEARCH AND DEVELOPMENT
During the fiscal year ended June 30, 2008, we incurred expenditures of
$5,463,963, $457,372 of which was capitalized, on research and development, as
compared to $6,328,265, $636,167 of which was capitalized and $7,581,898,
$714,253 of which was capitalized, during the fiscal years ended June 30, 2007
and June 30, 2006, respectively.
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 26, 2008 was approximately $36.5
million, as compared to $49.2 million at September 28, 2007. It is expected that
a substantial portion of the existing backlog of orders will be filled within
the 2009 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. Fonar has 145 patents issued and
approximately 70 patents pending. A number of Fonar's existing patents
specifically relate to protecting Fonar's position in the high-field iron frame
open MRI market. The patents further enhance Dr. Damadian's pioneer patent, the
1974 Patent, that initiated the MRI industry and provided the original invention
of MRI scanning. The 145 issued patents extend to various times up to 2026.
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* 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.
Because our export sales are not material at this point, foreign regulation does
not have a material effect on us. In any case, we do not believe that foreign
regulation will deter its efforts to penetrate foreign markets.
Reimbursement to Medical Providers for MRI Scans
Effective November 22, 1985, the Department of Health and Human Services
authorized reimbursement of MRI scans under the Federal Medicare program. In
addition, most private insurance companies have authorized reimbursement for MRI
scans.
Anti-Kickback and Self-Referral Legislation
Proposed and enacted legislation at the State and Federal levels has restricted
referrals by physicians to medical and diagnostic centers in which they or their
family members have an interest. In addition, regulations have been adopted by
the Secretary of Health and Human Services which provide limited "safe harbors"
under the Medicare Anti-Kickback Statute. These safe harbors describe payments
and transactions which are permitted between an entity receiving reimbursement
under the Medicare program and those having an interest in or dealings with the
entity. Although the Company cannot predict the overall effect of the adoption
of these regulations on the medical equipment industry, the use and continuation
of limited partnerships, where investors may be referring physicians, to own and
operate MRI scanners could be greatly diminished.
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* 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 2008 fiscal year, the revenues HMCA recognized from the MRI
facilities were $12.0 million. No revenues were recognized from physical therapy
and rehabilitation practices. For the 2007 fiscal year, the revenues HMCA
recognized from the MRI facilities were $11.9 million and no revenues were
recognized from the physical therapy and rehabilitation practices. For the
fiscal 2006 year, the revenues HMCA recognized from the MRI facilities were
$12.7 million and the revenues recognized from the physical and rehabilitation
practices were $648,000, for total revenues of $13.3 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 MRI facilities, HMCA decided to sell
its business of managing physical therapy and rehabilitation practices. The sale
was completed on July 28, 2005, at the beginning of the 2006 fiscal year.
The sale was made pursuant to an asset purchase agreement. The assets sold
consisted principally of the management agreements with the physical therapy and
rehabilitation facilities, the assignment of other agreements and rights
utilized in our physical therapy and rehabilitation facility management
business, the physical therapy equipment, a portion of the accounts receivable
and office furnishings and equipment we provided to the physical therapy and
rehabilitation facilities.
The sale was made to Health Plus Management Services, L.L.C. There is no
material relationship between Health Plus and Fonar, HMCA, or any of their
respective subsidiaries, directors or officers or associates of any such person.
The two principals of Health Plus were employed by HMCA up to the time of the
closing of the transaction. In consideration for the termination of their
employment agreements, these two individuals each became entitled to receive
$800,000. In addition, each became entitled to receive $200,000 for billing and
collection services to be provided on behalf of HMCA with respect to a portion
of the accounts receivable of certain physical therapy and rehabilitation
facilities which arose during the period when we were engaged in the management
of those facilities. The $1,000,000 payable was paid in shares of Fonar common
stock.
The purchase price under the asset purchase agreement was $6.6 million, payable
pursuant to a promissory note in 120 monthly installments commencing on August
28, 2005. The first twelve installments are interest only and the remaining 108
payments will consist of equal installments of principal and interest in the
amount of $76,014 each. The note is subject to prepayment provisions to the
extent Health Plus resells all or part of the assets and business or utilizes
the assets sold as collateral in any debt financing.
Pursuant to a Modification Agreement dated August 8, 2008, Health Plus made a
prepayment of principal in the amount of $2,000,000 in consideration for the
balance of the note being discounted by $1,000,000. After taking into account
the prepayment of $2,000,000 and the discount of $1,000,000, the remaining
balance of $2,378,130, was amortized and made payable over a period of 60
consecutive months, in equal installments of principal and interest of $47,089
each pursuant to a new replacement promissory note, bearing interest at a rate
of 7% per annum.
On July 31, 2007, HMCA sold its 20% equity interest in a non-consolidated entity
providing management services to a scanning center in the Bronx, New York for
approximately $600,000 and its 50% equity interest in a consolidated entity
providing management services to a scanning center in Orlando, Florida for
approximately $4.3 million.
Effective September 30, 2008, a wholly-owned subsidiary of HMCA sold its 92.3%
equity interest in an entity providing management services to a scanning center
in Bensonhurst, New York for approximately $2.3 million.
PHYSICIAN AND DIAGNOSTIC MANAGEMENT SERVICES
HMCA's services to the facilities it manages encompass substantially all of
their business operations. Each facility is controlled, however, by the
physician owner, not HMCA, and all medical services are performed by the
physicians and other medical personnel under the physician owner's supervision.
HMCA is the management company and performs services of a non-professional
nature. These services include:
1. Offices and Equipment. HMCA identifies, negotiates leases for and/or provides
office space and equipment to its clients. This includes technologically
sophisticated medical equipment. HMCA also provides improvements to leaseholds,
assistance in site selection and advice on improving, updating, expanding and
adapting to new technology.
2. Personnel. HMCA staffs all the non-medical positions of its clients with its
own employees, eliminating the client's need to interview, train and manage
non-medical employees. HMCA processes the necessary tax, insurance and other
documentation relating to employees.
3. Administrative. HMCA assists in the scheduling of patient appointments,
purchasing of medical supplies and equipment and handling of reporting,
accounting, processing and filing systems. It prepares and files the physician
portions of complex forms to enable its clients to participate in managed care
programs and to qualify for insurance reimbursement. We assist the clients to
implement programs and procedures to ensure full and timely regulatory
compliance and appropriate cost reimbursement under no-fault insurance and
workers' compensation guidelines, as well as compliance with other applicable
governmental requirements and regulations, including HIPAA and other privacy
requirements.
4. Billing and Collections. HMCA is responsible for the billing and collection
of revenues from third-party payors including those governed by no-fault and
workers' compensation statutes. HMCA is presently using a third party to perform
its billing and collection services for clients.
5. Cost Saving Programs. Based on available volume discounts, HMCA seeks to
obtain favorable pricing for medical supplies, equipment, contrast agents, such
as gadolinuim, and other inventory for its clients.
6. Diagnostic Imaging and Ancillary Services. HMCA can offer access to
diagnostic imaging equipment through diagnostic imaging facilities it manages.
The Company may expand the ancillary services offered in its network to include
CT-scans and x-rays, if it is determined that such additions may be useful to
clients.
7. Marketing Strategies. HMCA is responsible for developing marketing plans for
its clients.
8. Expansion Plans. HMCA assists the clients in developing expansion plans
including the opening of new or replacement facilities where appropriate.
HMCA advises clients on all aspects of their businesses, including expansion
where it is a reasonable objective, on a continuous basis. HMCA's objective is
to free physicians from as many non-medical duties as is practicable. Practices
can treat patients more efficiently if the physicians can spend less time on
business and administrative matters and more time practicing medicine.
HMCA provides its services pursuant to negotiated contracts with its clients.
While HMCA believes it can provide the greatest value to its clients by
furnishing the full range of services appropriate to that client, HMCA would
also be willing to enter into contracts providing for a more limited spectrum of
management services.
The facilities enter into contracts with third party payors, including managed
care companies. Neither HMCA's clients nor HMCA participate in any capitated
plans or other risk sharing arrangements. Capitated plans are those HMO programs
where the provider is paid a flat monthly fee per patient.
In the case of contracts with the MRI facilities, fees were charged by HMCA
during fiscal 2007 based on the number of procedures performed. In the case of
the physical therapy and rehabilitation practices we previously managed, flat
fees were charged on a monthly basis. Fees were subject to adjustment on an
annual basis, but must be based on mutual agreement. The per procedure charges
to the MRI facilities during fiscal 2007 ranged from $275 to $500 per MRI scan.
Commencing in fiscal 2008, however, the seven MRI facilities sold to Dr. Robert
Diamond by Dr. Raymond Damadian were charged a flat fee, pursuant to the new
contracts entered into by HMCA following the sale of said MRI facilities at the
end of fiscal 2007. Dr. Diamond has been reading scans for HMCA managed
facilities for more than seven years. Fees under the new contracts are also
subject to adjustment on an annual basis.
As of June 22, 2007, Dr. Robert Diamond purchased the stock of the professional
corporations owning the eight New York sites managed by HMCA, previously owned
by Dr. Raymond V. Damadian, the President, Chairman of the Board and principal
stockholder of Fonar. In connection with the sale, new management agreements
were substituted for the existing management agreements, providing, however, for
the same management services. The fees in fiscal 2008, however, were flat
monthly fees in the aggregate amount of $682,500 per month.
Dr. Damadian still owns the four MRI facilities in Georgia and Florida managed
by HMCA. 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. HMCA has agreed to
pay 6% of all adjusted deposits for these services.
HMCA MARKETING
HMCA's marketing strategy is to expand the business and improve the facilities
which it manages. HMCA will seek to increase the number of locations of those
facilities where market conditions are promising and to promote growth of its
clients' patient volume and revenue.
DIAGNOSTIC IMAGING FACILITIES AND OTHER ANCILLIARY SERVICES
Diagnostic imaging facilities managed by HMCA provide diagnostic imaging
services to patients referred by physicians who are either in private practice
or affiliated with managed care providers or other payor groups. The facilities
are operated in a manner which eliminates the admission and other administrative
inconveniences of in-hospital diagnostic imaging services. Imaging services are
performed in an outpatient setting by trained medical technologists under the
direction of physicians. Following diagnostic procedures, the images are
reviewed by the interpreting physicians who prepare a report of these tests and
their findings. These reports are transcribed by HMCA personnel and then
delivered to the referring physician.
HMCA develops marketing programs in an effort to establish and maintain
profitable referring physician relationships and to maximize reimbursement
yields. These marketing approaches identify and target selected market segments
consisting of area physicians with certain desirable medical specialties and
reimbursement yields. Corporate and facility managers determine these market
segments based upon an analysis of competition, imaging demand, medical
specialty and payor mix of each referral from the local market. HMCA also
directs marketing efforts at managed care providers.
Managed care providers have become an important factor in the diagnostic imaging
industry. To further its position, HMCA will seek to expand the imaging
modalities offered at its managed diagnostic imaging facilities.
HMCA COMPETITION
The physician and diagnostic management services field is highly competitive. A
number of large hospitals have acquired medical practices and this trend may
continue. HMCA expects that more competition will develop. Many competitors have
greater financial and other resources than HMCA.
With respect to the diagnostic imaging facilities managed by HMCA, the
outpatient diagnostic imaging industry is highly competitive. Competition
focuses primarily on attracting physician referrals at the local market level
and increasing referrals through relationships with managed care organizations.
HMCA believes that principal competitors for the diagnostic imaging centers are
hospitals and independent or management company-owned imaging centers.
Competitive factors include quality and timeliness of test results, ability to
develop and maintain relationships with managed care organizations and referring
physicians, type and quality of equipment, facility location, convenience of
scheduling and availability of patient appointment times. HMCA believes that it
will be able to effectively meet the competition in the outpatient diagnostic
imaging industry by installing the new Fonar Upright(R) MRI scanners at its most
promising facilities.
GOVERNMENT REGULATION APPLICABLE TO HMCA
FEDERAL REGULATION
Stark Law
Under the federal Self-Referral Law, also referred to as the "Stark Law", which
is applicable to Medicare and Medicaid patients, and the self-referral laws of
various States, certain health practitioners, including physicians,
chiropractors and podiatrists, are prohibited from referring their patients for
the provision of designated health services, including diagnostic imaging and
physical therapy services, to any entity with which they or their immediate
family members have a financial relationship, unless the referral fits within
one of the specific exceptions in the statutes or regulations. Statutory
exceptions under the Stark Law include, among others, direct physician services,
in-office ancillary services rendered within a group practice, space and
equipment rental and services rendered to enrollees of certain prepaid health
plans. Some of these exceptions are also available under the State self-referral
laws. HMCA believes that it and its clients are in compliance with these laws.
Anti-kickback Regulation
Under the federal Anti-kickback statute, which is applicable to Medicare and
Medicaid, it is illegal, among other things, for a provider of MRI services to
pay or offer money or other consideration to induce the referral of MRI scans.
Neither HMCA nor its clients engage in this practice.
In fiscal 2008, approximately 17.3% of the revenues of HMCA's clients were
attributable to Medicare and 1.8% were attributable to Medicaid. In fiscal 2007,
approximately 20.1% of the revenues of HMCA's clients were attributable to
Medicare and 1.6% were attributable to Medicaid. In fiscal 2006, approximately
18.2% of HMCA's revenues were attributable to Medicare and 1.1% were
attributable to Medicaid.
Deficit Reduction Act
The Deficit Reduction Act, which among other things, places limits on Medicare
reimbursements to MRI scanning facilities, has had a negative but not material
effect on the Medicare receipts of HMCA's clients.
State Regulation
In addition to the federal self-referral law and federal Anti-kickback statute,
many States, including those in which HMCA and its clients operate, have their
own versions of self-referral and anti-kickback laws. These laws are not limited
in their applicability, as are the federal laws, to specific programs. HMCA
believes that it and its clients are in compliance with these laws.
Various States prohibit business corporations from practicing medicine. Various
States also prohibit the sharing of professional fees or fee splitting.
Consequently, HMCA leases space and equipment to clients and provides clients
with a range of non-medical administrative and managerial services for agreed
upon fees. HMCA does not engage in the practice of medicine or establish
standards of medical practice or policies for its clients in any State even
where permitted.
HMCA's clients generate revenue from patients covered by no-fault insurance and
workers' compensation programs. For the fiscal year ended June 30, 2008
approximately 37.9% of our clients' receipts were from patients covered by no-
fault insurance and approximately 6.5% of our client's receipts were from
patients covered by worker's compensation programs. For the fiscal year ended
June 30, 2007, approximately 33.1% of HMCA's clients' receipts were from
patients covered by no-fault insurance and approximately 4.8% of HMCA's clients'
receipts were from patients covered by workers compensation programs. For the
fiscal year ended June 30, 2006 approximately 43% of HMCA's clients' receipts
were from patients covered by no-fault insurance and approximately 4.1% of
HMCA's clients' receipts were from patients covered by workers compensation
programs. In the event that changes in these laws alter the fee structures or
methods of providing service, or impose additional or different requirements,
HMCA could be required to modify its business practices and services in ways
that could be more costly to HMCA or in ways that decrease the revenues which
HMCA receives from its clients.
HMCA believes that it and its clients are in compliance with applicable Federal,
State and local laws. HMCA does not believe that such laws will have any
material effect on its business.
EMPLOYEES
As of July 1, 2008, we employed 268 persons on a full-time and part-time basis.
Of such employees, 28 were engaged in marketing and sales, 36 in research and
development, 39 in production, 43 in customer support services, 37 in
administration, including 66 on site at facilities and offices managed by HMCA
and 19 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 locations in Melville,
New York at a current aggregate annual rental rate of $958,687 excluding
utilities, taxes and other related expenses. The term of one of the leases
includes options to renew up through 2008 and the terms of the other leases
extend to 2013. Management believes that these premises are adequate for its
current needs. HMCA leased approximately 16,850 square feet for its headquarters
in Melville, New York but has vacated the premises to consolidate its
headquarters with those of Fonar. HMCA maintains leased office premises for its
clients having an aggregate annual rental rate of approximately $868,000 under
leases having various terms.
ITEM 3. LEGAL PROCEEDINGS
There is no material litigation pending, or to its knowledge, threatened against
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is traded in the Nasdaq SmallCap market under the National
Association of Securities Dealers Automated Quotation System, also referred to
as "NASDAQ", symbol FONR. The following table sets forth the high and low trades
reported in NASDAQ System for the periods shown.
Fiscal Quarter High Low
------------------------------ ----- -----
January - March 2006 21.25 14.25
April - June 2006 20.00 6.50
July - September 2006 15.50 8.25
October - December 2006 12.50 9.50
January - March 2007 8.75 5.00
April - June 2007 7.50 4.01
July - September 2007 10.00 4.20
October - December 2007 8.80 5.18
January - March 2008 5.45 2.38
April - June 2008 4.20 2.21
July - September 15, 2008 2.43 1.35
On September 15, 2008, we had approximately 4,412 stockholders of record of our
Common Stock, 12 stockholders of record of our Class B Common Stock, 4
stockholders of record of our Class C Common Stock and 3,876 stockholders of
record of our Class A Non-voting Preferred Stock.
At the present time, the only class of our securities for which there is a
market is the Common Stock.
In July, 2008 we received a notice from NASDAQ that our common stock would be
delisted due to failure to hold our annual meeting during fiscal 2008. We
appealed and requested a hearing before the Hearing Panel stating that we
planned, subject to their approval to hold a joint two-year meeting on November
17, 2008.
We paid cash dividends in fiscal 1998 and the first three quarters of fiscal
1999 on monies we received from the enforcement of our patents. Except for these
dividends, we have not paid any cash dividends. Except for these dividends, we
expect that we will retain earnings to finance the development and expansion of
our business.
Item 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data has been extracted from our
consolidated financial statements for the five years ended June 30, 2008. This
consolidated selected financial data should be read in conjunction with our
consolidated financial statements and the related notes included in Item 8 of
this form.
As of and For the Periods Ended June 30,
2008 2007 2006 2005 2004
------------- ------------- ------------- ------------- -------------
STATEMENT OF OPERATIONS
Revenues $ 35,569,000 $ 33,212,000 $ 33,076,000 $104,899,000 $ 71,609,000
Cost of revenues $ 24,893,000 $ 26,660,000 $ 26,950,000 $ 67,331,000 $ 44,945,000
Research and
Development
Expenses $ 5,007,000 $ 5,692,000 $ 6,868,000 $ 6,007,000 $ 5,491,000
Net (Loss) Income ($13,508,000) $(25,539,000) $(29,963,000) $ 1,014,000 ( $9,494,000)
Basic and Diluted
Net Income (Loss)
per common share
- continuing
operations $ (2.76) $ (5.29) $ (6.78) $ .23 $ (2.61)
Basic weighted
average number of
shares outstanding 4,897,997 4,830,652 4,416,125 4,063,680 3,641,118
Diluted Weighted
average number of
shares outstanding 4,897,997 4,830,652 4,416,125 4,220,228 3,641,118
BALANCE SHEET DATA
Working capital $(15,965,000) $ (7,566,000) $ 14,237,000 $ 36,224,000 $ 22,593,000
Total Assets $ 35,226,000 $ 41,210,000 $ 57,230,000 $ 76,094,000 $ 77,201,000
Long-term debt
and obligations
under capital
leases (1) $ 1,130,000 $ 1,213,000 $ 1,406,000 $ 1,392,000 $ 6,702,000
Stock holder's
(deficiency) equity($4,245,000) $ 8,898,000 $ 30,419,000 $ 51,869,000 $ 43,154,000
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
INTRODUCTION.
Fonar was formed in 1978 to engage in the business of designing, manufacturing
and selling MRI scanners. In 1997, we formed a wholly-owned subsidiary, Health
Management Corporation of America, also referred to as "HMCA", formerly known as
U.S. Health Management Corporation, in order to expand into the physician and
diagnostic management services business.
Fonar's principal MRI products are its Stand-Up(R)/Upright(R) MRI and Fonar
360(TM) MRI scanners. The Stand-Up(R) MRI allows patients to be scanned for the
first time under weight-bearing conditions. The Company has been aggressively
seeking new sales. The Stand-Up(R) MRI is the only MRI capable of producing
images in the weight bearing state.
At 0.6 Tesla field strength, the Upright(R) MRI and Fonar 360(TM) magnets are
among the highest field open MRI scanners in the industry, offering
non-claustrophobic MRI together with high-field image quality. Fonar's open MRI
scanners were the first high field strength MRI scanners in the industry.
