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FONAR CORPORATION
110 Marcus Drive
Melville, New York 11747
(631) 694-2929
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
Monday, June
25, 201223, 2014To The Stockholders:
The Annual Meeting of the stockholders of Fonar Corporation will be held at the Double Tree Hotel, Wilmington Downtown, 700 King Street, Wilmington, Delaware 19801 (302-655-0400), on Monday, June
25, 2012,23, 2014, at 10:00 a.m. local time for the following purposes:1. To elect five Directors to the Board of Directors.
2. To approve, on an advisory basis, the compensation of the Company’s named
executive officers.
3. To ratify the selection of Marcum LLP as the
Company'sCompany’s auditors for the fiscal yearendedending June 30,
2012. 3.2014.4. To transact such other business as may properly come before the meeting.
Only stockholders of record at the close of business on April
27, 201228, 2014 are entitled to notice of, and to vote at, this meeting. A list of such stockholders will be available for examination by any stockholder for any purpose germane to the meeting, during normal business hours, at the principal office of the Company, 110 Marcus Drive, Melville, New York, for a period of ten days prior to the meeting.Whether or not you expect to attend in person, we urge you to vote your shares at your earliest convenience. You may vote by internet, by phone or by signing, dating, and returning your proxy at your earliest convenience. Voting by internet, telephone or mail will not prevent you from voting your stock at the meeting if you desire to do so, as your proxy is revocable at your option.
BY ORDER OF THE BOARD OF DIRECTORS
/s//s/ Claudette J.V. Chan
Claudette J.V. Chan, Secretary
PROXY STATEMENT
FOR ANNUAL MEETING OF
STOCKHOLDERS TO BE HELD
June 25, 2012MONDAY, JUNE 23, 2014This proxy statement, which is first being made available to shareholders on or about May
11, 20129, 2014 on the internet, is furnished in connection with the solicitation of proxies by the Board of Directors of Fonar Corporation (the "Company"), to be voted at the annual meeting of the stockholders of the Company to be held at 10:00 a.m. on June25, 201223, 2014 and any adjournment(s) thereof for the purposes set forth in the accompanying Notice of Annual Meeting of Stockholders. At the same time a paper notice regarding the availability of proxy materials will be mailed to stockholders. Stockholders who execute proxies retain the right to revoke them at any time prior to the exercise of the powers conferred thereby. The cost of solicitation of proxiesis towill be borne by the Company.The stockholders will have several options as to how to view the materials and vote their shares.
This year, theThe Company is posting the Notice of Annual Meeting and Proxy Statement, together with the Annual Report on the internet. You may read the materials online or print out a copy. You will also have the ability to vote online.
In the alternative, you may elect to receive an e-mail or the traditional paper copies of the Notice of Annual Meeting and Proxy Statement, and the Annual Report. There is no charge for receiving e-mail or paper copies, BUT you must request them if you want them. To facilitate timely delivery please make the request as instructed on or before June
11, 2012.3, 2014.To view the materials and vote on the internet, have the 12 Digit Control Number(s) located on the Notice Regarding the Availability of Proxy Materials available and visit:
www.proxyvote.com.www.proxyvote.com.Stockholders may request a copy of the Proxy Materials:
1. By internet
-– visitwww.proxy.com2. By telephone
-– 1-800-579-16393. By e-mail
-–sendmaterial@proxyvote.comOnly stockholders of record at the close of business on April
27, 201228, 2014 will be entitled to vote at the meeting. Shares of Common Stock are entitled to one vote per share, shares of Class B Common Stock are entitled to ten votes per share and shares of Class C Common Stock are entitled to twenty-five votes per share. At the close of business on April27, 2011,28, 2014, there were issued and outstanding5,861,2626,025,075 shares of Common Stock held of record by approximately2,6001,825 stockholders,158146 shares of Class B Common Stock held of record by1211 stockholders and 382,513 shares of Class C Common Stock held of record by 3 stockholders. The shares of Class A Nonvoting Preferred Stock, 313,438 shares held of record by approximately2,4431,807 stockholders at the close of business on April27, 2012,28, 2014, are not entitled to vote. Except for the shares of Class ANonvotingnon-voting Preferred Stock, there are no shares of Preferred Stock issued and outstanding.All shares of HMCA's issued and outstanding Common Stock are owned by Fonar.Any proxy may be revoked at any time before it is exercised by delivery of a written instrument of revocation or a later dated proxy to the Secretary of the Company at the principal executive office of the Company or, while the meeting is in session, to the Secretary of the meeting, without, however, affecting any vote previously taken. The presence of a stockholder at the meeting will not operate to revoke his proxy. The casting of a ballot by a stockholder who is present at the meeting, however, will revoke his proxy, but only as to the matters on which the ballot is cast and not as to any matters on which he does not cast a ballot or as to matters previously voted upon.