HMCA commenced operations in July, 1997 and generates revenues from providing
comprehensive management services, including development, administration,
accounting, billing and collection services, together with office space, medical
equipment, supplies and non-medical personnel to its clients. Revenues are in
the form of fees which are earned under contracts with MRI facilities and
physical rehabilitation practices. Since April 2003, HMCA has not engaged in the
management of primary care medical practices. Since July 2005, HMCA has engaged
only in the management of MRI facilities, having sold the portion of its
business engaged in the management of physical therapy and rehabilitation
practices.
For the fiscal years ended June 30, 2008, June 30, 2007, 30.8% and 100%,
respectively, of HMCA's revenues were derived from contracts with facilities and
practices owned by Dr. Raymond V. Damadian, the President of Fonar and HMCA and
principal stockholder of Fonar. The agreements with the MRI facilities are for
one-year terms which renew automatically on an annual basis, unless terminated.
The fees for fiscal 2007 were based on the number of procedures performed and
ranged from $275 to $500 per MRI scan. Commencing with fiscal 2008, the MRI
facilities were charged a flat fee, pursuant to new contracts executed in
connection with the sale of the MRI facilities by Dr. Raymond Damadian to Dr.
Robert Diamond at the end of fiscal 2007. The fees will be reviewed and if
appropriate, adjusted on an annual basis by mutual agreement.
Critical Accounting Policies
----------------------------
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States
of America. The preparation of these consolidated financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to investments, intangible assets, income taxes, contingencies and
litigation. We base our estimates on historical experience and on various
assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements. We recognize revenue and related costs of revenue from
sales contracts for our MRI scanners, under the percentage-of-completion method.
Under this method, we recognize revenue and related costs of revenue, as each
sub-assembly is completed. Amounts received in advance of our commencement of
production are recorded as customer advances.
We record a valuation allowance to reduce our deferred tax assets to the amount
that is more likely than not to be realized. As of June 30, 2008, 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 2008 COMPARED TO FISCAL 2007
In fiscal 2008, we experienced a net loss of $13.5 million on revenues of $35.6
million, as compared to a net loss of $25.5 million on revenues of $33.2 million
for fiscal 2007. This represents an increase in revenues of 7.1%. This was due
mostly to increased unrelated party sales and service revenues, which increased
by 2.0% and 10.0% respectively. Related party product sales and management fees
decreased by 100% and 69.0% respectively. In addition, total cost and expenses
decreased by 10.5%. In fiscal 2007 and the beginning of fiscal 2008 we have made
significant cuts to reduce losses and negative cash flow. Our consolidated
operating results improved by $8.6 million to an operating loss of $16.9 million
for fiscal 2008 as compared to an operating loss of $25.5 million for fiscal
2007.
Discussion of Operating Results of Medical Equipment Segment
Fiscal 2008 Compared to Fiscal 2007
------------------------------------------------------------
Revenues attributable to our medical equipment segment increased by 10.6% to
$23.5 million in fiscal 2008 from $21.3 million in fiscal 2007, with product
sales revenues remaining constant at $11.3 million in fiscal 2007 and fiscal
2008, but service revenue increasing by 10.2%, from $10.0 million in fiscal 2007
to $11.0 million in fiscal 2008. This increase in revenues was attributable to
an increase in sales of our Upright(R) MRI to unrelated parties and increased
service revenues, notwithstanding the decrease in related party sales. We
attribute the lower sales volumes in fiscal 2007 and 2008 primarily to a concern
on the part of potential customers about MRI scan reimbursements from medical
insurance, no-fault insurance, worker's compensation and Federal and State
programs, most significantly Medicare and Medicaid. Even in our own management
of MRI facilities by HMCA, we have noticed an increasing resistance to paying
claims by insurers. Also of concern is the Deficit Reduction Act which is
reducing Medicare funding available for MRI imaging.
We anticipate an improvement in our Upright(R) MRI sales because the Upright(R)
MRI is unique in that it permits MRI scans to be performed on patients upright
in the weight-bearing state and in multiple positions that correlate with
symptoms. An important event in our ongoing effort to educate both the medical
community and payors about the benefits, if not necessity, of utilizing
Upright(R) MRI scanning, occurred in fiscal 2007 when we sold an Upright(R) MRI
scanner to the largest orthopedic hospital in the Netherlands, St.
Maartenskliniek. Upon placing the order, the Chairman of Spine Surgery at St.
Maartenskliniek expressed the view that for their hospital to continue to engage
in spine surgery without Fonar's Upright(R) MRI technology, now that it was
available was "unacceptable" and that owning the scanner "was not optional, but
mandatory". He further stated that "[o]nce our active research program has
discovered the benefits of this new Fonar technology for patients, we intend to
publish the results in a lot of peer reviewed scientific journals".
In addition, significant progress is being made in developing the Fonar 360(TM)
MRI scanner so that it can be used in interventional procedures. At the
Oxford-Nuffield site in the United Kingdom, where we installed the first Fonar
360(TM) MRI, Fonar software engineers have completed and installed our 2nd
generation tracking software, which is designed to enable the surgeons to insert
needles into the patient and accurately advance them under direct visual image
guidance to the target tissue, such as a tumor, in order to inject therapeutic
agents directly into the tissue.
The increase in service revenue is a result primarily of our increase scanner
base, as scanners sold in previous years become service customers after the
warranty period expires.
Product sales to unrelated parties increased by 2.0% in fiscal 2008 from $11.1
million in fiscal 2007 to $11.3 million in fiscal 2008. Product sales to related
parties decreased by 100% in fiscal 2008 from $152,000 in fiscal 2007 to $0 in
fiscal 2008.
We believe that one of our principal challenges in achieving greater market
penetration is attributable to the better name recognition and larger sales
forces of our larger competitors such as General Electric, Siemens, Hitachi,
Philips and Toshiba and the ability of some of our competitors to offer
attractive financing terms through affiliates, such as G.E. Capital.
Nevertheless, no other competitor offers a whole body weight bearing MRI scanner
such as the Upright(R) MRI, and the General Electric Medical Systems division of
General Electric acts as a manufacturer's representative for the Stand-Up(R)
MRI.
We believe that our aggregate product sales to unrelated parties of Upright(R)
Scanners shows that we are successfully meeting that challenge.
The operating results for the medical equipment segment improved by $8.1 million
from a loss of $22.2 million in fiscal 2007 to a loss of $14.1 million in fiscal
2008. This improvement is attributable most significantly to an increase in
service revenue and to an increase in our scanner sales.
We recognized revenues of $11.2 million from the sale of our Upright(R) MRI
scanners in fiscal 2008. In fiscal 2007, we recognized revenues of $11.0 million
from the sale of Upright(R) MRI scanners.
Sales of MRI scanners to related parties, consisting of professional
corporations and other entities in which Dr. Damadian or members of his family
have an interest, represented none of our revenues in fiscal 2008, as compared
to 0.5%, or $152,000, of our revenues in fiscal 2006. We believe concerns about
payor reimbursements adversely affected these sales as well as sales to
unrelated parties.
License and royalty revenue in fiscal 2008 increased to $1.2 million as compared
to $0 in fiscal 2007.
Research and development expenses, net of capitalized costs, decreased by 12% to
$5.0 million in fiscal 2008 as compared to $5.7 million in fiscal 2007. Our
expenses for fiscal 2008 represented continued research and development of
Fonar's scanners, Fonar's new hardware and software product, Sympulse(TM) and
new surface coils to be used with the Stand-Up(R) MRI scanner.
Discussion of Operating Results of Physician and Diagnostic Services Management
Segment.
Fiscal 2008 Compared to Fiscal 2007
-------------------------------------------------------------------------------
Revenues attributable to the Company's physician and diagnostic services
management segment, HMCA, increased by 0.8% to $12.0 million in fiscal 2008 from
$11.9 million in fiscal 2007. The increase in revenues reflects a change in
management fees charged from a per procedure charge to a flat fee on 7 of the
MRI centers. This was offset by a reduction of income in the MRI center located
in Orlando, Florida in which HMCA sold its partnership interest in July 2007.
HMCA manages only MRI facilities. Presently, 9 of the 10 MRI facilities managed
by HMCA have Upright(R) MRI scanners and additional upgrades are planned.
Cost of revenues as a percentage of the related revenues for our physician and
diagnostic services management segment decreased from $9.0 million or 75.2% of
related revenues for the year ended June 30, 2007 to $8.6 million, or 71.3% of
related revenue for the year ended June 30, 2008. This resulted from our
inability to benefit from reduced costs per scanner that would have resulted if
there had been a higher volume of sales in fiscal 2008.
Operating results of this segment improved from an operating loss of $3.2
million in fiscal 2007 to operating loss of $2.8 million in fiscal 2008. We
attribute the improvement to a slight increase in revenue along with a decrease
in our cost of revenues.
Discussion of Certain Consolidated Results of Operations
Fiscal 2008 Compared to Fiscal 2007
--------------------------------------------------------
Interest and investment income decreased in 2008 compared to 2007. We recognized
interest income of $728,711 in 2008 as compared to $819,637 in fiscal 2007,
representing an decrease of 11.1%.
Interest expense of $535,322 was recognized in fiscal 2008, as compared to
$279,912 in fiscal 2007, representing an increase of 91.2%.
Notwithstanding that revenue increased by 7.1%, selling, general and
administrative expenses, decreased by 15.7% to $20.4 million in fiscal 2008 from
$24.2 million in fiscal 2007.
Compensatory element of stock issuances also decreased from approximately
$121,000 in fiscal 2007 to $370 in fiscal 2008. This reflected Fonar's decision
not to use its stock bonus plans to pay employees and others, in order to
prevent dilution of its outstanding stock.
The higher provision for bad debt of $2.2 million in fiscal 2008 as compared to
$2.0 million in fiscal 2007, reflected an increase in reserves of certain
indebtedness by our physician and diagnostic services management segment.
Service and repair fees also have steadily increased, as reflected by the
increase in service and repair fees from $2.5 million in fiscal 2003 to $3.2
million in fiscal 2004 to $5.8 million in fiscal 2005 to $8.6 million in fiscal
2006 to $10.0 million in fiscal 2007 and to $11.0 million in fiscal 2008.
Continuing our tradition as the originator of MRI, we remain committed to
maintaining our position as the leading innovator of the industry through
aggressive investing in research and development. In fiscal 2008 we continued
our investment in the development of our new MRI scanners, together with
software and upgrades, with an investment of $5,463,963 in research and
development, $457,372 of which was capitalized, as compared to $6,328,265,
$636,167 of which was capitalized, in fiscal 2007. The research and development
expenditures were approximately 23.2% of revenues attributable to our medical
equipment segment, and 15.4% of total revenues, in 2008 and 29.8% of medical
equipment segment revenues, and 19.1% of total revenues in fiscal 2007. This
represented a 13.7% decrease in research and development expenditures in fiscal
2008 as compared to fiscal 2007.
The physician and diagnostic services management segment, HMCA, revenues
decreased, from $13.4 million in fiscal 2006 to $11.9 in fiscal 2007 and then to
$12.0 million in fiscal 2008. This is primarily attributable to the sale of
HMCA's physical therapy and rehabilitation facility management business, which
had generated revenues of $9.7 million in fiscal 2005.
We have been taking steps to improve HMCA revenues by closing unprofitable
facilities and continuing our program of replacing the MRI scanners at the MRI
facilities we manage with Upright(R) MRI scanners and opening new facilities
equipped with Upright(R) MRI scanners.
Marketing expenditures are likely to increase, as the Company continues its
efforts to promote sales.
In the beginning of fiscal 2006, in July of 2005, HMCA sold the portion of its
business engaged in the management of physical therapy and rehabilitation
facilities to Health Plus Management Services, L.L.C. for a purchase price of
$6.6 million, payable pursuant to a promissory note payable in 120 monthly
installments.
The first twelve installments were interest only and the remaining 108 payments
were to consist of equal installments of principal and interest in the amount of
$76,014 each. The note was secured by a first lien on all of the assets of
Health Plus, including its accounts receivable. The note was subject to
prepayment provisions to the extent Health Plus resells all or part of the
assets and business or utilizes the assets sold as collateral in any debt
financing.
Pursuant to a Modification Agreement dated August 8, 2008, Health Plus made a
prepayment of $2,000,000 on the note and received a discount of $1,000,000 in
return. A new note was executed for the balance of the indebtedness remaining,
in the amount of $2,378,130.25, providing for 60 consecutive equal monthly
payments of principal and interest of $47,089.83 each. The security agreement
and the mandatory prepayment provisions applicable to the original note are also
applicable to the replacement note.
HMCA had recognized revenue from the management of physical therapy and
rehabilitation facilities of approximately $9.7 million during both fiscal 2005
and 2004, but only $648,000 in fiscal 2006 due to the sale of this portion of
HMCA's business in July, 2005. In fiscal 2007 and 2008, HMCA received no revenue
from the physical therapy and rehabilitation business. HMCA recognized a
diminimus loss during the quarter ended September 30, 2005. In addition, HMCA
recorded a one time charge to earnings during the quarter ended September 30,
2005 of $1.6 million related to the termination of the employment contracts of
the two principal individuals involved in the management of the physical therapy
and rehabilitation facilities.
RESULTS OF OPERATIONS. FISCAL 2007 COMPARED TO FISCAL 2006
In fiscal 2007, we experienced net loss of $25.5 million on revenues of $33.2
million, as compared to a net loss of $30.0 million on revenues of $33.1 million
for fiscal 2006. This represented an increase in revenues of 0.4%. This was due
mostly to increased unrelated product sales and service revenues which increased
by 36.1% and 19.8% respectively. Related party product sales and management fees
decreased by 94.9% and 10.7% respectively. In addition, total cost and expenses
decreased by only 6.6%. We were reluctant at the time to make drastic cuts
because we anticipated that our sales results would improve and we wanted to
maintain our manufacturing capacity. Our consolidated operating results improved
by $4.2 million to an operating loss of $25.5 million for fiscal 2007 as
compared to an operating loss of $29.7 million for fiscal 2006.
Discussion of Operating Results of Medical Equipment Segment Fiscal 2007
Compared to Fiscal 2006
--------------------------------------------------------------------------------
Revenues attributable to our medical equipment segment increased by 7.9% to
$21.3 million in fiscal 2007 from $19.7 million in fiscal 2006, reflecting an
increase in product sales revenues of 1.0%, from $11.1 million in fiscal 2006 to
$11.3 million in fiscal 2007 and an increase in service revenue of 16.9%, from
$8.6 million in fiscal 2006 to $10.0 million in fiscal 2007. This decline in
revenues was attributable to a reduction in sales of our Upright(R) MRI. The
increase in service revenue was a result primarily of our increased scanner
base, as scanners sold in previous years became service customers after the
warranty period expired.
Product sales to unrelated parties increased by 36.1% in fiscal 2007 from $8.2
million in fiscal 2006 to $11.1 million in fiscal 2007. Product sales to related
parties decreased by 94.9% in fiscal 2007 from $3.0 million in fiscal 2006 to
$152,000 in fiscal 2007.
The operating results for the medical equipment segment improved by $2.5 million
from a loss of $24.7 million in fiscal 2006 to a loss of $22.2 million in fiscal
2007. This improvement was attributable most significantly to an increase in
service of revenue and an increase in our scanner sales.
We recognized revenues of $11.0 million from the sale of our Upright(R) MRI
scanners in fiscal 2007. In fiscal 2006, we recognized revenues of $10.5 million
from the sale of Upright(R) MRI scanners and the balance of $383,589 from the
sale of our first Fonar 360(TM) MRI Scanner.
Sales of MRI scanners to related parties, consisting of professional
corporations and other entities in which Dr. Damadian or members of his family
have an interest represented approximately 0.5%, or $152,000, of our revenues in
fiscal 2007, as compared to 9.0%, or $3.0 million, of our revenues in fiscal
2006.
We had no license and royalty revenue in fiscal 2007 and fiscal 2006.
Research and development expenses, net of capitalized costs, decreased by 17.1%
to $5.7 million in fiscal 2007 as compared to $6.9 million in fiscal 2006. Our
expenses for fiscal 2007 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 2007 Compared to Fiscal 2006
-------------------------------------------------------------------------------
Revenues attributable to the Company's physician and diagnostic services
management segment, HMCA, decreased by 10.7% to $11.9 million in fiscal 2007
from $13.4 million in fiscal 2006.
The decrease in revenues reflected decreases resulting from sale of HMCA's
physical therapy and rehabilitation facility management business and delayed
collections. Following the sale, HMCA managed only MRI facilities.
Cost of revenues as a percentage of the related revenues for our physician and
diagnostic services management segment increased from $9.4 million or 70.4% of
related revenues for the year ended June 30, 2006 to $9.0 million, or 75.2% of
related revenue for the year ended June 30, 2007. This resulted from our
inability to benefit from reduced costs per scanner that would have resulted if
there had been a higher volume of sales in fiscal 2007.
Operating results of this segment declined from an operating loss of $5.0
million in fiscal 2006 to an operating loss of $3.2 million in fiscal 2007. We
attributed the decline to HMCA's sale of its physical therapy and rehabilitation
facility management business.
Discussion of Certain Consolidated Results of Operations
Fiscal 2007 Compared to Fiscal 2006
--------------------------------------------------------
We recognized interest income of $819,637 in 2007 as compared to $809,691 in
fiscal 2006, representing an increase of 1.2%.
Interest expense of $279,912 was recognized in fiscal 2007 increasing from
$281,903 in fiscal 2006 and representing a increase of 0.7%. The increase was
attributable primarily to new capital lease obligations.
Notwithstanding that revenue decreased by 0.4%, selling, general and
administrative expenses, exclusive of compensatory element of stock issuances,
increased by 0.9% to $24.2 million in fiscal 2007 from $24.0 million in fiscal
2006.
The decrease in compensatory element of stock issuances from approximately $1.9
million in fiscal 2006 to $121,000 in fiscal 2007 reflected the continued but
reduced use of Fonar's stock bonus plans to pay certain highly compensated
employees and others in stock rather than in cash.
The higher provision for bad debt of $2.0 million in fiscal 2007 as compared to
$1.5 million in fiscal 2006, reflected an increase in reserves and write-offs of
certain indebtedness by our physician and diagnostic services management
segment.
Service and repair fees also increased, as reflected by the increase in service
and repair fees from $2.2 million in fiscal 2002 to $2.5 million in fiscal 2003
to $3.2 million in fiscal 2004 to $5.8 million in fiscal 2005 to $8.6 million in
fiscal 2006 and $10.0 million in fiscal 2007.
In fiscal 2007 we continued our investment in the development of our MRI
scanners, together with software and upgrades, with an investment of $6,328,265
in research and development, $636,167 of which was capitalized, as compared to
$7,581,898, $714,253 of which was capitalized, in fiscal 2006. The research and
development expenditures were approximately 29.8% of revenues attributable to
our medical equipment segment, and 19.1% of total revenues, in 2007 and 38.5% of
medical equipment segment revenues, and 22.9% of total revenues in fiscal 2006.
This represented a 17.1% decrease in research and development expenditures in
fiscal 2007 as compared to fiscal 2006.
The physician and diagnostic services management segment, HMCA, revenues
decreased from $13.4 million in fiscal 2006 to $11.9 million in fiscal 2007.
This was primarily attributable to the sale by HMCA of the portion of its
business engaged in the management of physical therapy and rehabilitation
facilities in July of 2005 to Health Plus Management Services, L.L.C.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and marketable securities decreased by 30.6% from $3.4
million at June 30, 2007 to $2.4 million at June 30, 2008.
Marketable securities approximated $1.1 million as of June 30, 2008, as compared
to $2.0 million as of June 30, 2007. At June 30, 2008, we decreased our
investments in U.S. Government obligations from approximately $539,000 at June
30, 2007 to approximately $0, decreased our investments in corporate and
government agency bonds from approximately $1.3 million at June 30, 2007 to
approximately $1.0 million and decreased our investments in certificates of
deposits, notes and equivalents from $96,000 at June 30, 2007 to $0.
Cash used in operating activities for fiscal 2008 approximated $4.7 million.
Cash used in operating activities was attributable substantially to the net loss
of $13.5 million and an increase in customer advances of $4.2 million and an
increase in billings in excess of costs and estimated earnings on uncompleted
contracts of $2.3 million, offset by an increase in accounts and management fee
receivable of $2.9 million.
Cash provided by investing activities for fiscal 2008 approximated $4.6 million.
The principal uses of cash from investing activities were purchases of property
and equipment of $366,000, costs of capitalized software development of $457,000
and costs of patents and copyrights of $230,000. The principal source of cash
provided by investing activities was the proceeds of approximately $4.1 million
from the sale of a consolidated subsidiary.
Cash used in financing activities for fiscal 2008 approximated $82,000. The
principal sources of cash in financing activities were proceeds from the long
term debt of $265,000 and proceeds of $130,000 from repayment of notes
receivable from employee stockholders, offset by the repayment of borrowings and
capital lease obligations of $349,000 and distributions to holders of minority
interests of $128,000.
Total liabilities increased by 23.7% during fiscal 2008, from approximately
$31.8 million at June 30, 2007 to approximately $39.3 million at June 30, 2008.
The increase in total liabilities reflected principally an increase in billings
in excess of costs and estimated earnings on uncompleted contracts of 65.9% from
$3.5 million at June 30, 2007 to $5.8 million at June 30, 2008 and a increase in
customer advances of 27.5% from $10.0 million at June 30, 2007 to $12.8 million
at June 30, 2008, resulting from our increased backlog.
Our contractual obligations and the periods in which they are scheduled to
become due are set forth in the following table:
Contractual Due in Less Due in Due in Due after
Obligation Total than 1 Year 1-3 years 4-5 years 5 years
-------------- ----------- ----------- ----------- ----------- -----------
Long-term debt $ 705,855 $ 173,050 $ - $ - $ 532,805
Capital lease
Obligation $ 423,844 $ 199,673 $ 220,037 $ 4,134 $ -
Operating
leases $ 6,143,282 $ 2,009,654 $ 1,899,953 $ 1,599,159 $ 634,516
----------- ----------- ----------- ----------- -----------
Total cash
Obligations $ 7,272,981 $ 2,382,377 $ 2,119,990 $ 1,603,293 $ 1,167,321
=========== =========== =========== =========== ===========
As at June 30, 2008, our obligations included approximately $2.5 million in
various state sales taxes.
At June 30, 2008, however, we had a working capital deficit of approximately
$16.0 million as compared to a working capital deficit of $7.6 million at June
30, 2007 and a stockholders' deficiency of 44.2 million at June 30, 2008 as
compared to a stockholders' equity of $8.9 million at June 30, 2007. For the
year ended June 30, 2008, we incurred a net loss of $13.5 million, which
included non-cash charges of approximately $5.9 million.
Our principal source of liquidity has been derived from revenues, as well as
cash provided by previous debt and equity financing. In addition we have funded
our cash flow deficit for fiscal 2008 through cash provided by the sale of
marketable securities, other assets and debt financing.
In July 2007, we sold our 50% interest in a consolidated subsidiary and our 20%
interest in a non-consolidated subsidiary, and received proceeds of
approximately $4.8 million.
Effective September 30, 2008, subsequent to the end of fiscal 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 regards
to the asset purchase agreement with Health Plus Management Services, LLC. The
Company received a $2,000,000 payment on the note issued by Health Plus.
Our business plan includes an aggressive program for manufacturing and selling
our Upright(R) MRI scanners. In addition, we are enhancing our revenue by
participating in the physician and diagnostic services management business
through our subsidiary, HMCA and are upgrading the facilities which it manages,
most significantly by the replacement of existing MRI scanners with new
Upright(R) MRI scanners. Presently, of the 10 MRI facilities managed by HMCA, 9
are equipped with Upright(R) MRI scanners.
Our business plan also calls for a continuing emphasis on providing our
customers with enhanced equipment service and maintenance capabilities and
delivering state-of-the-art, innovative and high quality equipment upgrades at
competitive prices. Fees for on-going service and maintenance from our installed
base of scanners were $10.0 million for the year ended June 30, 2007 and $11.0
million for the year ended June 30, 2008.
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, such as we have experienced in fiscal 2007 and
2008, by keeping expenditures at levels which, if necessary, can be supported by
service revenues and HMCA revenues. The effect of these measures will be
reflected for the most part in fiscal 2009 and are for the most part not
reflected in the results for fiscal 2008 and estimates that the annualized
savings related to these cost-cutting measures approximates $5 million. We are
also seeking equity and debt financing and have been engaged in discussions with
several possible sources.
Although sales levels remained weak in fiscal 2008, we are continuing to focus
our efforts on increased advertising and marketing campaigns, and distribution
programs 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 increased
product sales. If we are not successful with our marketing efforts to increase
sales and weak demand continues, 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, 2009. 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 2009.
Capital expenditures for fiscal 2008 approximated $367,000. Capitalized software
costs were $457,000, and capitalized patent costs were $230,000.
Fonar has not committed to making capital expenditures in the 2009 fiscal year
other than its plans to continue research and development expenditures at
current levels. We believe that the above mentioned financial resources,
anticipated cash flows from operations and potential financing sources, will
provide the cash flows needed to achieve the sales, service and production
levels necessary to support our operations.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Fonar's investments in fixed rate instruments. None of the fixed rate
instruments in which we invest extend beyond June 30, 2010. Below is a tabular
presentation of the maturity profile of the fixed rate instruments held by us at
June 30, 2008.
INTEREST RATE SENSITIVITY
PRINCIPAL AMOUNT BY EXPECTED MATURITY
WEIGHTED AVERAGE INTEREST RATE
Investments
in Fixed Rate Weighted Average
Date Instruments Interest Rate
------- ------------- ----------------
6/30/09 $ 300,000 3.84%
6/30/10 $ 800,000 2.56%
-----------
Total: $ 1,100,000
Fair Value
at 6/30/08 $ 1,040,085
All of our revenue, expense and capital purchasing activities are transacted in
United States dollars.
See Note 12 to the consolidated Financial Statements for information on long-
term debt.
Item 8.
FINANCIAL STATEMENTS
FONAR CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No.
-------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED BALANCE SHEETS
At June 30, 2008 and 2007
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Years Ended June 30, 2008, 2007 and 2006
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIENCY) EQUITY
For the Three Years Ended June 30, 2008, 2007 and 2006
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Years Ended June 30, 2008, 2007 and 2006
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, 2008 and 2007, and
the related consolidated statements of operations, stockholders'
(deficiency)/equity and cash flows for each of the three years in the period
ended June 30, 2008. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of FONAR
Corporation and Subsidiaries at June 30, 2008 and 2007, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended June 30, 2008, in conformity with accounting principles generally
accepted in the United States of America.
During each of the three years in the period ended June 30, 2008, a significant
portion of the Company's revenues was from related parties.
/s/ Marcum & Kliegman LLP
Marcum & Kliegman LLP
New York, New York
October 6, 2008
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
------
June 30,
--------------------------
2008 2007
------------ ------------
Current Assets:
Cash and cash equivalents $ 1,325,512 $ 1,469,821
Marketable securities 1,068,168 1,979,309
Accounts receivable - net of allowances for
doubtful accounts of $1,401,028 and $1,306,209
at June 30, 2008 and 2007, respectively 4,688,803 3,527,699
Accounts receivable - related parties - net of
allowances for doubtful accounts of
$619,180 and $646,621 at June 30, 2008 and
2007, respectively 468,791 444,541
Medical receivables - net of allowances for
doubtful accounts of $769,000 and $190,000
at June 30, 2008 and 2007, respectively 1,227,858 2,781,014
Management fee receivable - net of allowances for
doubtful accounts of $3,958,733 and $2,110,306
at June 30, 2008 and 2007, respectively 5,040,523 5,095,280
Management fee receivable - related medical
practices - net of allowances for doubtful
accounts of $2,413,483 and $2,093,180 at
June 30, 2008 and 2007, respectively 1,372,261 1,354,185
Costs and estimated earnings in excess of
billings on uncompleted contracts 6,285 -
Inventories 3,255,915 4,465,924
Current portion of advances and notes to related
medical practices 214,004 215,832
Current portion of note receivable less discount
for below market interest 2,508,306 578,823
Prepaid expenses and other current assets 810,772 1,103,349
------------ ------------
Total Current Assets 21,987,198 23,015,777
Property and Equipment - Net 3,932,533 5,159,085
Advances and Notes to Related Medical Practices -
net of allowances for doubtful accounts of
$264,791 and $364,791 at June 30, 2008
and 2007, respectively 263,363 473,822
Notes Receivable less discount for below market
interest - net of allowance for doubtful
accounts of $65,000 and $0 at June 30, 2008 and
2007, respectively 2,296,560 5,527,845
Other Intangible Assets - Net 4,809,564 5,345,445
Other Assets 1,936,415 1,688,201
------------ ------------
Total Assets $35,225,633 $41,210,175
============ ============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES
-----------
June 30,
--------------------------
2008 2007
------------ ------------
Current Liabilities:
Current portion of long-term debt and capital
leases $ 372,722 $ 257,639
Accounts payable 4,019,993 3,939,797
Other current liabilities 8,316,263 7,755,392
Unearned revenue on service contracts 4,732,061 4,606,867
Unearned revenue on service contracts -
related parties 461,584 460,422
Customer advances 12,804,311 10,039,072
Customer advances - related party 1,472,000 41,566
Billings in excess of costs and estimated
earnings on uncompleted contracts 5,773,286 3,480,689
------------ ------------
Total Current Liabilities 37,952,220 30,581,444
------------ ------------
Long-Term Liabilities:
Due to related medical practices 97,663 92,663
Long-term debt and capital leases, less
Current portion 756,976 955,563
Other liabilities 496,837 150,539
------------ ------------
Total Long-Term Liabilities 1,351,476 1,198,765
------------ ------------
Total Liabilities 39,303,696 31,780,209
------------ ------------
Commitments, Contingencies and Other Matters
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
STOCKHOLDERS' (DEFICIENCY) EQUITY
---------------------------------
June 30,
--------------------------
2008 2007
------------ ------------
Minority Interest $ 166,966 $ 531,938
------------ ------------
Stockholders' (Deficiency) Equity:
Class A non-voting preferred stock - $.0001
par value; authorized - 1,600,000 shares;
issued and outstanding - 313,451 shares
at June 30, 2008 and 2007 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, 2008 and 2007, respectively;
issued - 4,915,918 and 4,885,850 shares
at June 30, 2008 and 2007, respectively;
outstanding - 4,904,275 and 4,874,207
shares at June 30, 2008 and 2007, respectively 490 487
Class B common stock (10 votes per share) -
$.0001 par value; authorized - 800,000
shares; issued and outstanding - 158
shares at June 30, 2008 and 2007 - -
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, 2008 and 2007 38 38
Paid-in capital in excess of par value 172,276,540 172,071,727
Accumulated other comprehensive loss (72,723) (103,604)
Accumulated deficit (175,379,874) (161,871,507)
Notes receivable from employee stockholders (394,141) (523,754)
Treasury stock, at cost - 11,643 shares
of common stock at June 30, 2008 and 2007 (675,390) (675,390)
------------ ------------
Total Stockholders' (Deficiency) Equity (4,245,029) 8,898,028
------------ ------------
Total Liabilities and Stockholders'
(Deficiency) Equity $35,225,633 $41,210,175
============ ============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30,
-----------------------------------------
2008 2007 2006
------------- ------------- -------------
Revenues
Product sales - net $ 11,326,388 $ 11,103,374 $ 8,161,158
Product sales - related parties - net - 152,237 2,983,281
Service and repair fees - net 9,992,413 9,081,043 7,581,674
Service and repair fees - related
parties - net 1,047,918 933,335 981,942
Management and other fees 8,337,000 - 647,999
Management and other fees - related
medical practices - net 3,706,636 11,941,943 12,720,275
License fees and royalties 1,158,478 - -
------------- ------------- -------------
Total Revenues - Net 35,568,833 33,211,932 33,076,329
------------- ------------- -------------
Costs and Expenses
Costs related to product sales 11,143,826 12,267,225 9,132,140
Costs related to product sales - related
parties - 155,618 2,820,472
Costs related to service and repair fees 4,669,508 4,767,790 4,948,870
Costs related to service and repair fees
- related parties 489,698 490,026 640,954
Costs related to management and other fees 5,548,605 - 527,392
Costs related to management and other fees
- related medical practices 3,041,828 8,979,821 8,879,688
Research and development 5,006,591 5,692,098 6,867,645
Selling, general and administrative,
inclusive of compensatory element of stock
issuances of $360, $120,818, and
$1,895,462 for the years ended June 30,
2008, 2007 and 2006, respectively 20,386,748 24,309,803 25,873,719
Provision for bad debts 2,208,820 2,002,122 1,472,635
Termination costs paid with common stock - - 1,600,000
Amortization of management agreements - - 37,300
------------- ------------- -------------
Total Costs and Expenses 52,495,624 58,664,503 62,800,815
------------- ------------- -------------
Loss from Operations (16,926,791) (25,452,571) (29,724,486)
Other Income and (Expenses):
Interest expense (535,322) (279,912) (281,903)
Investment income 694,910 777,628 796,517
Interest income - related parties 33,801 42,009 13,174
Other income - net 129,368 289,929 327,000
Minority interests in income of partnerships ( 219,058) ( 915,950) (1,039,625)
Gain on sale of investment 571,161 - -
Gain on sale of consolidated subsidiary 3,394,975 - -
Loss on note receivable ( 658,351) - -
------------- ------------- -------------
Loss Before (Benefit from) Provision
for Income Taxes (13,515,307) (25,538,867) (29,909,323)
(Benefit from) Provision for Income Taxes (6,940) - 54,034
------------- ------------- -------------
Net Loss $(13,508,367) $(25,538,867) $(29,963,357)
============= ============= =============
Basic and Diluted Loss Per Common Share $(2.76) $(5.29) $(6.78)
Weighted Average Number of Common ======= ======= =======
Shares Outstanding
4,897,997 4,830,652 4,416,125
========= ========= =========
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIENCY) EQUITY
FOR THE YEAR ENDED JUNE 30, 2008
Class A
Non-Voting Common Stock
Preferred --------------------
Stock shares Amount
---------- --------- --------
Balance - June 30, 2007 $ 31 4,874,207 $ 487
Net loss - - -
Other comprehensive loss, net of tax:
Unrealized gains on securities arising
during the year, net of tax - - -
Stock issued to employees under
stock bonus plans - 68 -
Issuance of stock for goods and services - 30,000 3
Payments on notes receivable
from employee stockholders - - -
---------- --------- -------
Balance - June 30, 2008 $ 31 4,904,275 $ 490
========== ========= =======
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIENCY) EQUITY
FOR THE YEAR ENDED JUNE 30, 2008
Paid-in
Class B Class C Capital in
Common Common Excess of
Stock Stock Par Value
------- ------- ------------
Shares
------
Balance - June 30, 2007 158 $ 38 $172,071,727
Net loss - - -
Other comprehensive loss, net of tax:
Unrealized gains on securities arising
During the year, net of tax - - -
Stock issued to employees under stock
bonus plans - - 360
Issuance of stock for goods and services - - 204,453
Payments on notes receivable from
employee stockholders - - -
------- ------- ------------
Balance - June 30, 2008 158 $ 38 $172,276,540
======= ======= ============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIENCY) EQUITY
FOR THE YEAR ENDED JUNE 30, 2008
Notes
Receivable Accumulated
From Other
Treasury Employee Comprehensive
Stock Stockholders Loss
---------- ------------ -------------
Balance - June 30, 2007 $(675,390) $ (523,754) $ (103,604)
Net loss - - -
Other comprehensive loss, net of tax:
Unrealized gains on securities arising
during the year, net of tax - - 30,881
Stock issued to employees under
stock bonus plans - - -
Issuance of stock for goods and services - - -
Payments on notes receivable from
employee stockholders - 129,613 -
---------- ------------ -------------
Balance - June 30, 2008 $(675,390) $ (394,141) $ (72,723)
========== ============ =============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIENCY) EQUITY
FOR THE YEAR ENDED JUNE 30, 2008
Accumulated Comprehensive
Deficit Total Income (Loss)
-------------- ------------ -------------
Balance - June 30, 2007 $(161,871,507) $ 8,898,028 $ -
Net loss (13,508,367) (13,508,367) (13,508,367)
Other comprehensive loss, net of tax:
Unrealized gains on securities
arising during the year,
net of tax - 30,881 30,881
Stock issued to employees under stock
bonus plans - 360 -
Issuance of stock for goods and
services - 204,456 -
Payments on notes receivable from
employee stockholders - 129,613 -
-------------- ------------ -------------
Balance - June 30, 2008 $(175,379,874) $(4,245,029) $(13,477,486)
============== ============= =============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY *
FOR THE YEAR ENDED JUNE 30, 2007
Class A
Non-Voting Common Stock
Preferred --------------------
Stock shares Amount
---------- --------- -------
Balance - June 30, 2006 $ 31 4,588,161 $ 459
Net loss - - -
Other comprehensive gains, net of tax:
Unrealized gains on securities arising
during the year, net of tax - - -
Cash surrender value of life insurance - - -
Exercise of stock options - 3,680 -
Compensatory element of stock options - - -
Stock issued to employees under stock
bonus plans - 5,030 -
Issuance of stock for goods and services - 227,936 23
Issuance of stock for consulting services - 7,000 1
Sale of stock for cash - 43,600 4
Cancel shares from notes receivable - (1,200) -
Payments on notes receivable
from employee stockholders - - -
---------- --------- -------
Balance - June 30, 2007 $ 31 4,874,207 $ 487
========== ========= =======
* On April 17, 2007, the Company effected a one-for twenty-five reverse split of
its issued and outstanding Common Stock, treasury shares of the Common Stock,
the Class B Common Stock, the Class C Common Stock, the Class A Non- Voting
Preferred Stock and the Preferred Stock. The accompanying consolidated financial
statements, notes and other references to share and per share data have been
retroactively restated to reflect the reverse stock splits for all periods
presented.
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2007
Paid-in
Class B Class C Capital in
Common Common Excess of
Stock Stock Par Value
------- ------- -------------
Shares
------
Balance - June 30, 2006 158 $ 38 $168,424,269
Net loss
Other comprehensive gains, net of tax:
Unrealized gains on securities arising
During the year, net of tax - - -
Cash surrender value of life insurance - - 1,234,130
Exercise of stock options - - 49,680
Compensatory element of stock options - - 920
Stock issued to employees under stock
bonus plans - - 41,698
Issuance of stock for goods and services - - 1,912,375
Issuance of stock for consulting services - - 78,199
Sale of stock for cash - - 372,756
Cancel shares from notes receivable - - (42,300)
Payments on notes receivable from
employee stockholders - - -
------- ------- -------------
Balance - June 30, 2007 158 $ 38 $172,071,727
======= ======= =============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2007
Notes
Receivable Accumulated
From Other
Treasury Employee Comprehensive
Stock Stockholders Loss
---------- ------------ -------------
Balance - June 30, 2006 $(675,390) $ (751,890) $ (246,080)
Net loss - - -
Other comprehensive gains, net of tax:
Unrealized gains on securities arising
during the year, net of tax - - 142,476
Cash surrender value of life insurance - - -
Exercise of stock options - - -
Compensatory element of stock options - - -
Stock issued to employees under stock bonus
plans - - -
Issuance of stock for goods and services - - -
Issuance of stock for consulting services - - -
Sale of stock for cash - - -
Cancel shares for notes receivable - 42,300 -
Payments on notes receivable from employee
stockholders - 185,836 -
---------- ------------ -------------
Balance - June 30, 2007 $(675,390) $ (523,754) $ (103,604)
========== ============ =============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2007
Accumulated Comprehensive
Deficit Total Income (Loss)
-------------- ------------ -------------
Balance - June 30, 2006 $(136,332,640) $ 30,418,797 $ -
Net loss (25,538,867) (25,538,867) (25,538,867)
Other comprehensive gains, net of tax:
Unrealized gains on securities arising
during the year, net of tax - 142,476 142,476
Cash surrender value of life insurance - 1,234,130 -
Exercise of stock options - 49,680 -
Compensatory element of stock options - 920 -
Stock issued to employees under stock
bonus plans - 41,698 -
Issuance of stock for goods and services - 1,912,398 -
Issuance of stock for consulting services - 78,200 -
Sale of stock for cash - 372,760 -
Cancel shares from notes receivable - - -
Payments on notes receivable from employee
stockholders - 185,836 -
-------------- ------------ -------------
Balance - June 30, 2007 $(161,871,507) $ 8,898,028 $(25,396,391)
============== ============ =============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2006
Class A
Non-Voting Common Stock
Preferred --------------------
Stock shares Amount
---------- --------- --------
Balance - June 30, 2005 $ 31 4,190,078 $ 419
Net loss - - -
Other comprehensive loss, net of tax:
Unrealized losses on securities arising
during the year, net of tax - - -
Exercise of stock options - 68,193 7
Compensatory element of stock options - - -
Stock issued to employees under stock
bonus plans - 117,202 12
Issuance of stock for goods and services - 190,377 19
Issuance of stock for consulting services - 22,311 2
Payments on notes receivable
from employee stockholders - - -
---------- --------- --------
Balance - June 30, 2006 $ 31 4,588,161 $ 459
========== ========= ========
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2006
Paid-in
Class B Class C Capital in
Common Common Excess of
Stock Stock Par Value
------- ------- -------------
Shares
------
Balance - June 30, 2005 158 $ 38 $159,940,597
Net loss - - -
Other comprehensive loss, net of tax:
Unrealized losses on securities arising
during the year, net of tax - - -
Exercise of stock options - - 1,206,906
Compensatory element of stock options - - 109,936
Stock issued to employees under stock
bonus plans - - 2,894,293
Issuance of stock for goods and services - - 3,781,319
Issuance of stock for consulting services - - 491,218
Payments on notes receivable from employee
stockholders - - -
------- ------- -------------
Balance - June 30, 2006 158 $ 38 $168,424,269
======= ======= ============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2006
Notes
Receivable Accumulated
From Other
Treasury Employee Comprehensive
Stock Stockholders Loss
---------- ------------ -------------
Balance - June 30, 2005 $ (675,390) $ (845,641) $ (182,250)
Net loss - - -
Other comprehensive loss, net of tax:
Unrealized losses on securities arising
during the year, net of tax - - (63,830)
Exercise of stock options - (422,673) -
Compensatory element of stock options - - -
Stock issued to employees under stock
bonus plans - - -
Issuance of stock for goods and services - - -
Issuance of stock for consulting services - - -
Payments on notes receivable from
employee stockholders - 516,424 -
---------- ------------ -------------
Balance - June 30, 2006 $(675,390) $ (751,890) $ (246,080)
========== ============ ============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2006
Accumulated Comprehensive
Deficit Total Income (Loss)
-------------- ------------ -------------
Balance - June 30, 2005 $(106,369,283) $51,868,521 $ -
Net loss (29,963,357) (29,963,357) (29,963,357)
Other comprehensive loss, net of tax:
Unrealized losses on securities arising
during the year, net of tax - (63,830) (63,830)
Exercise of stock options - 784,240 -
Compensatory element of stock options - 109,936 -
Stock issued to employees under stock
bonus plans - 2,894,305 -
Issuance of stock for goods and services - 3,781,338 -
Issuance of stock for consulting services - 491,220 -
Payments on notes receivable from employee
stockholders - 516,424 -
-------------- ------------ -------------
Balance - June 30, 2006 $(136,332,640) $ 30,418,797 $(30,027,187)
============== ============ =============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30,
-----------------------------------------
2008 2007 2006
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(13,508,367) $(25,538,867) $(29,963,357)
Adjustments to reconcile net loss
to net cash used in
operating activities:
Minority interest in income of
partnerships 219,058 915,950 1,039,625
Depreciation and amortization 2,793,592 2,675,831 3,286,865
Loss from sale of physical medicine
management business - - 143,598
Gain on sale of equipment - - (2,839)
Provision for bad debts 2,208,820 2,002,122 1,472,635
Compensatory element of stock
issuances 360 120,819 3,495,462
Stock issued for costs and expenses 204,456 1,912,397 3,781,337
Gain on sale of consolidated
subsidiary (3,394,975) - -
Gain on sale of investment ( 571,161) - -
Loss on note receivable 658,351 - -
(Increase) decrease in operating
assets, net:
Accounts, management fee and
Medical receivable (2,905,437) 2,028,501 659,240
Notes receivable 578,451 71,400 22,000
Costs and estimated earnings
In excess of billings on
Uncompleted contracts (6,285) 2,957,679 7,580,484
Inventories 1,210,009 2,611,135 2,760,731
Principal payments received on
Sales-type lease - 279,028 173,751
Prepaid expenses and other
Current assets 292,577 177,299 504,287
Other assets (251,214) (88,021) 39,716
Advances and notes to related
Parties medical practices 200,528 76,591 36,986
Increase (decrease) in operating
Liabilities, net:
Accounts payable 80,196 ( 946,884) (3,569,204)
Other current liabilities 687,227 1,938,546 (420,720)
Customer advances 4,195,673 4,575,181 3,830,908
Billings in excess of costs and
Estimated earnings on uncompleted
Contracts 2,292,597 364,491 2,661,558
Other liabilities 346,298 (64,432) (55,401)
Due to related medical practices 5,000 - (35,065)
Income taxes payable - (8,088) (3,146)
------------- ------------- -------------
NET CASH USED IN
OPERATING ACTIVITIES (4,664,246) (3,939,322) (2,560,549)
------------- ------------- -------------
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30,
-----------------------------------------
2008 2007 2006
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of marketable securities $ (765,203) $ - $ (300,000)
Sales of marketable securities 1,707,225 3,101,009 4,709,559
Purchases of property and equipment ( 366,574) ( 432,721) (2,440,530)
Costs of capitalized software development (457,372) (636,167) (714,254)
Proceeds from sale of equipment - - 97,466
Cost of patents (229,886) (514,570) (443,431)
Proceeds from sale of investment 571,161 - -
Proceeds from sale of consolidated
subsidiary 4,142,134 - -
NET CASH PROVIDED BY ------------- ------------- -------------
INVESTING ACTIVITIES
4,601,485 1,517,551 908,810
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term Debt
Repayment of borrowings and capital lease
Obligations 265,000 - 555,152
Net proceeds from exercise of stock
Options and warrants (348,504) (192,492) (298,671)
Distributions to holders of minority
Interests - 49,680 784,240
Net proceeds from sale of stock
Repayment of notes receivable from (127,657) (1,080,872) (865,329)
Employee stockholders - 372,760 -
NET CASH (USED IN) PROVIDED BY 129,613 185,836 516,424
FINANCING ACTIVITIES ------------- ------------- -------------
NET DECREASE IN CASH AND CASH ( 81,548) ( 665,088) 691,816
EQUIVALENTS ------------- ------------- -------------
CASH AND CASH EQUIVALENTS - BEGINNING OF ( 144,309) (3,086,859) (959,923)
YEAR
CASH AND CASH EQUIVALENTS - END OF YEAR 1,469,821 4,556,680 5,516,603
------------- ------------- -------------
$ 1,325,512 $ 1,469,821 $ 4,556,680
============= ============= =============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
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, 2008,
HMCA manages 11 diagnostic imaging facilities located in the states of New York,
Georgia and Florida.
Liquidity and Capital Resources
-------------------------------
In September 2008, the Company sold its 92.3% interest (to a related party) in
an entity that provided management services to a scanning center in Bensonhurst,
New York and received cash proceeds of approximately $2.3 million.
In August 2008, the Company signed a modification agreement with regards to the
asset purchase agreement with Health Plus (See Note 23). The Company received a
$2,000,000 payment on the note issued by Health Plus.
In July 2007, the Company sold its 50% interest (to an unrelated third party) in
an entity that provided management services to a diagnostic center in Orlando,
Florida and 20% interest in an unconsolidated entity and received proceeds of
approximately $4.8 million.
At June 30, 2008, the Company had a working capital deficit of $15,965,022 and a
stockholders' deficiency of $4,245,029. For the year ended June 30, 2008, the
Company incurred a net loss of $13,508,367, which included non-cash charges of
approximately $5,866,000. The Company has funded its cash flow deficit for the
year ended June 30, 2008 through cash provided by the sale of marketable
securities, other assets and debt financing. In addition, during June 2008, the
Company implemented a restructuring program, including a reduction of its
workforce, across the board salary reductions, elimination of manufacturing
facilities and restructuring of its diagnostic imaging management service
business. Management estimates that the annualized savings related to these
cost-cutting measures approximates $5,000,000.
Although sales levels remained weak in fiscal 2008, we are continuing to focus
our efforts on increased advertising and marketing campaigns, and distribution
programs 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 increased
product sales. If we are not successful with our marketing efforts to increase
sales and weak demand continues, 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, 2009. 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 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 reduction in operating expenses 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, 2008
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of FONAR Corporation,
its majority and wholly-owned subsidiaries and partnerships. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
----------------
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities in
the consolidated financial statements and accompanying notes. The most
significant estimates relate to accounts receivable allowances, intangible
assets, income taxes, useful lives of property and equipment, contingencies,
revenue recognition and litigation. In addition, healthcare industry reforms and
reimbursement practices will continue to impact the Company's operations and the
determination of contractual and other allowance estimates. Actual results could
differ from those estimates.
Investment in Marketable Securities
-----------------------------------
The Company accounts for its investments using Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS No. 115"). This standard requires that certain debt
and equity securities be adjusted to market value at the end of each accounting
period. Unrealized market value gains and losses are charged to operations if
the securities are traded for short-term profit. Otherwise, such unrealized
gains and losses are charged or credited to 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,
2008 and 2007, all securities covered by SFAS No. 115 were designated as
available for sale. Accordingly, these securities are stated at fair market
value, with unrealized gains and losses reported in comprehensive income (loss).
Realized gains and losses on sales of investments, as determined on a specific
identification basis, are included in investment income in the accompanying
Consolidated Statements of Operations.
Inventories
-----------
Inventories consist of purchased parts, components and supplies, as well as
work-in-process, and are stated at the lower of cost determined on the first-
in, first-out method or market.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and Equipment
----------------------
Property and equipment procured in the normal course of business is stated at
cost. Property and equipment purchased in connection with an acquisition is
stated at its estimated fair value, generally based on an appraisal. Property
and equipment is being depreciated for financial accounting purposes using the
straight-line method over the shorter of their estimated useful lives, generally
five to seven years, or the term of a capital lease, if applicable. Leasehold
improvements are being amortized over the shorter of the useful life or the
remaining lease term. Upon retirement or other disposition of these assets, the
cost and related accumulated depreciation of these assets are removed from the
accounts and the resulting gains or losses are reflected in the results of
operations. Expenditures for maintenance and repairs are charged to operations.
Renewals and betterments are capitalized. Maintenance and repair expenses
totaled approximately $402,000, $423,000 and $434,000 for the years ended June
30, 2008, 2007 and 2006.
Other Intangible Assets
-----------------------
1) Capitalized Software Development Costs
Capitalization of software development costs begins upon the establishment of
technological feasibility. Technological feasibility for the Company's computer
software is generally based upon achievement of a detail program design free of
high risk development issues and the completion of research and development on
the product hardware in which it is to be used. The establishment of
technological feasibility and the ongoing assessment of recoverability of
capitalized computer software development costs require considerable judgment by
management with respect to certain external factors, including, but not limited
to, technological feasibility, anticipated future gross revenue, estimated
economic life and changes in software and hardware technology.
Amortization of capitalized software development costs commences when the
related products become available for general release to customers. Amortization
is provided on a product by product basis. The annual amortization is the
greater of the amount computed using (a) the ratio that current gross revenue
for a product bear to the total of current and anticipated future gross revenue
for that product, or (b) the straight-line method over the remaining estimated
economic life of the product.
The Company periodically performs reviews of the recoverability of such
capitalized software development costs. At the time a determination is made that
capitalized amounts are not recoverable based on the estimated cash flows to be
generated from the applicable software, any remaining capitalized amounts are
written off.
2) Patents and Copyrights
Amortization is calculated on the straight-line basis over a period ranging from
15 to 17 years.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Long-Lived Assets
-----------------
The Company periodically assesses the recoverability of long-lived assets,
including property and equipment and intangibles, when there are indications of
potential impairment, based on estimates of undiscounted future cash flows. The
amount of impairment is calculated by comparing anticipated discounted future
cash flows with the carrying value of the related asset. In performing this
analysis, management considers such factors as current results, trends, and
future prospects, in addition to other economic factors.
Revenue Recognition
-------------------
Revenue on sales contracts for scanners, included in "product sales" in the
accompanying consolidated statements of operations, is recognized under the
percentage-of-completion method. The Company manufactures its scanners under
specific contracts that provide for progress payments. Production and
installation take approximately three to six months. The percentage of
completion is determined by the ratio of costs incurred to date on completed
sub-assemblies to the total estimated cost for each scanner. Contract costs
include purchased parts and components, direct labor and overhead. Revisions in
cost estimates and provisions for estimated losses on uncompleted contracts, if
any, are made in the period in which such losses are determined. The asset,
"Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts",
represents revenues recognized in excess of amounts billed. The liability,
"Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts",
represents amounts billed in excess of revenues recognized.
Revenue on scanner service contracts is recognized on the straight-line method
over the related contract period, usually one year.
Revenue from sales of other items is recognized upon shipment.
Revenue under management and lease contracts is recognized based upon
contractual agreements for management services rendered by the Company and
leases of medical equipment primarily under various long-term agreements with
various medical providers (the "PCs"). Through June 22, 2007, the PCs were
primarily owned by Raymond V. Damadian, M.D., President and Chairman of the
Board of FONAR. Commencing with June 23, 2007, all of the New York based PCs,
consisting of six PC's and eight diagnostic imaging facilities, were acquired by
an unrelated third party. Through June 30, 2007, the Company's agreements with
the PCs stipulate fees for services rendered and equipment leased, are primarily
calculated on activity based efforts at pre-determined rates per unit of
activity. Commencing July 1, 2007, the contractual fees for services rendered to
the New York based PCs were changed to fixed monthly fees per diagnostic imaging
facility ranging from approximately $45,000 to $125,000. All fees are
re-negotiable at the anniversary of the agreements and each year thereafter.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Research and Development Costs
------------------------------
Research and development costs are charged to expense as incurred. The costs of
materials and equipment that are acquired or constructed for research and
development activities, and have alternative future uses (either in research and
development, marketing or production), are classified as property and equipment
and depreciated over their estimated useful lives.
Advertising Costs
-----------------
Advertising costs are expensed as incurred. Advertising expense approximated
$1,293,000, $1,082,000 and $936,000 for the years ended June 30, 2008, 2007 and
2006, respectively.
Shipping Costs
--------------
The Company's shipping and handling costs are included under costs related to
product sales.
Income Taxes
------------
Deferred tax assets and liabilities are determined based on the difference
between the financial statement carrying amounts and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse.
Customer Advances
-----------------
Cash advances and progress payments received on sales orders are reflected as
customer advances until such time as revenue recognition begins.
Minority Interest
-----------------
The Company records adjustments to minority interest for the allocable portion
of income or loss that the minority interest holders are entitled based upon
their portion of certain of the subsidiaries that they own. Distributions to
holders of minority interests are adjusted to the respective minority interest
holders' balance.
The Company suspends allocation of losses to minority interest holders when the
minority interest balance for a particular minority interest holder is reduced
to zero. Any excess loss above the minority interest holders' balance is not
charged to minority interest as the minority interest holders have no obligation
to fund such losses.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock Options and Warrants and Similar Equity Instruments and Earnings (Loss)
Per Share
--------------------------------------------------------------------------------
Basic earnings (loss) per share ("EPS") is computed based on weighted average
shares outstanding and excludes any potential dilution. In accordance with
Emerging Issues Task Force ("EITF 03-6"), "Participating Securities and the
Two-Class Method under FASB Statement No. 128" ("EITF 03-6"), the Company uses
the two-class method to calculate the effect of the Company's participating
convertible securities on basic EPS, which include the Class A Non-voting
Preferred stock, Class B common stock and Class C common stock, and the if-
converted method is used to calculate the effect of participating convertible
securities on diluted EPS. In addition, these participating convertible
securities were not included in the computation of basic EPS for the years ended
June 30, 2008, 2007 and 2006 because the participating securities did not have a
contractual obligation to share in the losses of the Company.
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 as
follows: 267,062, 278,932 and 284,328 as of June 30, 2008, 2007 and 2006,
respectively.
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004),
"Share-Based Payment", SFAS 123R. SFAS 123R requires the compensation cost
relating to stock-based payment transactions be recognized in financial
statements. That cost will be measured based on the fair value of the equity or
liability instruments issued on the grant date of such instruments, and will be
recognized over the period during which an individual is required to provide
service in exchange for the award (typically the vesting period). SFAS 123R
covers a wide range of stock-based compensation arrangements including stock
options, restricted stock plans, performance-based awards, stock appreciation
rights, and employee stock purchase plans. SFAS 123R replaces SFAS 123 and
supersedes APB Opinion 25.
On July 1, 2005, the Company adopted SFAS 123R using the modified prospective
method, in which compensation cost is recognized beginning with the effective
date (a) based on the requirements of SFAS 123R for all share-based payments
granted after the effective date and (b) based on the fair value as measured
under SFAS 123 for all awards granted to employees prior to the effective date
of SFAS 123R that remain unvested on the effective date.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock Options and Warrants and Similar Equity Instruments and Earnings (Loss)
Per Share (Continued)
--------------------------------------------------------------------------------
The adoption of SFAS 123R's fair value method did not have a significant impact
on our result of operations. SFAS 123R also requires the benefits of tax
deductions in excess of recognized compensation cost to be reported as a
financing cash flow, rather than as an operating cash flow as required under
current literature. It is unlikely that the Company will have near term benefits
from tax deductions. This requirement will reduce net operating cash flows and
increase net financing cash flows in periods after adoption. The Company cannot
estimate what those amounts will be in the future because of various factors,
including but not limited to the timing of employee exercises and whether the
Company will be in a taxable position. At this time, there would be not tax
impact related to the prior periods since the Company has a net loss.
For the period ending prior to July 1, 2005, as permitted under SFAS No. 148,
"Accounting for Stock-Based Compensation Transactions and Disclosure", which
amended SFAS No. 123, "Accounting for Stock-Based Compensation", the Company had
elected to continue to follow the intrinsic value method in accounting for its
stock-based employee compensation arrangements as defined by Accounting
Principles Board Opinion ("APB") No. 25 "Accounting for Stock Issued to
Employees", and related interpretations including FASB Interpretation No. 44,
"Accounting for Certain Transactions Involving Stock Compensation", an
interpretation of APB No. 25. No stock-based employee compensation cost was
reflected in operations, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant.
Cash and Cash Equivalents
-------------------------
The Company considers all short-term highly liquid investments with a maturity
of three months or less when purchased to be cash or cash equivalents.
Concentration of Credit Risk
----------------------------
Cash: The Company maintains its cash and cash equivalents with various financial
institutions, which exceed federally insured limits throughout the year. At June
30, 2008, the Company had cash on deposit of approximately $638,000 in excess of
federally insured limits.
Related Parties: Net revenues from related parties accounted for approximately
13%, 39% and 50% of the consolidated net revenues for the years ended June 30,
2008, 2007 and 2006, respectively.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Value of Financial Instruments
-----------------------------------
The financial statements include various estimated fair value information at
June 30, 2008, 2007 and 2006, as required by SFAS No. 107, "Disclosures about
Fair Value of Financial Instruments". Such information, which pertains to the
Company's financial instruments, is based on the requirements set forth in that
Statement and does not purport to represent the aggregate net fair value to the
Company.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and cash equivalents: The carrying amount approximates fair value because
of the short-term maturity of those instruments.
Accounts receivable and accounts payable: The carrying amounts approximate fair
value because of the short maturity of those instruments.
Investments and advances and notes to related medical practices: The carrying
amount approximates fair value because the discounted present value of the cash
flow generated by the related parties approximates the carrying value of the
amounts due to the Company.
Long-term debt and notes payable: The carrying amounts of debt and notes payable
approximate fair value due to the length of the maturities, the interest rates
being tied to market indices and/or due to the interest rates not being
significantly different from the current market rates available to the Company.
All of the Company's financial instruments are held for purposes other than
trading.
Comprehensive Income (Loss)
---------------------------
Comprehensive income (loss) generally includes all changes in equity during a
period, except those resulting from investments by stockholders and
distributions to stockholders.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements
--------------------------------
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments-An Amendment of FASB No. 133 and 140. The purpose of SFAS
statement No. 155 is to simplify the accounting for certain hybrid financial
instruments by permitting fair value re-measurement for any hybrid financial
instrument that contains an embedded derivative that otherwise would require
bifurcation. SFAS No.155 also eliminates the restriction on passive derivative
instruments that a qualifying special-purpose entity may hold. SFAS No. 155 is
effective for all financial instruments acquired or issued after the beginning
of any entity's first fiscal year beginning after September 15, 2006. The
adoption of this standard on July 1, 2007 did not have a material effect on the
Company's consolidated financial statements.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of
Financial Assets, an Amendment of SFAS No. 140. SFAS No. 156 requires separate
recognition of a servicing asset and a servicing liability each time an entity
undertakes an obligation to service a financial asset by entering into a
servicing contract. This statement also requires that servicing assets and
liabilities be initially recorded at fair value and subsequently adjusted to the
fair value at the end of each reporting period. This statement is effective in
fiscal years beginning after September 15, 2006. The adoption of this standard
on July 1, 2007 did not have a material effect on the Company's consolidated
financial statements.
In June 2006, the EITF reached a consensus on Issue No. 06-3 ("EITF 06-3")
"Disclosure Requirements for Taxes Assessed by a Governmental Authority on
Revenue-Producing Transactions". The consensus allows companies to choose
between two acceptable alternatives based on their accounting policies for
transactions in which the company collects taxes on behalf of a governmental
authority, such as sales tax. Under the gross method, taxes collected are
accounted for as a component of sales revenue with an offsetting expense.
Conversely, the net method allows a reduction to sales revenue. If such taxes
are reported gross and are significant, companies should disclose the amount of
those taxes. The guidance should be applied to financial reports through
retrospective application for all periods presented, if amounts are significant,
for interim and annual reporting beginning after December 15, 2006 with early
adoption is permitted. The adoption of this standard on July 1, 2007 did not
have a material effect on the Company's consolidated financial statements.
In September, 2006, the FASB issued SFAS No. 157, "Fair Value Measurements",
which defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. This standard applies under
other accounting pronouncements that require or permit fair value measurements,
but does not require any new fair value measurements. SFAS No. 157 will become
effective for the Company in fiscal 2009. We are currently assessing the impact
of SFAS No. 157; however, we do not believe the adoption of this standard will
have a material effect on the Company's consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
--------------------------------------------
Effective January 1, 2007, the Company adopted the provisions of FASB
Interpretation No. 48, "Accounting of Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109" (FIN 48). FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position 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 carry forward or amount of tax refundable is reduced) for an
unrecognized tax benefit because it represents an enterprise's potential future
obligation to the taxing authority for a tax position that was not recognized as
a result of applying the provisions of FIN 48. In accordance with FIN 48,
interest costs related to unrecognized tax benefits are required to be
calculated (if applicable) and would be classified as "Interest expense, net".
Penalties if incurred would be recognized as a component of "General and
administrative" expenses. The Company files corporate income tax returns in the
United States (federal) and in various state and local jurisdictions. In most
instances, the Company is no longer subject to federal, state and local income
tax examinations by tax authorities for years prior to 2004. The adoption of the
provisions of FIN 48 did not have a material impact on the Company's
consolidated financial position and results of operations. As of June 30, 2008,
no liability for unrecognized tax benefits was required to be recorded. (See
Note 13)
In February 2007, the FASB issued SFAS No. 159, "Fair Value Option for Financial
Assets and Financial Liabilities". SFAS No. 159 provides companies with an
option to report selected financial assets and liabilities at fair value. SFAS
No. 159's objective is to reduce both complexity in accounting for financial
instruments and the volatility in earnings caused by measuring related assets
and liabilities differently. SFAS No. 159 also establishes presentation and
disclosure requirements designed to facilitate comparisons between companies
that choose different measurement attributes for similar types of assets and
liabilities. SFAS No. 159 requires companies to provide additional information
that will help investors and other users of financial statements to more easily
understand the effect of the Company's choice to use fair value on its earnings.
It also requires entities to display the fair value of those assets and
liabilities for which the Company has chosen to use fair value on the face of
the balance sheet. SFAS No. 159 is effective as of the beginning of an entity's
first fiscal year beginning after November 15, 2007. Early adoption is permitted
as of the beginning of the previous fiscal year provided that the entity makes
that choice in the first 120 days of that fiscal year and also elects to apply
the provisions of Statement 157. The Company did not early adopt SFAS No. 159.
We are currently assessing the impact of SFAS No. 159; however we do not believe
the adoption of this standard will have a material effect on our consolidated
financial statements.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
--------------------------------------------
In March 2007, the FASB ratified the Emerging Issues Task Force (EITF) consensus
on EITF Issue No. 06-10. "Accounting for Collateral Assignment Split Dollar Life
Insurance". This EITF indicates that an employer should recognize a liability
for postretirement benefits related to collateral assignment split- dollar life
insurance arrangements. In addition, the EITF provides guidance for the
recognition of an asset related to a collateral assignment split-dollar life
insurance arrangement. The EIFT is effective for fiscal years beginning after
December 15, 2007. The Company will adopt the EITF as required and management
does not expect it to have any impact on the Company's results of operations,
financial condition and liquidity.
In December 2007, the FASB issued SFAS No. 141R, "Business Combinations" ("SFAS
141R"), which replaces SFAS No. 141, "Business Combinations". SFAS 141R
establishes principles and requirements for determining how an enterprise
recognizes and measures the fair value of certain assets and liabilities
acquired in a business combination, including noncontrolling interests,
contingent consideration, and certain acquired contingencies. SFAS 141R also
requires acquisition-related transaction expenses and restructuring costs be
expensed as incurred rather than capitalized as a component of the business
combination. SFAS 141R will be applicable prospectively to business combinations
for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. SFAS 141R would have
an impact on accounting for any businesses acquired after the effective date of
this pronouncement.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51" ("SFAS 160").
SFAS 160 establishes accounting and reporting standards for the noncontrolling
interest in a subsidiary (previously referred to as minority interests). SFAS
160 also requires that a retained noncontrolling interest upon the
deconsolidation of a subsidiary be initially measured at its fair value. Upon
adoption of SFAS 160, the Company will be required to report its noncontrolling
interests as a separate component of stockholders' equity. The Company will also
be required to present net income allocable to the noncontrolling interest and
net income attributable to the stockholders of the Company separately in its
consolidated statements of income. Currently, minority interests are reported as
a liability in the Company's consolidated balance sheets and the related income
attributable to the minority interests is reflected as an expense in arriving at
net loss. SFAS 160 is effective for fiscal years, and interim periods within
those fiscal years, beginning on or after December 15, 2008. SFAS 160 requires
retroactive adoption of the presentation and disclosure requirements for
existing minority interests. All other requirements of SFAS 160 shall be applied
prospectively.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
-------------------------------------------
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities-an amendment of FASB Statement No 133" ("SFAS
No. 161"). SFAS No. 161 changes the disclosure requirements for derivative
instruments and hedging activities. Entities are required to provide enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under SFAS No.
133 and its related interpretations, and (c) how derivative instruments and
related hedged item affect an entity's financial position, financial performance
and cash flows. The guidance in SFAS No. 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008, with early application encouraged. This Statement encourages, but does
not require, comparative disclosures for earlier periods at initial adoption.
The Company doe not believe that the implementation of SFAS No. 161 will have
any impact on the Company's consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles". SFAS No. 162 identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles in the
United States. It is effective 60 days following the SEC's approval of the
Public Company Accounting Oversight Board amendments to AU Section 411, "The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles". The adoption of this statement in not expected to have a material
effect on our consolidated financial statements.
In May 2008, the FASB issued SFAS No. 163, "Accounting for Financial Guarantee
Insurance Contracts - An Interpretation of FASB Statement No. 60". SFAS No. 163
requires that an insurance enterprise recognize a claim liability prior to an
event of default when there is evidence that credit deterioration has occurred
in an insured financial obligation. It also clarifies how Statement 60 applies
to financial guarantee insurance contracts, including the recognition and
measurement to be used to account for premium revenue and claim liabilities, and
requires expanded disclosures about financial guarantee insurance contracts. It
is effective for financial statements issued for fiscal years beginning after
December 15, 2008, except for some disclosures about the insurance enterprise's
risk-management activities. SFAS No. 163 requires that disclosures about the
risk-management activities of the insurance enterprise be effective for the
first period beginning after issuance. Except for those disclosures, earlier
application is not permitted. The adoption of the statement is not expected to
have a material effect on our consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investment At Cost
------------------
The Company had a 20% equity interest in an unconsolidated entity. The income on
this investment is included under other income. This equity interest was sold to
an unrelated third party on July 31, 2007 (See Note 24).
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 - MANAGEMENT AGREEMENTS
In connection with two acquisitions completed in June of 1997 and August of
1998, a portion of the purchase price was allocated to various long-term
management agreements. These management agreements were sold on July 28, 2005
(see Note 23). Amortization of management agreements for the years ended June
30, 2008, 2007 and 2006 was $0, $0 and $37,300, respectively.
On May 23, 2005, HMCA and its subsidiary Dynamic Management Services, LLC
("Dynamic") terminated their management agreements with three related physical
medicine practices, under which HMCA and Dynamic were managing six physical
medicine facilities. Commensurate with this termination, HMCA and Dynamic
entered into new management agreements with four unrelated medical practices to
manage five of the same physical medicine facilities. Pursuant to the
Termination and Replacement Agreements, the related medical practices assigned
to HMCA and Dynamic medical receivables valued at $11,775,000 in consideration
of management fees outstanding of $7,669,993 and termination fees of $4,105,007.
The balance of the medical receivables as of June 30, 2008 is $1,227,858. The
$4,105,007 was accounted for as a recovery of the capitalized management
agreements.
On July 28, 2005, the Replacement Management Agreements, along with certain
related assets, were sold (see Note 23).
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
NOTE 4 - MARKETABLE SECURITIES
The following is a summary of marketable securities at June 30, 2008 and 2007:
June 30, 2008
-----------------------------------------
Unrealized Fair Market
Cost Loss Value
----------- ----------- -----------
Corporate and government agency bonds $ 1,100,000 $ ( 59,915) $ 1,040,085
Equities - other 40,891 (12,808) 28,083
----------- ----------- -----------
$ 1,140,891 $ ( 72,723) $ 1,068,168
=========== =========== ===========
June 30, 2007
-----------------------------------------
Unrealized Fair Market
Cost Loss Value
----------- ----------- -----------
Certificate of deposits $ 100,000 $ ( 4,035) $ 95,965
U.S. Government Obligations 548,062 ( 8,610) 539,452
Corporate and government agency bonds 1,400,000 ( 90,496) 1,309,504
Equities - other 34,851 ( 463) 34,388
----------- ----------- -----------
$ 2,082,913 $ (103,604) $ 1,979,309
=========== =========== ===========
All debt securities are due within two years. At June 30, 2008, the amount of
cost due within one year was $300,000.
NOTE 5 - MANAGEMENT FEE RECEIVABLE AND ACCOUNTS RECEIVABLE
The Company's customers are concentrated in the healthcare industry.
Management Fee Receivable
-------------------------
The Company's receivable from the related and non-related professional
corporations ("P.C.s") substantially consists of fees outstanding under
management agreements. Payment of the outstanding fees is dependent on
collection by the P.C.s of fees from third party medical reimbursement
organizations, principally insurance companies and health management
organizations.
As of June 22, 2007, an unrelated third party purchased the stock of the
professional corporations owning the eight New York sites managed by the
Company, previously owned by Dr. Raymond V. Damadian, the President, Chairman
of the Board and principal stockholder of Fonar. In connection with the sale,
new management agreements were substituted for the existing management
agreements, providing, however, for the same management services. The fees in
fiscal 2008, however, are currently fixed monthly fees in amounts ranging from
$45,000 to $125,000 per month. Dr. Damadian still owns the four MRI facilities
in Georgia and Florida managed by the Company. No MRI facilities or other
medical facilities are owned by the Company.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
NOTE 5 - MANAGEMENT FEE RECEIVABLE AND ACCOUNTS RECEIVABLE (Continued)
Management Fee Receivable (Continued)
-------------------------------------
Collection by the Company of its management fee receivable may be impaired by
the uncollectibility of the PC's medical fees from third party payors,
particularly insurance carriers covering automobile no-fault and workers
compensation claims due to longer payment cycles and rigorous informational
requirements and certain other disallowed claims. Approximately 44%, 38% and
47%, respectively, of the PC's 2008, 2007 and 2006 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.
On February 8, 2006, the Deficit Reduction Act of 2005 ("DRA") was signed into
law by President George W. Bush. The DRA would result in caps on Medicare and
Medicaid payment rates for most imaging services, including MRI and CT,
furnished in physicians' offices and other non-hospital based settings. Under
the cap, payments for these imaging services could not exceed the hospital
outpatient payment rates for those services. This change applied to services
furnished by the P.C.'s on or after January 1, 2007. Although the professional
corporations managed by the Company bill for scans on a "global basis", which
means a single fee per scan, the limitation is applicable only to the technical
component of the services, which is the payment or portion of the payment
attributable to the non-professional services. If the fee for the technical
component of the service (without including geographic adjustments) exceeds the
hospital outpatient payment amount for the service (also without including
geographic adjustments), under the Physician Fee Schedule, then the payment
would be limited to the Physician Fee Schedule rate.
Currently, a statute in the State of Florida requires all drivers, licensed in
the State of Florida, to carry a $10,000 no-fault insurance policy covering
personal injury protection benefits. This statute expired in October 2007 but
will be in effect again in a slightly revised form on January 1, 2008.
Management does not believe that the expiration of this statute will have a
material impact on the Company's consolidated financial position or results of
consolidated operations in the future.
While the Company has prepared certain estimates of the impact of the above
discussed changes and possible changes, it is not possible to fully quantify
their impact on its business. There can be no assurance that the impact of these
changes will not be greater than estimated or that any future health care
legislation or reimbursement changes will not adversely affect the Company's
business.
Net revenues from management and other fees charged to the related PC's
accounted for approximately 10%, 36% and 38%, of the consolidated net revenues
for the years ended June 30, 2008, 2007 and 2006, respectively.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
NOTE 5 - MANAGEMENT FEE RECEIVABLE AND ACCOUNTS RECEIVABLE (Continued)
Management Fee Receivable (Continued)
-------------------------------------
HMCA entered into a management agreement in September 2007 with Integrity
Healthcare Management Inc ("Integrity"). Under the terms of the agreement,
Integrity provided the billings and collections for HMCA's facilities as well as
assist in the management of the facilities. Integrity was to receive as
compensation 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 original term of the agreement was one year with an automatic
year to year renewal, but may be terminated by either party without cause at the
end of any year. During June 2008, HMCA terminated the agreement and no
management fees were earned by Integrity. Integrity is a subsidiary of Health
Diagnostics, LLC. The director of Health Diagnostics, LLC, Timothy Damadian, is
a son of the President and Chief Executive Officer of Fonar, Dr. Raymond
Damadian. Commencing with June 2008, however, the Company hired Health
Diagnostics, LLC, the parent company of Integrity, to perform all billing and
collection procedures on our behalf. The Company has agreed to pay 6% of all
adjusted deposits for these services.
Unaudited Financial Information of Unconsolidated Managed Medical Practices
---------------------------------------------------------------------------
Audited financial information related to the unconsolidated twelve diagnostic
imaging facilities owned by PC's and managed by the Company is not available.
Substantially all of these medical practices' books and records are maintained
on a cash basis, their assets are depreciated on an accelerated tax basis and
have a December 31 year end.
Summarized unaudited income statement data for the years ended December 31, 2007
and 2006 related to the unconsolidated medical practices managed by the Company
are as follows:
(000's omitted)
2007 2006
--------- ---------
Patient Revenue - Net $ 16,490 $ 18,244
========= =========
(Loss) Income from
Operations (Income Tax
- Cash Basis) $ (385) $ 496
========= =========
Net Income (Loss)
(Income Tax - Cash Basis) $ 131 $ (312)
========= =========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
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. Bad debt expense has been within management's
expectations and, generally, the Company does not require collateral or other
security to support accounts receivable.
NOTE 6 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND CUSTOMER
ADVANCES
1) Information relating to uncompleted contracts as of June 30, 2008 and 2007 is
as follows:
As of June 30,
---------------------------
2008 2007
------------ ------------
Costs incurred on uncompleted
Contracts $ 4,031,388 $ 2,136,262
Estimated earnings 1,297,111 938,549
------------ ------------
5,328,499 3,074,811
Less: Billings to date 11,095,500 6,555,500
------------ ------------
$(5,767,001) $(3,480,689)
============ ============
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
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,
----------------------------
2008 2007
------------ ------------
Costs and estimated earnings
in excess of billings on
uncompleted contracts $ 6,285 $ -
Less: Billings in excess
of costs and estimated
earnings on uncompleted
contracts 5,773,286 3,480,689
Less: Billings in excess of
costs and estimated earnings
on uncompleted contracts -
related party - -
------------ ------------
$(5,767,001) $(3,480,689)
============ ============
2) Customer advances consist of the following:
As of June 30, 2008
-------------------------------------
Related
Total Parties Other
----------- ----------- -----------
Total advances $25,371,811 $ 1,472,000 $23,899,811
Less: Advances on contracts
under construction 11,095,500 - 11,095,500
----------- ----------- -----------
$14,276,311 $ 1,472,000 $12,804,311
=========== =========== ===========
2) Customer advances consist of the following (continued):
As of June 30, 2007
-----------------------------------------
Related
Total Parties Other
------------ ------------ -------------
Total advances $16,636,138 $ 41,566 $16,594,572
Less: Advances on contracts
under construction 6,555,500 - 6,555,500
------------ ------------ -------------
$10,080,638 $ 41,566 $10,039,072
============ ============ =============
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
NOTE 7 - INVENTORIES
Inventories included in the accompanying consolidated balance sheets consist of:
As of June 30,
------------------------
2008 2007
----------- -----------
Purchased parts, components and supplies $ 1,847,381 $ 3,284,569
Work-in-process 1,408,534 1,181,355
----------- -----------
$ 3,255,915 $ 4,465,924
=========== ===========
NOTE 8 - PROPERTY AND EQUIPMENT
Property and equipment, at cost, less accumulated depreciation and amortization,
at June 30, 2008 and 2007, is comprised of:
As of June 30,
---------------------------
2008 2007
------------ ------------
Diagnostic equipment under capital
leases $ 780,150 $ 780,150
Diagnostic equipment 2,783,397 2,816,325
Research, development and
demonstration equipment 9,605,961 9,368,963
Machinery and equipment 3,582,539 3,582,539
Furniture and fixtures 2,164,373 2,155,818
Equipment under capital leases 1,504,123 1,504,123
Leasehold improvements 5,201,350 5,453,829
Building 939,614 939,614
------------ ------------
26,561,507 26,601,361
Less: Accumulated depreciation
and amortization 22,628,974 21,442,276
------------ ------------
$3,932,533 $5,159,085
============ ============
Depreciation and amortization of property and equipment for the years ended June
30, 2008, 2007 and 2006 was $1,570,453, $1,941,056 and $2,518,116, respectively.
Equipment under capital leases has a net book value of $295,073 and $484,889 at
June 30, 2008 and 2007, respectively.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
NOTE 9 - OTHER INTANGIBLE ASSETS
Other intangible assets, net of accumulated amortization, at June 30, 2008 and
2007 are comprised of:
As of June 30,
------------------------
2008 2007
---------- ----------
Capitalized software development Costs $5,606,350 $5,148,979
Patents and copyrights 3,885,919 4,093,673
---------- ----------
9,492,269 9,242,652
Less: Accumulated amortization 4,682,705 3,897,207
---------- ----------
$4,809,564 $5,345,445
========== ==========
Information related to the above intangible assets for the years ended June 30,
2008, 2007 and 2006 is as follows:
2008 2007 2006
----------- ----------- -----------
Balance - Beginning of Year $5,345,445 $4,929,483 $4,503,247
Amounts capitalized 687,258 1,150,737 1,157,685
Amortization (1,223,139) (734,775) (731,449)
----------- ----------- -----------
Balance - End of Year $4,809,564 $5,345,445 $4,929,483
=========== =========== ===========
Amortization of patents and copyrights for the years ended June 30, 2008, 2007
and 2006 amounted to $592,059, $124,015 and $110,493, respectively.
Amortization of capitalized software development costs for the years ended June
30, 2008, 2007 and 2006 was $631,080, $610,760 and $620,956, respectively.
The estimated amortization of patents and copyrights and capitalized software
development costs for the five years ending June 30, 2013 is as follows:
Capitalized
Software
For the Years Patents and Development
Ending June 30, Total Copyrights Costs
--------------- ---------- ----------- -----------
2009 $ 699,816 $ 158,304 $ 541,512
2010 627,319 139,816 487,503
2011 583,910 145,246 438,664
2012 512,679 156,908 355,771
2013 446,744 164,975 281,769
Thereafter 1,939,096 1,818,772 120,324
---------- ---------- ----------
$4,809,564 $2,584,021 $2,225,543
========== ========== ==========
The weighted average am ortization period for other intangible assets is 9.1
years and has no residual value.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
NOTE 10 - NOTES RECEIVABLE
Notes receivable as of June 30, 2008 and 2007 consist of the following:
June 30,2008 June 30, 2007
------------ -------------
Note Receivable - Sale of
assets (Note 23 & 25) $ 4,484,674 $ 6,105,662
Note Receivable - (a) 65,000 65,000
Note Receivable - (b) 334,276 375,000
Note Receivable - Other - 5,000
--------- ----------
Total Notes Receivable 4,883,950 6,550,662
Discount of note receivable
(Note 23 & 25) ( 14,084) ( 443,994)
Allowance ( 65,000) -
---------- -----------
Net Notes Receivable $ 4,804,866 $ 6,106,668
========== ===========
Current Portion $ 2,508,306 $ 578,823
Long-Term Portion $ 2,296,560 $ 5,527,845
a) The note receivable represents a note due from a customer for the purchase of
a system. The note is payable over two years. The balance of this note
receivable is $65,000 as of June 30, 2008 and 2007.
b) The 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.
NOTE 11 - CAPITAL STOCK
Common Stock
------------
Cash dividends payable on the common stock shall, in all cases, be on a per
share basis, one hundred twenty percent (120%) of the cash dividend payable on
shares of Class B common stock and three hundred sixty percent (360%) of the
cash dividend payable on a share of Class C common stock.
On April 17, 2007, the Company amended its certificate of incorporation
decreasing the number of authorized shares of Common Stock from 150,000,000 to
30,000,000, Class B Common Stock from 4,000,000 to 800,000, Class C Common Stock
from 10,000,000 to 2,000,000, Class A Non-voting Preferred Stock from 8,000,000
to 1,600,000 and Preferred stock from 10,000,000 to 2,000,000.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
NOTE 11 - CAPITAL STOCK (Continued)
Class B Common Stock
--------------------
Class B common stock is convertible into shares of common stock on a one-for-
one basis. Class B common stock has 10 votes per share. There were 158 of such
shares outstanding at June 30, 2008 and 2007.
Class C Common Stock
--------------------
On April 3, 1995, the stockholders ratified a proposal creating a new Class C
common stock and authorized the exchange offering of three shares of Class C
common stock for each share of the Company's outstanding Class B common stock.
The Class C common stock has 25 votes per share, as compared to 10 votes per
share for the Class B common stock and one vote per share for the common stock.
The Class C common stock was offered on a three-for-one basis to the holders of
the Class B common stock. Although having greater voting power, each share of
Class C common stock has only one-third of the rights of a share of Class B
common stock to dividends and distributions. Class C common stock is convertible
into shares of common stock on a three-for-one basis.
Class A Non-Voting Preferred Stock
----------------------------------
On April 3, 1995, the stockholders ratified a proposal consisting of the
creation of a new class of Class A non-voting preferred stock with special
dividend rights and the declaration of a stock dividend on the Company's common
stock consisting of one share of Class A non-voting preferred stock for every
five shares of common stock. The stock dividend was payable to holders of common
stock on October 20, 1995. Class A non-voting preferred stock issued pursuant to
such stock dividend approximates 313,000 shares.
The Class A non-voting preferred stock is entitled to a special dividend equal
to 3-1/4% of first $10 million, 4-1/2% of next $20 million and 5-1/2% on amounts
in excess of $30 million of the amount of any cash awards or settlements
received by the Company in connection with the enforcement of five of the
Company's patents in its patent lawsuits, less the revised special dividend
payable on the common stock with respect to one of the Company's patents.
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).
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
NOTE 11 - CAPITAL STOCK (Continued)
Options
-------
The Company has stock option plans, which provide for the awarding of incentive
and non-qualified stock options to employees, directors and consultants who may
contribute to the success of the Company. The options granted vest either
immediately or ratably over a period of time from the date of grant, typically
three or four years, at a price determined by the Board of Directors or a
committee of the Board of Directors, generally the fair value of the Company's
common stock at the date of grant. The options must be exercised within ten
years from the date of grant.
FONAR's 1993 Incentive Stock Option Plan (the "FONAR 1993 Plan"), adopted on
March 26, 1993, was intended to qualify as an incentive stock option plan under
Section 422A of the Internal Revenue Code of 1954, as amended. The FONAR 1993
Plan permitted the issuance of stock options covering an aggregate of 60,000
shares of common stock of FONAR. The FONAR 1993 Plan terminated on March 25,
2003. No options to purchase shares of common stock remained available for grant
under the FONAR 1993 Plan at that time. During the year ended June 30, 2008,
2,360 options expired, therefore, there are no options that were issued under
the FONAR 1993 Plan that remain outstanding.
FONAR's 1997 Nonstatutory Stock Option Plan, adopted on May 9, 1997, permits the
issuance of stock options covering an aggregate of 200,000 shares of common
stock of FONAR. The options may be issued at such prices and upon such terms and
conditions as are determined by FONAR. The 1997 Plan terminated on May 8, 2007.
During the year ended June 30, 2008, 6,012 options were forfeited, therefore of
the options granted under this plan 78,166 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, 2008, 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, 2008, 3,497 options were forfeited, therefore 19,233
shares remain outstanding.
FONAR's 2005 Incentive Stock Option Plan (the "FONAR 2005 Plan"), adopted on
February 16, 2005, is intended to qualify as an incentive stock option plan
under Section 422A of the Internal Revenue Code of 1954, as amended. The FONAR
2005 Plan permits the issuance of stock options covering an aggregate of 80,000
shares of common stock of FONAR. The options have an exercise price equal to the
fair market value of the underlying stock on the date the option is granted, are
non-transferable, are exercisable for a period not exceeding ten years, and
expire upon the voluntary termination of employment. The FONAR 2005 Plan will
terminate on February 14, 2015. As of June 30, 2008, 80,000 shares of common
stock of FONAR were available for future grant under this Plan.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
NOTE 11 - CAPITAL STOCK (Continued)
Options (Continued)
-------
Stock option activity and weighted average exercise prices under these plans and
grants for the years ended June 30, 2008, 2007 and 2006 were as follows:
Weighted
Average Aggregate
Number of Exercise Intrinsic
Options Price Value
---------- --------- --------
Outstanding, June 30, 2005 113,426 30.50 -
Granted 71,633 17.75 -
Exercised ( 68,193) 17.75 -
Forfeited ( 2,200) 28.50 -
---------- ---------
Outstanding, June 30, 2006 114,666 30.00 -
Granted 240 13.50 -
Exercised ( 3,680) 13.50 -
Forfeited ( 1,956) 28.44 -
---------- ---------
Outstanding, June 30, 2007 109,270 30.55 -
Granted - - -
Exercised - - -
Forfeited / Expired ( 11,869) 29.70 -
---------- ---------
Outstanding, June 30, 2008 97,401 30.66 -
========== =========
Exercisable at:
June 30, 2006 114,666 $30.00
June 30, 2007 109,270 $30.55
June 30, 2008 97,401 $30.66
During the year ended June 30, 2007, 240 options were granted and exercised by a
consultant. The compensatory element of the options granted was $920. During the
year ended June 30, 2006, 71,633 options were granted, of which, 2,000 were
granted to an employee and 69,633 were granted to consultants. The compensatory
element of the options granted was $109,936. During the year ended June 30,
2006, 68,193 of the options granted in 2006 were exercised. The fair value of
the options granted in 2007 and 2006 to the consultants was calculated under the
Black Scholes pricing method factoring in the short-term exercise period. The
value of the employee options granted during the year ended June 30, 2006 was
determined to be deminimus, as calculated using the Black Scholes pricing
method. The calculation was based on an expected life of three years, interest
rate of 4% and a 34% volatility.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
NOTE 11 - CAPITAL STOCK (Continued)
Options (Continued)
-------
The range of exercise prices for options outstanding as of June 30, 2008 was as
follows:
Weighted
Average
Number of Remaining
Options Contractual
Range of Exercise Price Outstanding Life in Years
----------------------- ----------- -------------
$18.75 - $28.13 69,105 2.8
$29.00 - $42.18 20,479 3.8
$46.88 7,817 3.1
-----------
97,401
===========
On March 10, 1997, HMCA adopted the 1997 Incentive Stock Option Plan, pursuant
to which HMCA authorized the issuance of up to 2,000,000 shares of the common
stock of HMCA. Options to purchase 1,600,000 shares at an option price of $0.10
per share were granted on March 10, 1997. As of June 30, 2008, there were no
shares of HMCA common stock available for future grant under this plan.
On December 16, 1998, HMCA adopted the 1998 Non-Statutory Stock Option Plan,
pursuant to which HMCA authorized the issuance of up to 500,000 shares of the
common stock of HMCA. Options to purchase 400,000 shares at an option price of
$1.00 per share were granted on December 16, 1998. During the year ended June
30, 2003, the Company issued 45,000 shares of FONAR common stock at a value of
$1,226,251 to a related party in exchange for the options outstanding under the
HMCA 1997 Incentive and 1998 Non-Statutory Stock Option Plans. As of June 30,
2008, 100,000 shares of HMCA common stock were available for future grant under
this plan.
On December 16, 1998, HMCA adopted the 1998 Incentive Stock Option Plan,
pursuant to which HMCA authorized the issuance of up to 2,000,000 shares of the
common stock of HMCA. Options to purchase 670,000 shares at an option price of
$1.00 per share were granted on December 16, 1998. 470,000 of the options
granted will not become exercisable unless and until such time as HMCA
successfully completes a public offering of its securities, and 200,000 of the
options will not become exercisable until one year thereafter. The options will
expire on December 15, 2008. No options have vested as of June 30, 2008. As of
June 30, 2008, options to purchase 1,330,000 shares of HMCA common stock were
available for future grant under this plan.
Stock option share activity and weighted average exercise prices under the HMCA
plans and grants for the three years ended June 30, 2008, 2007 and 2006 were as
follows:
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
NOTE 11 - CAPITAL STOCK (Continued)
Options (Continued)
--------
Weighted
Average Aggregate
Number of Exercise Intrinsic
Options Price Value
--------- --------- ---------
Outstanding, June 30, 2006 660,000 $1.00 -
Forfeited - -
---------
Outstanding, June 30, 2007 660,000 $1.00 -
Forfeited - -
---------
Outstanding, June 30, 2008 660,000 $1.00 -
=========
Exercisable at:
June 30, 2006 -
June 30, 2007 -
June 30, 2008 -
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,
2008, 69,932 shares of common stock of FONAR were available for future grant
under this plan.
Warrants
--------
As of June 30, 2008, 42,000 warrants remain outstanding, which expire on May 24,
2009. The exercise price is $19.75. The holder of the warrants has anti-
dilution rights which provide for proportionate adjustments of the exercise
price and number of underlying shares in the event of stock splits, stock
dividends or reverse stock splits and sales of the Company's common stock below
the warrant exercise price.
Reverse Stock Split
-------------------
On April 17, 2007, the Company effected a one-for-twenty-five reverse split of
its issued and outstanding Common Stock, treasury shares of the Common Stock,
the Class B Common Stock, the Class C Common Stock, the Class A Non-Voting
Preferred Stock and the Preferred Stock. The accompanying consolidated financial
statements, notes and other references to share and per share data have been
retroactively restated to reflect the reverse stock splits for all periods
presented.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
NOTE 12 - LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASES
Long-term debt, notes payable and capital leases consist of the following:
June 30,
-------------------------
2008 2007
----------- -----------
Capital lease requiring monthly payments of $13,623,
including interest at a rate of 10.51% per annum
through July 2010. The loan is collateralized by the
related equipment. $ 315,545 $ 428,954
Capital lease requiring monthly payments of $2,997,
including interest at a rate of 8.36% per annum
through October 2008. The loan is collateralized by
the related equipment. 11,704 47,572
Note payable requiring monthly payments of interest
at a rate of 7% until May 2009 followed by monthly
payments of $3,908 through May 2026. A final payment
of $532,805 will be due on May 29, 2026. The loan is
collateralized by the related building. 532,805 545,237
Other (including capital leases for property and
equipment). 269,644 191,439
------------ -----------
1,129,698 1,213,202
Less: Current portion 372,722 257,639
------------ -----------
$ 756,976 $ 955,563
============ ===========
The maturities of long-term debt over the next four years are as follows:
Years Ending
June 30,
------------
2009 $ 372,722
2010 183,450
2011 36,587
2012 4,134
Thereafter 532,805
----------
$1,129,698
==========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
NOTE 13 - INCOME TAXES
Components of the current (benefit from) provision for income taxes are as
follows:
Years Ended June 30,
----------------------------------
2008 2007 2006
---------- ---------- ----------
Current:
Federal $ - $ - $ 33,546
State ( 6,940) - 20,488
---------- ---------- ----------
$ ( 6,940) $ - $ 54,034
========== ========== ==========
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,
----------------------------------
2008 2007 2006
---------- ---------- ----------
Taxes at federal statutory rate (34.0)% (34.0)% (34.0)%
State and local income taxes
(benefit), net of federal benefit 0.0 0.0 0.2
Permanent differences 0.9 2.0 1.7
Increase in the valuation allowance 33.1 32.0 32.3
---------- ---------- ----------
Effective income tax rate 0.0% 0.0% 0.2%
========== ========== ==========
As of June 30, 2008, the Company has net operating loss ("NOL") carryforwards of
approximately $166,295,000 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 $ 4,848,000
2013 845,000
2019 15,801,000
2020 18,718,000
2021 19,657,000
2022 19,667,000
2023 16,114,000
2024 9,257,000
2025 44,000
2026 27,001,000
2027 22,698,000
2028 11,645,000
------------
$166,295,000
============
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
NOTE 13 - INCOME TAXES (Continued)
The Company has, for federal income tax purposes, research and development tax
credit carryforwards aggregating $3,870,239, 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 218,736
----------
$3,870,239
==========
In addition, for New York State income tax purposes, the Company has tax credit
carryforwards, aggregating approximately $1,100,000, which are accounted for
under the flow-through method. The tax credit carryforwards expire during the
years ending June 30, 2006 to June 30, 2024.
Significant components of the Company's deferred tax assets and liabilities at
June 30, 2008 and 2007 are as follows:
June 30,
---------------------------
2008 2007
------------ ------------
Deferred tax assets:
Allowance for doubtful accounts $ 3,596,865 $ 2,624,314
Non-deductible accruals 383,359 328,943
Net operating carryforwards 66,518,124 62,478,267
Tax credits 4,970,084 4,732,454
Inventory capitalization for tax purposes 113,101 157,378
Property and equipment and depreciation 1,217,280 1,090,958
Capital losses carryforwards - 536,845
Charitable contributions 4,500 3,200
------------ ------------
76,803,313 71,952,359
Valuation allowance (75,915,772) (70,992,657)
------------ ------------
Net deferred tax assets 887,541 959,702
------------ ------------
Deferred tax liabilities:
Capitalized software development costs (887,541) (959,702)
------------ ------------
Gross deferred tax liabilities (887,541) ( 959,702)
------------ ------------
Net deferred tax liabilities $ - $ -
============ ============
The net change in the valuation allowance for deferred tax assets increased by
approximately $4,923,000 and $9,991,000, respectively, for the years ended June
30, 2008 and 2007.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
NOTE 14 - OTHER CURRENT LIABILITIES
Included in other current liabilities are the following:
June 30,
--------------------------
2008 2007
----------- -----------
Royalties $ 622,780 $ 635,338
Accrued salaries, commissions and
Payroll taxes 900,934 1,105,655
Accrued interest 876,389 573,461
Litigation accruals 193,349 193,349
Sales tax payable 2,543,795 2,579,345
Legal and other professional fees 633,659 509,245
Accounting fees 502,594 480,000
Insurance premiums 409,928 196,518
Penalty - Sales tax 632,500 457,500
Penalty - 401k plan 250,000 250,000
Other 750,335 774,981
----------- -----------
$ 8,316,263 $ 7,755,392
=========== ===========
NOTE 15 - COMMITMENTS AND CONTINGENCIES
Leases
------
The Company rents its operating facilities and certain equipment, pursuant to
operating lease agreements expiring at various dates through December 2013. The
leases for certain facilities contain escalation clauses relating to increases
in real property taxes as well as certain maintenance costs.
In May 2002, HMCA entered into a sub-lease agreement (as amended in January
2003) with an entity owned by a relative of Raymond V. Damadian. The sub-lease
agreement expired on May 31, 2008. As of June 1, 2008, the sub-lease tenant
occupies the entire space and paid the monthly rent of $ 39,064 on a month to
month basis. Rental income under the sub-lease agreement for the years ended
June 30, 2008, 2007 and 2006 amounted to $99,371, $112,197 and $102,329,
respectively. The amount due from the related party at June 30, 2008 was $26,199
and is included in current portion of advances and notes to related medical
practices (see Note 18).
During 2003, HMCA entered into a sub-lease agreement with a third party. The
sub-lease agreement expired on June 30, 2006. Rental income under the sub- lease
agreement for the years ended June 30, 2008, 2007 and 2006 amounted to
approximately $0, $0 and $87,000, respectively. The rental income is included in
the consolidated statements of operations under costs related to management and
other fees - related medical practices.
In March 2008, HMCA entered into a s sub-lease agreement with a third party. The
sub-lease agreement expires on February 28, 2009 but can be renewed for one
additional year. Rental income under the sub-lease agreement for the year ended
June 30, 2008 amounted to $48,493. 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, 2008
NOTE 15 - COMMITMENTS AND CONTINGENCIES (Continued)
Future minimum operating lease commitments, along with sub-lease income
consisted of the following at June 30, 2008:
Facilities
And
Equipment
Year Ending (Operating Sub-Lease
June 30, Lease) (Income)
----------- ------------ ----------
2009 $ 2,106,640 $ (96,986)
2010 1,092,193 -
2011 807,760 -
2012 832,110
2013 767,049 -
Thereafter 634,516 -
------------ ----------
Total minimum obligations $ 6,240,268 $( 96,986)
============ ==========
Rent expense for operating leases approximated $3,078,000, $2,841,000 and
$2,923,000 for the years ended June 30, 2008, 2007 and 2006, respectively.
License Agreements
------------------
The Company has a license agreement which requires the Company to pay a royalty
on the Company's future sales of certain MRI imaging apparatus. Royalty expense
charged to operations for the years ended June 30, 2008, 2007 and 2006
approximated $67,000, $67,000 and $65,000, respectively. In April 2008 BTG
International Ltd. commenced action in Superior Court, New Castle County,
Delaware for the outstanding royalties of $666,734 plus interest and other
costs. The Company answered the complaint raising affirmative defenses including
duress, failure of consideration and violation of United States Antitrust Laws.
As of June 30, 2008, the Company has accrued $710,461 for royalties and
interest. The Company plans to vigoursly defend this complaint.
In July 2000, the Company entered into a license agreement, pursuant to which it
licensed certain of its intellectual assets on a non-exclusive basis.
Remuneration payable to the Company under this agreement was $11.7 million, of
which $9.0 million was received in September of 2000 and $2.7 million in January
of 2001. The license fee of $11.7 million was recognized as income ratably over
the five-year period ended June 30, 2005. The Company also entered into a
non-exclusive sales representative agreement. 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. As the third
party did not sell any scanners in the past contract year, the Company received
the gross margin payment on two scanners of $1,158,478 in November 2007. The
amount is shown in the Company's consolidated statements of operations as
revenue, license fees and royalties for the year ended June 30, 2008.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
NOTE 15 - COMMITMENTS AND CONTINGENCIES (Continued)
Employee Benefit Plans
----------------------
The Company has a non-contributory 401(k) Plan (the "401(k) Plan"). The 401(k)
Plan covers all non-union employees who are at least 21 years of age with no
minimum service requirements. There were no employer contributions to the Plan
for the years ended June 30, 2008, 2007 and 2006. (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, 2008.
Litigation
----------
The Company is subject to legal proceedings and claims arising from the ordinary
course of its business, including personal injury, customer contract and
employment claims. In the opinion of management, the aggregate liability, if
any, with respect to such actions, will not have a material adverse effect on
the consolidated financial position or results of operations of the Company.
NASDAQ Notice of Non-compliance
-------------------------------
The Company received a letter from The NASDAQ Stock Market LLC indicating the
Company is not in compliance with Marketplace Rules 4350(e) and 4350(g) due to
the fact that is has not yet solicited proxies and held its annual meeting for
the fiscal year end June 30, 2007. As a result, the notice indicated that the
Company's securities would be subject to delisting from The NASDAQ Capital
Market unless the Company requested a hearing before a NASDAQ Listing
Qualifications Panel. On July 15, 2008, the Company requested a hearing with the
NASDAQ Listing Qualifications Panel. The request was granted. The hearing was
held on August 28, 2008 with no decision rendered. The Company is scheduled to
hold a joint two-year annual meeting on November 17, 2008.
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. At the present time, such
discussions are ongoing and the Company cannot yet determine the outcome.
Management is of the belief the resolution of this matter will not materially
impact the consolidated financial statements. The Company has recorded a
provision of $250,000 to cover any potential tax liability including interest.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
NOTE 15 - COMMITMENTS AND CONTINGENIES (Continued)
Other Matters (Continued)
-------------------------
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 $1,941,000 plus interest and penalties of approximately
$1,370,000. The Company is in the process of determining is regulatory
requirements in order to become compliant.
The Company has determined they may not be in compliance with the Department of
Labor and Internal Revenue Service regulations concerning the requirements to
file Form 5500 to report activity of its 401K Employee Benefit Plan and Flex
Plan. The filings do not require the Company to pay tax, however they may be
subject to penalty for non-compliance. The Company has recorded provisions for
any potential penalties totaling $250,000. The Company has engaged outside
counsel to handle such matters to determine the necessary requirements to ensure
compliance. Such non-compliance could impact the eligibilty of the plan. At this
time the outcome cannot be determined.
NOTE 16 - OTHER INCOME
Other income consists of:
For the Years Ended June 30,
------------------------------------
2008 2007 2006
---------- ---------- ----------
Income from investment $ 5,000 $ 142,000 $ 156,000
Other income (expense) 124,368 147,929 171,000
---------- ---------- ----------
$ 129,368 $ 289,929 $ 327,000
========== ========== ==========
NOTE 17 - SUPPLEMENTAL CASH FLOW INFORMATION
During the years ended June 30, 2008, 2007 and 2006, the Company paid $214,394,
$241,661 and $281,903 for interest, respectively. During the years ended June
30, 2008, 2007 and 2006, the Company paid $0, $8,088 and $57,180 for income
taxes, respectively.
Non-Cash Transactions
---------------------
- During the Year Ended June 30, 2007:
a) The Company paid premiums for life insurance on its Chief Executive Officer.
The insurance policies are owned by a life insurance trust. The cash surrender
value of the life insurance policies of $1,234,000 was contributed to capital
during the first quarter of fiscal 2007 pursuant to a split dollar agreement.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
NOTE 17 - SUPPLEMENTAL CASH FLOW INFORMATION (Continued)
Non-Cash Transactions (Continued)
---------------------------------
- During the Year Ended June 30, 2006:
a) The Company acquired equipment of $132,262 under capital lease obligations.
b) The Company received notes receivable from employee stockholders of $422,673
in connection with issuance of 674,339 shares of its common stock.
c) In connection with the Company's sale of it's subsidiary in January 2006, an
equipment loan totaling $374,565 was assumed by the purchaser.
NOTE 18 - ADVANCES AND NOTES TO RELATED MEDICAL PRACTICES
Canarsie MRI Associates ("Canarsie"), a joint venture partnership, of which MRI
Specialties, Inc. ("Specialties") is an owner, is a party to a service agreement
for its scanner with the Company at an annual fee of $85,000. In addition,
during fiscal 2001, Canarsie purchased a QUAD MRI scanner from the Company, for
a purchase price of $850,000, payable as follows: (1) $400,000 downpayment
(received April 2001); (2) $450,000 in 84 equal monthly installments, including
interest at 6%, pursuant to a promissory note to be executed upon acceptance of
the scanner. Timothy Damadian, the son of Raymond V. Damadian, is the sole
stockholder, Director and President of Specialties. The balance due under this
note as of June 30, 2008 is $32,382. Interest income on this note for the years
ended June 30, 2008, 2007 and 2006 amounted to $3,852, $9,249 and $12,791,
respectively.
The Company has cumulative advances due from a former subsidiary, Tallahassee
Magnetic Resonance Imaging, P.A., totaling $546,183. This balance is payable as
follows: (1) Monthly payments of interest only of $2,730 until August 2007 (2)
$546,183 in 40 monthly installments, including interest at 6%, pursuant to a
promissory note. The balance due under this note as of June 30, 2008 is
$414,724. Interest income on this note for the years ended June 30, 2008 and
2007 amounted to $29,949 and $32,760, respectively.
The maturities of advances and notes to related medical practices over the next
three years are as follows:
Years Ending
June 30,
------------
2009 $214,004
2010 170,268
2011 93,095
--------
$477,367
========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
NOTE 19 - SALE OF SUBSIDIARY
On January 31, 2006, the Company sold 100% of the stock of Tallahassee Magnetic
Resonance Imaging, P.A. to Raymond V. Damadian for a deminimus amount since the
liabilities exceeded the assets. No gain or loss was recognized on this sale.
Revenue recognized from this entity totaled $590,883 and $1,272,859 for the year
ended June 30, 2006 and 2005, respectively.
NOTE 20 - SEGMENT AND RELATED INFORMATION
The Company provides segment data in accordance with the provisions of SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information".
The Company operates in two industry segments - manufacturing and the servicing
of medical equipment and management of 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.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
NOTE 20 - SEGMENT AND RELATED INFORMATION (Continued)
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 2008:
-----------
Net revenues from external
customers $ 23,525,197 $ 12,043,636 $ 35,568,833
Intersegment net revenues $ 889,167 $ - $ 889,167
Loss from operations $(14,133,689) $ (2,793,102) $(16,926,791)
Depreciation and amortization $ 1,851,746 $ 941,846 $ 2,793,592
Compensatory element of stock
issuances $ 360 $ - $ 360
Total identifiable assets $ 19,203,367 $ 16,022,266 $ 35,225,633
Capital expenditures $ 943,197 $ 110,635 $ 1,053,832
Fiscal 2007:
-----------
Net revenues from external
customers $ 21,269,989 $ 11,941,943 $ 33,211,932
Intersegment net revenues $ 1,053,106 $ - $ 1,053,106
Loss from operations $(22,219,240) $ (3,233,331) $(25,452,571)
Depreciation and amortization $ 1,562,393 $ 1,113,438 $ 2,675,831
Compensatory element of stock
issuances $ 116,068 $ 4,750 $ 120,818
Total identifiable assets $ 21,098,416 $ 20,111,759 $ 41,210,175
Capital expenditures $ 1,370,227 $ 213,231 $ 1,583,458
Fiscal 2006:
-----------
Net revenues from external
customers $ 19,708,055 $ 13,368,274 $ 33,076,329
Intersegment net revenues $ 587,465 $ - $ 587,465
Loss from operations $(24,742,622) $ (4,981,864) $(29,724,486)
Depreciation and amortization $ 2,028,332 $ 1,258,533 $ 3,286,865
Compensatory element of stock
issuances $ 1,172,254 $ 723,208 $ 1,895,462
Termination costs paid with
common stock $ - $ 1,600,000 $ 1,600,000
Total identifiable assets $ 31,264,366 $ 25,965,178 $ 57,229,544
Capital expenditures $ 1,552,275 $ 2,045,940 $ 3,598,215
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
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 0.0%, 15.8% and 23.2%
of product sales revenues to third parties for the years ended June 30, 2008,
2007 and 2006, 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,
-----------------------------
2008 2007 2006
------- ------ ------
Kuwait (0.5)% (7.9)% 9.7%
England - .2 7.6
Holland - 11.7 -
Germany - 11.8 5.9
Greece 0.5 - -
------- ------ ------
0.0% 15.8% 23.2%
======= ====== ======
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%, 6.8% and 8.2% of consolidated net service and repair fees
for the years ended June 30, 2008, 2007 and 2006, 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,
-----------------------------
2008 2007 2006
------- ------ ------
Korea -% .1% .9%
Spain 1.6 1.7 2.0
Puerto Rico 1.3 1.1 1.1
Saudi Arabia - ( .1) .9
Poland - .4 .9
Switzerland 1.0 1.1 .7
Germany 1.0 .3 .2
England 1.2 .9 .2
Holland .7 .2 -
Scotland 1.0 1.1 1.3
------- ------ ------
7.8% 6.8% 8.2%
======= ====== ======
The Company does not have any material assets outside of the United States.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
NOTE 21 - QUARTERLY FINANCIAL DATA (UNAUDITED)
(000's omitted, except per share data)
For the Quarters Ended
------------------------------------------------
September 30, December 31, March 31, June 30,
2007 2007 2008 2008 Total
------------- ------------ --------- -------- --------
Total Revenues
- Net $ 8,669 $ 10,680 $ 8,071 $ 8,149 $35,569
Total Costs and
Expenses 12,775 14,556 10,792 14,373 52,496
Net Loss ( 209) (3,838) (2,695) (6,766) (13,508)
Basic and Diluted
Net Loss Per Share $(0.04) $(0.78) $(0.55) $(1.38) $(2.76)
(000's omitted, except per share data)
For the Quarters Ended
------------------------------------------------
September 30, December 31, March 31, June 30,
2007 2007 2008 2008 Total
------------- ------------ --------- -------- --------
Total Revenues
- Net $ 7,783 $ 7,672 $ 8,782 $ 8,975 $33,212
Total Costs and
Expenses 13,874 13,071 14,097 17,623 58,665
Net Loss (6,105) (5,470) (5,401) (8,563) (25,539)
Basic and Diluted
Net Loss Per Share (1.29) $(1.13) $(1.11) $(1.76) $(5.29)
Loss per share from operations for each quarter was computed independently using
the weighted-average number of shares outstanding during the quarter. However,
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 loss per share
for the four quarters may not equal the full year loss per share.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
NOTE 22 - ALLOWANCE FOR DOUBTFUL ACCOUNTS
The following represents a summary of allowance for doubtful accounts for the
years ended June 30, 2008, 2007 and 2006, respectively:
Balance Balance
Description June 30, 2007 Additions Deductions June 30, 2008
----------- ------------- ------------ ---------- -------------
Receivables from equipment
sales and service contracts $1,306,209 (1)$ 169,820 $ 75,001 $ 1,401,028
Receivables from equipment
sales and service contracts
- related parties 646,621 - 27,441 619,180
Management fee
receivable 2,110,306 (1)1,848,427 3,958,733
Management fee receivable from
related medical practices 2,093,180 (1) 320,303 - 2,413,483
Medical receivables 190,000 (1) 579,000 - 769,000
Advance and notes to related
parties 364,791 - 100,000 264,791
Notes receivable - (1) 65,000 - 65,000
Balance Balance
Description June 30, 2006 Additions Deductions June 30, 2007
----------- ------------- ------------ ---------- -------------
Receivables from equipment
sales and service contracts $ 644,087 (1)$ 662,122 $ - $1,306,209
Receivables from equipment
sales and service contracts
- related parties 646,621 - - 646,621
Management fee receivable from
related medical practices 3,053,486 (1)1,150,000 - 4,203,486
Medical receivables - (1) 190,000 - 190,000
Advance and notes to related
parties 364,791 - - 364,791
Balance Balance
Description June 30, 2005 Additions Deductions June 30, 2006
----------- ------------- ------------ ---------- -------------
Receivables from equipment
sales and service contracts $ 498,452 (1)$ 145,635 $ - $ 644,087
Receivables from equipment
sales and service contracts
- related parties 646,621 - - 646,621
Management fee receivable from
Related medical practices 2,017,163 (1)1,327,000 290,677 3,053,486
Advance and notes to related
Parties 364,791 - - 364,791
(1) Included in provision for bad debts.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
NOTE 23 - SALE OF PHYSICAL MEDICINE MANAGEMENT BUSINESS
On July 28, 2005, FONAR, HMCA and Dynamic entered into an Asset Purchase
Agreement with Health Plus Management Services, L.L.C. ("Health Plus"), pursuant
to which HMCA and its subsidiary Dynamic sold to Health Plus the portion of
their business which was engaged in the business of managing physical therapy
and rehabilitation facilities, together with the assets used in the conduct of
such business.
The assets sold consisted principally of the management agreements with the
physical therapy and rehabilitation facility management business, the physical
therapy equipment, a portion of the accounts receivable and furniture and
fixtures the Company provided to the physical therapy and rehabilitation
facilities.
The two principals of Health Plus were employed by HMCA and Dynamic up to the
time of the closing of the business. In consideration for the termination of
their employment agreement, these two individuals each became entitled to
receive $800,000. In addition, each became entitled to receive $200,000 for
collection services to be provided on behalf of HMCA and Dynamic with respect to
a portion of the accounts receivable of certain physical therapy and
rehabilitation facilities which arose during the period when HMCA was engaged in
the management of those facilities. The $1,000,000 payable to each of these
individuals was satisfied in shares of FONAR common stock in 2006.
The purchase price under the Asset Purchase Agreement was $6,600,000, payable
pursuant to a promissory note (the "Note") in 120 monthly installments
commencing on August 28, 2005. The first twelve installments are interest only
and the remaining 108 payments will consist of equal installments of principal
and interest in the amount of $76,014 each. The Note is secured by a first lien
on all of the assets of Health Plus, including its accounts receivable. The Note
is subject to prepayment provisions to the extent Health Plus resells all or
part of the assets and business or utilizes the assets sold as collateral in any
debt financing. The note provides for interest at 5% per annum. The fair value
assigned to the note was $6,078,068 reflecting a discount of $521,932 for the
below market interest rate. The Company recorded a loss of $143,598 on this
transaction during the year ended June 30, 2006. The note was modified in August
2008 (see Note 25).
NOTE 24 - SALE OF INVESTMENT AND CONSOLIDATED SUBSIDIARY
Sale of Investment
------------------
On July 31, 2007, the Company sold its 20% equity interest in an unconsolidated
entity (management company for a diagnostic center) to an unrelated third party.
The selling price was $629,195. The Company realized a gain on the sale of the
equity interest of $571,161.
The gain was calculated as follows:
Selling Price: $ 629,195
Less: Closing costs ( 58,034)
----------
Selling Price - Net 571,161
Basis 0
----------
Gain on sale of investment $ 571,161
==========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
NOTE 24 - SALE OF INVESTMENT AND CONSOLIDATED SUBSIDIARY (Continued)
Sale of Consolidated Subsidiary
-------------------------------
On July 31, 2007, the Company sold its 50% interest (to an unrelated third
party) in an entity which provided management services to a diagnostic center in
Orlando, FL. The Company continues to manage other diagnostic centers in the
Florida region.
The unrelated third party purchased all assets and assumed all liabilities of
the diagnostic center which included cash, the management fee receivable,
furniture and fixtures and other miscellaneous assets. The purchase price under
the for the 50% interest was $4,499,768 and after closing costs the amount
received was $4,256,372.
The following is the calculation of the gain on sale of the 50% interest in a
consolidated subsidiary:
Selling Price: $ 4,499,768
Less: Closing costs ( 243,396)
-----------
Selling Price - Net: $ 4,256,372
Assets sold:
Cash $ 114,238
Management fee receivable 1,166,100
Property and equipment - net 22,673
Other Assets 14,759
Minority Interest ( 456,373)
-----------
Subtotal 861,397
-----------
Gain on sale of consolidated entity $ 3,394,975
===========
NOTE 25 - SUBSEQUENT EVENTS
On July 25, 2008, the Company entered into a settlement agreement with regards
to property the Company leased and has vacated at 405 Smith Street, Farmingdale,
New York. The Company has agreed to pay $270,740 plus interest at 7.5% per annum
in 36 monthly installments.
On August 8, 2008, the Company signed a modification agreement with regards to
the Asset Purchase Agreement with Health Plus (see Note 23). Under the
modification agreement Health Plus made a $2,000,000 principal payment on the
promissory note in exchange for a discount on the original note of $1,000,000.
The original promissory note ("Note") was modified to $2,378,130 payable in 60
consecutive months in equal installments of principal and interest of $47,090.
The Note is secured by a first lien on all of the assets of Health Plus,
including its accounts receivable and is subject to prepayment provisions to the
extent Health Plus resells all or part of the assets and business or utilizes
the assets sold as collateral in any debt financing. The note provides for
interest at 7% per annum. The Company recorded a change to earnings representing
the net discount on this note of $658,351 on this transaction during the quarter
ended June 30, 2008.
On September 30, 2008, the Company sold to a related party its 92.3% interest
(to a related party) in an entity which provided management services to a
scanning center in Bensonhurst, NY. The Company continues to manage other
diagnostic centers in the New York region.
The buyer purchased all assets and assumed all liabilities of the scanning
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 the
closing.
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
We maintain disclosure controls and procedures (as defined in Exchange Act Rule
13a-15(e) and 15d-15(e)) that are designed to ensure that information required
to be disclosed in reports that we file or submit under the Securities Exchange
Act of 1934 is recorded, processed, summarized, and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms,
and that such information is accumulated and communicated to our management,
including our Chief Executive Officer and our principal financial officer, as
appropriate, to allow timely decisions regarding the required disclosures. In
designing and evaluating the disclosure controls and procedures, we recognize
that any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives.
Our principal executive and financial officers have concluded that our
disclosure controls and procedures over financial reporting were effective as of
June 30, 2008. Management's assessment is that our internal control over
financial reporting for the year ended June 30, 2008 is effective. There has
been no change in our internal control over financial reporting that occurred
during the fourth quarter of fiscal year 2008 that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.
This annual report does not include an attestation report of the company's
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the company's
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the company to provide only management's
report in this annual report.
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. 72 President, Treasurer,
Chairman of the Board
and a Director
Claudette J.V. Chan 70 Director and Secretary
Robert J. Janoff 81 Director
Charles N. O'Data 72 Director
Robert Djerejian 77 Director
Raymond V. Damadian, M.D. has been the Chairman of the Board and President of
Fonar since its inception in 1978 and Treasurer since February, 2001. Dr.
Damadian was employed by the State University of New York, Downstate Medical
Center, New York, as an Associate Professor of Biophysics and Associate
Professor of Internal Medicine from 1967 until September 1979. Dr. Damadian
received an M.D. degree in 1960 from Albert Einstein College of Medicine, New
York, and a B.S. degree in mathematics from the University of Wisconsin in 1956.
In addition, Dr. Damadian conducted post-graduate work at Harvard University,
where he studied extensively in the fields of physics, mathematics and
electronics. Dr. Damadian is the author of numerous articles and books on the
nuclear magnetic resonance effect in human tissue, which is the theoretical
basis for the Fonar MRI scanners. Dr. Damadian is a 1988 recipient of the
National Medal of Technology and in 1989 was inducted into the National
Inventors Hall of Fame, for his contributions in conceiving and developing the
application of magnetic resonance technology to medical applications including
whole body scanning and diagnostic imaging. Dr. Damadian is the President,
Treasurer and director of HMCA.
Claudette J.V. Chan has been a Director of Fonar since October 1987 and
Secretary of Fonar since January 2008. Mrs. Chan was employed from 1992 through
1997 by Raymond V. Damadian, M.D. MR Scanning Centers Management Company and
since 1997 by HMCA, as "site inspector," in which capacity she is responsible
for supervising and implementing standard procedures and policies for MRI
scanning centers. From 1989 to 1994 Mrs. Chan was employed by St. Matthew's and
St. Timothy's Neighborhood Center, Inc., as the director of volunteers in the
"Meals on Wheels" program, a program which cares for the elderly. In
approximately 1983, Mrs. Chan formed the Claudette Penot Collection, a retail
mail-order business specializing in women's apparel and gifts, of which she was
the President until she stopped operating the business in approximately 1989.
Mrs. Chan practiced and taught in the field of nursing until 1973, when her son
was born. She received a bachelor of science degree in nursing from Cornell
University in 1960. Mrs. Chan is the sister of Raymond V. Damadian.
Robert J. Janoff has been a Director of Fonar since February 1989. Mr. Janoff
has been a self-employed New York State licensed private investigator for more
than thirty-five years and was a Senior Adjustor in Empire Insurance Group for
more than 15 years until retiring from that position on July 1, 1997. Mr. Janoff
also served, from June 1985 to June 1991, as President of Action Data Management
Strategies, Ltd., a supplier of computer programs for use by insurance
companies. Mr. Janoff was a member of the Board of Directors of Harmony Heights
of Oyster Bay, New York for over 25 years, which is a nonprofit residential
school for girls with learning disabilities.
Charles N. O'Data has been a Director of Fonar since February 1998. From 1968 to
1997, Mr. O'Data was the Vice President for Development for Geneva College, a
liberal arts college located in western Pennsylvania. In that capacity, he acted
as the College's chief investment officer. His responsibilities included
management of the College's endowment fund and fund raising. In July 1997, Mr.
O'Data retired from Geneva College after 36 years of service to assume a
position of National Sales Executive for SC Johnson Company's Professional
Markets Group, a unit of SC Johnson Wax, and specialized in healthcare and
education sales, a position he held until the spring of 1999. In his capacity
with SC Johnson he was responsible for sales to the nation's three largest Group
Purchasing Organizations which included some 4,000 hospitals. Mr. O'Data
presently acts as an independent financial consultant to various entities. Mr.
O'Data served on the board of the Medical Center, Beaver, Pennsylvania, now a
part of Heritage Valley Health System, a 500 bed acute care facility, for 22
years, three as its Chair. Mr. O'Data also served on the board of the Hospital
Council of Western Pennsylvania, a shared-services and group purchasing
organization covering seven states. He founded The Beaver County Foundation, a
Community Foundation, in 1992, and serves as its President. Mr. O'Data is listed
as a finance associate in the Middle States Association, Commission on Higher
Education. The commission is the formal accrediting body for higher education in
the eastern region of the country. In this capacity he evaluates the financial
aspects of educational organizations. Mr. O'Data is a graduate of Geneva
College, where he received a B.S. degree in Economics in 1958.
Robert Djerejian has been a Director for Fonar since June 2002. Since 1996 he
has served as a senior consultant for Haines, Lundberg & Waehler International
(HLW International), an architectural, engineering, planning interior design
firm, which among other hi-tech specialties designs hospitals and laboratories.
Prior to that time he was the Senior Managing Partner of HLW International for a
period of 22 years where he received numerous design awards including the
National Honor Award from the Endowment for the Arts and The Design Excellence
Award from the NY Society of the American Institute of Architects. During his
management of the firm he brought the firm to international prominence with
offices in London, Shanghai and Saudi Arabia. He currently consults to private
clientele in design management in planning, design and construction services.
Mr. Djerejian is an Emeritus member of the Board of Trustees of Pratt Institute
since 1992, where he chaired the Nominations Committee and was the Vice Chairman
of the Executive Committee. He served as a Board Member coordinating the joint
venture of Corcoran College of Art & Design in Washington DC with Pratt
Institute as one of the founding directors forming the Delaware College of Art
and Design. He is a member of the American institute of Architects and the NY
Society of Architects. Mr. Djerejian is a graduate of Pratt Institute School of
Architecture, where he received his B.A. in Architecture in 1955.
ITEM 11. EXECUTIVE COMPENSATION.
With the exception of the Chief Executive Officer, the compensation of the
Company's executive officers is based on a combination of salary and bonuses
based on performance. The Chief Executive Officer's compensation consists of a
salary.
The Chief Executive Officer's salary varies only slightly and is by his own
decision relatively low. It is not expected to increase materially in the near
future. At such time as we become consistently and sufficiently profitable or
there is a reconsideration of our compensation policy, the compensation payable
to the Chief Executive Officer may be reconsidered. As presently existing, the
Chief Executive Officer's compensation package includes no understandings with
respect to bonuses, options or other incentives; as such, it is not subject to
our general policy later discussed.
The Board of Directors does not have a compensation Committee. Dr. Raymond V.
Damadian, President, Chief Executive Officer and Chairman of the Board, controls
over 50% of the voting power of our capital stock. Dr. Damadian is the only
executive officer who is a member of the Board of Directors. Dr. Damadian
participates in the determination of executive compensation for our officers.
The Board of Directors has established an audit committee. The members of the
committee are Robert J. Janoff, Charles N. O'Data and Robert Djerejian.
Our compensation policy includes a combination of salary, commissions, bonuses,
stock bonuses and stock options, designed to incentivize our employees. There is
no universal plan applicable to all of our employees. The fixed and variable
components of our employees' compensation tend to be individualized, based on a
combination of the employees' performance, responsibilities and position, our
assessment of how best to motivate a person in such a position and the needs and
preferences of the particular employees, as negotiated between employees and
their supervisors or management.
There is set forth in the following Summary Compensation Table the compensation
provided by us during fiscal 2008 to our Chief Executive Officer, who also
serves as our acting Principal Financial Officer. There is set forth in the
following Outstanding Equity Awards Table and Director Compensation Table the
required information.
The Company paid premiums for life insurance on its Chief Executive Officer. The
insurance policies are owned by a life insurance trust. The cash surrender value
of the life insurance policies in the approximate amount of $1.2 million was
contributed to capital during the first fiscal quarter of fiscal 2007 pursuant
to a split dollar agreement.
I. SUMMARY COMPENSATION TABLE
--------------------------------------------------------------------------------
Name and All
All Other Other Total
Principal Compen- Compen-
Total Salary Bonus sation sation
Position Year ($) ($) ($) ($)
(a) (b) (c) (d) (i) (j)
---------- ---- ---------- ----- ------- ----------
Raymond V. 2008 $90,087.83 - - $90,087.83
Damadian, 2007 $90,162.36 - - $90,162.36
President 2006 $93,059.68 - - $93,059.68
and CEO
--------------------------------------------------------------------------------
II. OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
Name Number of Option Option
Securities Exercise Expiration
Underlying Price Date
Unexercised ($)
Options
(#)
Exercisable
(a) (b) (c)
---------- ----------- -------- -----------
Raymond V.
Damadian,
CEO/CFO 463 28.125 12/26/10
--------------------------------------------------------------------------------
III. DIRECTOR COMPENSATION
Name Fees Earned or Total
Paid in Cash ($) ($)
(a) (b) (c)
------------------- ---------------- -----------
Raymond V. Damadian 0 0
Claudette J.V. Chan $ 20,160.00 $ 20,160.00
Robert J. Janoff $ 20,000.24 $ 20,000.24
Charles N. O'Data $ 20,000.24 $ 20,000.24
Robert Djerejian $ 19,999.98 $ 19,999.98
EMPLOYEE COMPENSATION PLANS
Equity Compensation Plan Information as of June 30, 2008
(a) (b) (c)
Plan Number of weighted- Number of securities
category securities average remaining available
to be issued exercise for future issuance
upon exercise price of under equity
of outstanding outstanding compensation plans
options, options, (excluding securities
warrants warrants reflected in
and rights and rights column (a)
-------------- --------------- ----------- ---------------------
Equity
compensation
plans approved
by security
holders 97,400 $ 30.66 $ 130,943
Equity
compensation
plans not
approved by
security
holders - N/A -
=============== =========== =====================
Total 97,400 $ 30.66 $ 130,943
Fonar's 1993 Incentive Stock Option Plan, adopted on March 26, 1993, terminated
on March 25, 2003. During the year ended June 30, 2008, 2,360 options expired,
therefore, there are no options that were issued under the FONAR 1993 plan that
remain outstanding.
Fonar's 1997 Nonstatutory Stock Option Plan, adopted on May 9, 1997 terminated
on May 8, 2007. Of the options granted under this plan, 78,166 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, 2008, 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 19,234 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, 2008, 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 September 24, 2008, 69,932 shares were available for
issuance.
HMCA's 1997 Incentive Stock Option Plan, adopted on March 10, 1997, is intended
to qualify as an incentive stock option plan under Section 422A of the Internal
Revenue Code of 1954, as amended. The 1997 Incentive Stock Option Plan permits
the issuance of stock options covering an aggregate of 2,000,000 shares of
Common Stock of HMCA. The options have an exercise price equal to the fair
market value of the underlying stock on the date the option is granted, are
nontransferable, are exercisable for a period not exceeding ten years and expire
upon the voluntary termination of employment. The exercisability of the options
granted to date is contingent upon the successful completion by HMCA of a public
offering of its securities or the recognition by HMCA of at least $10 million in
revenues for at least two consecutive fiscal quarters. The 1997 Stock Option
Plan terminated on March 9, 2007.
HMCA's 1998 Incentive Stock Option Plan, adopted on December 16, 1998, is
intended to qualify as an incentive stock option plan under Section 422A of the
Internal Revenue Code of 1954, as amended. The 1998 Incentive Stock Option Plan
permits the issuance of stock options covering an aggregate of 2,000,000 shares
of Common Stock of HMCA. The options have an exercise price equal to the fair
market value of the underlying stock on the date the option is granted, are
nontransferable, are exercisable for a period not exceeding ten years and expire
upon the voluntary termination of employment. The excerciseability of the
options granted to date is contingent upon the successful completion by HMCA of
a public offering of its securities. The 1998 Stock Option Plan will terminate
on December 15, 2008.
HMCA's 1998 Nonstatutory Stock Option Plan, adopted on December 16, 1998,
permits the issuance of stock options covering an aggregate of 500,000 shares of
Common Stock of HMCA. The options may be issued at such prices and upon such
terms and conditions as are determined by HMCA. The exercisability of the
options granted to date is contingent upon the successful completion by HMCA of
a public offering of its securities. The 1998 Nonstatutory Stock Option Plan
will terminate on December 15, 2008.
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 15, 2008.
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 2.46%
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 3,600 *
Class A Preferred 80 *
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 124,036 2.54%
Class C Stock 382,447 99.98%
Class A Preferred 19,205 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, 11 MRI Centers
have management agreements with HMCA. Dr. Damadian was the sole stockholder,
director and president of each of the Centers.
The fees to HMCA under the management agreements with the MRI Centers were based
on the number of procedures performed.
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. In connection with
the sale, HMCA entered into new management agreements with the MRI Centers under
which HMCA performs essentially the same services for the MRI Centers as prior
to the sale. The fees charged, however, are flat fees charged on a monthly
basis.
Dr. Damadian remains the owner of three MRI Centers in Florida and one in
Georgia. The fees payable to HMCA for its services to these MRI Centers remain
based on the number of procedures performed, ranging between $300 and $400 per
procedure.
During the fiscal years ended June 30, 2008 and June 30, 2007 the net revenues
received by HMCA from the MRI Centers owned by Dr. Damadian were approximately
$3.7 million and $11.9 million respectively.
OTHER TRANSACTIONS
Robert Janoff, a director of the Company, was a limited partner in a partnership
in which we had a 92% partnership interest. The partnership manages an MRI
scanning center in Bensonhurst, Brooklyn, New York and was party to a service
contract at an annual rate of $110,000 on its scanner for the period of July 1,
2007 through June 30, 2008. We sold our interest in the partnership at the end
of September, 2008.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit Fees
The aggregate fees billed by Marcum & Kliegman LLP for the audit of our annual
consolidated financial statements for the fiscal year ended June 30, 2008 and
the reviews of the financial statements included in our Forms 10-Q for the
fiscal year ended June 30, 2008 were $574,674. An audit of internal controls was
not required this year.
The aggregate fees billed by Marcum & Kliegman LLP for the audit of our annual
financial statements for the fiscal year ended June 30, 2007 and our internal
controls, and the reviews of the financial information included in our Forms
10-Q for the fiscal year ended June 30, 2007 were $679,052.
Audit Related Fees
No fees were billed by Marcum & Kliegman LLP for the fiscal years ended June 30,
2008 or June 30, 2007 for services related to the audit or review of our
financial statements that are not included under the caption "Audit Fees".
No fees were billed by Marcum & Kliegman LLP for the fiscal years ended June 30,
2008 or June 30, 2007 for designing, operating, supervising or implementing any
of our financial information systems or any hardware or software systems for our
financial information.
Tax Fees
The aggregate fees billed by Marcum & Kliegman LLP for tax compliance, tax
advice and tax planning in the fiscal year ended June 30, 2008 were $115,668.
The aggregate fees billed by Marcum & Kliegman LLP for tax compliance, tax
advice and tax planning in the fiscal year ended June 30, 2007 were $153,337.
All Other Fees
The aggregate fees billed by Marcum & Kliegman LLP for all other services
rendered by them during the fiscal years ended June 30, 2008 and June 30, 2007
were $6,125 and $49,878, respectively, which included services in connection
with the registration of securities, employee benefit plan audits and reviews
and procedures that we requested Marcum & Kliegman 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 & Kliegman LLP of
services in addition to audit services in fiscal 2008 and 2007 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
Report of Independent Registered Public Accounting Firm on Internal Control
over Financial Reporting.
Consolidated Balance Sheets as at June 30, 2008 and 2007.
Consolidated Statements of Operations for the Three Years Ended June 30,
2008, 2007 and 2006.
Consolidated Statements of Stockholders' Equity for the Three Years Ended
June 30, 2008, 2007 and 2006.
Consolidated Statements of Cash Flows for the Three Years Ended June 30,
2008, 2007 and 2006.
Notes to Consolidated Financial Statements.
Information required by schedules called for under Regulation S-X is either
not applicable or is included in the consolidated financial statements or notes
to the financial statements.
b) REPORTS ON FORM 8-K
None.
c) EXHIBITS
3.1 Certificate of Incorporation, as amended, of the Registrant
incorporated by reference to Exhibit 3.1 to the Registrant's registration
statement on Form S-1,Commission File No. 33-13365.
3.2 Article Fourth of the Certificate of Incorporation, as amended, of the
Registrant incorporated by reference to Exhibit 4.1 to the Registrant's
registration statement on Form S-8, Commission File No. 33-62099.
3.3 Section A of Article Fourth of the Certificate of Incorporation, as
amended, of the Registrant incorporated by reference to Exhibit 4.3 to the
Registrant's registration statement on Form S-3, Commission File No. 333-63782.
3.4 Section A of Article Fourth of the Certificate of Incorporation, as
amended, of the Registrant incorporated by reference to Exhibit 3.3 of the
Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2003,
Commission File No. 0-10248.
3.5 By-Laws, as amended, of the Registrant incorporated by reference to
Exhibit 3.2 to the Registrant's registration statement on Form S-1, Commission
File No. 33-13365.
4.1 Specimen Common Stock Certificate incorporated by reference to Exhibit
4.1 to the Registrant's registration statement on Form S-1, Commission File No.
33-13365.
4.2 Specimen Class B Common Stock Certificate incorporated by reference to
Exhibit 4.2 to the Registrant's registration statement on Form S-1, Commission
File No. 33-13365.
4.3 Form of 4% Convertible Debentures due June 30, 2002 incorporated by
reference to Exhibit 4.1 of the Registrant's current report on Form 8-K filed on
June 11, 2001. Commission File No. 0-10248.
4.4 Form of Purchase Warrants incorporated by reference to Exhibit 4.2 of
the Registrant's current report on Form 8-K filed on June 11, 2001. Commission
File No. 0-10248.
4.5 Form of Callable Warrants incorporated by reference to Exhibit 4.3 of
the Registrant's current report on Form 8-K filed on June 11, 2001. Commission
File No. 0-10248.
4.6 Form of Replacement Callable Warrants incorporated by reference to
Exhibit 4.7 of the Registrant's registration statement on Form S- 3, Commission
File No. 333-10677.
4.7 Form of Amended and Restated Purchase Warrant for The Tail Wind Fund,
Ltd. incorporated by reference to Exhibit 4.7 of the Registrants registration
statement on Form S-3, Commission File No. 333-116908.
4.8 Form of Amended and Restated Purchase Warrant for Placement Agent and
Designees incorporated by reference to Exhibit 4.8 of the Registrant's
registration statement on Form S-3, Commission File No. 333- 116908.
10.1 License Agreement between the Registrant and Raymond V. Damadian
incorporated by reference to Exhibit 10 (e) to Form 10-K for the fiscal year
ended June 30, 1983, Commission File No. 0-10248.
10.2 1983 Nonstatutory Stock Option Plan incorporated by reference to
Exhibit 10 (a) to Form 10-K for the fiscal year ended June 30, 1983, Commission
File No. 0-10248, and amendments thereto dated as of March 7, 1984 and dated
August 22, 1984, incorporated by referenced to Exhibit 28 (a) to Form 10-K for
the year ended June 30, 1984, Commission File No. 0-10248.
10.3 1984 Incentive Stock Option Plan incorporated by reference to Exhibit
28 (c) to Form 10-K for the year ended June 30, 1984, Commission File No. 0-
10248.
10.4 1986 Nonstatutory Stock Option Plan incorporated by reference to
Exhibit 10.7 to Form 10-K for the fiscal year ended June 30, 1986, Commission
File No. 0-10248.
10.5 1986 Stock Bonus Plan incorporated by reference to Exhibit 10.8 to
Form 10-K for the fiscal year ended June 30, 1986, Commission File No. 0-10248.
10.6 1986 Incentive Stock Option Plan incorporated by reference to Exhibit
10.9 to Form 10-K for the fiscal year ended June 30, 1986, Commission File No.
0-10248.
10.7 Lease Agreement, dated as of August 18, 1987, between the Registrant
and Reckson Associates incorporated by reference to Exhibit 10.26 to Form 10-K
for the fiscal year ended June 30, 1987, Commission File No. 0-10248.
10.8 1993 Incentive Stock Option Plan incorporated by reference to Exhibit
28.1 to the Registrant's registration statement on Form S-8, Commission File No.
33-60154.
10.9 1993 Non-Statutory Stock Option Plan incorporated by reference to
Exhibit 28.2 to the Registrant's registration statement on Form S-8, Commission
File No. 33-60154.
10.10 1993 Stock Bonus Plan incorporated by reference to Exhibit 28.3 to
the Registrant's registration statement on Form S-8, Commission File No. 33-
60154.
10.11 1994 Non-Statutory Stock Option Plan incorporated by reference to
Exhibit 28.1 to the Registrant's registration statement on Form S-8, Commission
File No. 33-81638.
10.12 1994 Stock Bonus Plan incorporated by reference to Exhibit 28.2 to
the Registrant's registration statement on Form S-8, Commission File No. 33-
81638.
10.13 1995 Non-Statutory Stock Option Plan incorporated by reference to
Exhibit 28.1 to the Registrant's registration statement on Form S-8, Commission
File No. 33-62099.
10.14 1995 Stock Bonus Plan incorporated by reference to Exhibit 28.2 to
the Registrant's registration statement on Form S-8, Commission File No. 33-
62099.
10.15 1997 Non-Statutory Stock Option Plan incorporated by reference to
Exhibit 28.1 to the Registrant's registration statement on Form S-8, Commission
File No.: 333-27411.
10.16 1997 Stock Bonus Plan incorporated by reference to Exhibit 28.2 to
the Registrant's registration statement on Form S-8, Commission File No: 333-
27411.
10.17 Stock Purchase Agreement, dated July 31, 1997, by and between U.S.
Health Management Corporation, Raymond V. Damadian, M.D. MR Scanning Centers
Management Company and Raymond V. Damadian, incorporated by reference to Exhibit
2.1 to the Registrant's Form 8-K, July 31, 1997, commission File No: 0-10248.
10.18 Merger Agreement and Supplemental Agreement dated June 17, 1997 and
Letter of Amendment dated June 27, 1997 by and among U.S. Health Management
Corporation and Affordable Diagnostics Inc. et al., incorporated by reference to
Exhibit 2.1 to the Registrant's 8-K, June 30, 1997, Commission File No: 0-
10248.
10.19 Stock Purchase Agreement dated March 20, 1998 by and among Health
Management Corporation of America, Fonar Corporation, Giovanni Marciano, Glenn
Muraca et al., incorporated by reference to Exhibit 2.1 to the Registrant's 8-
K, March 20, 1998, Commission File No: 0-10248.
10.20 Stock Purchase Agreement dated August 20, 1998 by and among Health
Management Corporation of America, Fonar Corporation, Stuart Blumberg and Steven
Jonas, incorporated by reference to Exhibit 2 to the Registrant's 8-K, September
3, 1998, Commission File No. 0-10248.
10.21 2000 Stock Bonus Plan incorporated by reference to Exhibit 99.1 to
the Registrant's registration Statement on Form S-8, Commission File No.: 333-
66760.
10.22 2002 Stock Bonus Plan incorporated by reference to Exhibit 99.1 to
the Registrant's registration statement on Form S-8, Commission File No.: 333-
89578.
10.23 2002 Incentive Stock Option Plan incorporated by reference to Exhibit
99.1 to the Registrant's registration statement on Form S-8, Commission File
No.: 333-96557.
10.24 2003 Stock Bonus Plan incorporated by reference to Exhibit 99.1 to
the Registrant's registration statement on Form S-8, Commission File No: 333-
106626.
10.25 2003 Supplemental Stock Bonus Plan incorporated by reference to
Exhibit 99.1 to the Registrant's registration statement on Form S-8, Commission
File No: 333-106626.
10.26 2004 Stock Bonus Plan incorporated by reference to Exhibit 99.1 to
the Registrant's registration statement on Form S-8, Commission File No. 333-
112577.
10.27 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. See Exhibits.
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 report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FONAR CORPORATION
Dated: October 6, 2008
By: /s/ Raymond Damadian
Raymond V. Damadian, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Raymond Damadian Chairman of the October 6, 2008
Raymond V. Damadian Board of Directors,
President, Director
Principal Executive
Officer and Acting
Principal Financial
Officer)
/s/ Claudette J.V. Chan Director and October 6, 2008
Claudette J.V. Chan Secretary
/s/ Robert J. Janoff Director October 6, 2008
Robert J. Janoff
/s/ Charles N. O'Data Director October 6, 2008
Charles N. O'Data
/s/ Robert Djerejian Director October 6, 2008
Robert Djerejian