Proxies received by management will be voted at the meeting or any adjournment thereof. EACH PROXY WILL BE VOTED IN ACCORDANCE WITH THE SPECIFICATIONS MADE THEREIN BY THE PERSON GIVING THE PROXY. TO THE EXTENT NO CHOICE IS SPECIFIED, HOWEVER, THE PROXY WILL BE VOTED FOR
MANAGEMENT'SMANAGEMENT’S PROPOSALS. All ofmanagement'smanagement’s proposals have been unanimously approved by the Board of Directors.1. ELECTION OF DIRECTORS AND MANAGEMENT INFORMATION
Five directors are to be elected at the annual meeting, to hold office until the next annual meeting of stockholders and until their successors are elected and qualified. It is intended that the accompanying proxy will be voted in favor of the following nominees to serve as directors unless the stockholder indicates to the contrary on the proxy. All of the nominees are currently directors. Management expects that each of the nominees will be available for election.
NOMINEES FOR DIRECTORS AND OFFICERS
Raymond V. Damadian, M.D. (age
76)78), a nominee for Director, has been the Chairman of the Board and President of FONAR since its inception and Treasurer since February, 2001. 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 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 also the director and sole officer of theCompany'sCompany’s wholly-owned subsidiary, Health Management Corporation of America("HMCA"(“HMCA”).Claudette J.V. Chan (age
74)76), a nominee for Director, has been a Director of FONAR since October 1987. She also has been the Secretary of FONAR since January, 2008. Mrs. Chan has been employed since 1992 by HMCA and its predecessor, Raymond V. Damadian, M.D. MR Scanning Centers Management Company, as "site inspector," in which capacity she is responsible for supervising and implementing standard procedures and policies for MRI scanning centers. From 1989 to 1994 Mrs. Chan was employed by St. Matthew's and St. Timothy's Neighborhood Center, Inc., as the director of volunteers in the "Meals on Wheels" program, a program which cares for the elderly. 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 (age
84)86), a nominee for Director, 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 is a Director Emeritus of Harmony Heights of Oyster Bay, New York, which is a nonprofit residential school for girls with learning disabilities.Charles N. O'Data (age
76)78), a nominee for Director, 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 the 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.Mr. O'Data presently serves as Director of Philanthropic Advisors for McKinley Carter Wealth Services a regional wealth management firm.He founded The Beaver County Foundation, a Community Foundation, in 1992, and serves as its President. Mr.O'DataO’Data served as a director of Heritage Valley Health System, The Medical Center, Beaver for 25 years, three years as Chairman. Mr. O'Data is a graduate of Geneva College, where he received a B.S. degree in Economics in 1958.Robert Djerejian served as a Director for Fonar from June 2002 until his death at the age of 80 on August 21, 2011.Ronald G. Lehman (age
35)37), a nominee for Director, has been a Director of Fonar since April, 2012, when he was unanimously appointed by the remaining four Directors to fill the vacancy resulting from the death of former Director Robert Djerejian. From October, 2009 to the present, Mr. Lehman has served as Managing Director of Investment Banking with Bruderman Brothers, Inc., a private New York-based broker-dealer registered with the Securities and Exchange Commission and which is a member of the Financial Industry RegulatoryauthorityAuthority (FINRA) and the Securities Investor Protection Corporation (SIPC). Mr. Lehman directly manages all facets of thefirm'sfirm’s transaction processes, from deal origination, to sourcing capital, to negotiating deal structures, through documentation and closing. The firm provides buy and sell-side advisory, capital raising, and consulting services to lower middle-market companies. Mr. Lehman specializes in advising healthcare services companies and has recently completedrecapitalizations.several recapitalizations in the industry. He also participates in thefirm'sfirm’s merchant banking investments and oversees many of these assignments. From May, 2008 to October, 2009, Mr. Lehman served as Senior Vice President of Acquisitions at Health Diagnostics, LLC, where he managed thecompany'scompany’s acquisition and corporate finance activities. From March, 2000 to May, 2008, Mr. Lehman worked for various Bruderman entities as a buy and sell-side advisor and as a principal in several private equity transactions. From September, 1998 to March, 2000, Mr. Lehman worked at Deutsche Bank Securities, Inc. and last held the position of Associate in their Global Custody Group. Mr. Lehman graduated from Columbia University with a B.A. in 1998.CORPORATE GOVERNANCE, THE BOARD AND ITS COMMITTEES
All of the nominees are presently directors of the Company. The five nominees will be elected to hold office for the ensuing year or until their respective successors are elected and qualified. Of the five nominees, Messrs. Charles N.
O'Data,O’Data, Robert J. Janoff and Ronald G. Lehman are independent, as defined in the Securities and Exchange Commission Regulations and Nasdaq Market Place Rules. In making such determinations, there were no transactions, relationships or arrangements not disclosed in our SEC filings to be considered by the Board of Directors, in determining whether the director was independent.BOARD MEETINGS
During the year ended June 30,
2011,2013 the Board of Directors unanimously consented to take action in lieu of a meeting ontwofour occasions, and the audit committee met four times.The attendance of the Board of Directors at annual meetings is not required. The Chairman of the Board and Chief Executive Officer, Dr. Raymond V. Damadian, however,
has always attendedattends the annual meeting of stockholders where he acts as Chairman of the Meeting.Dr. Damadian receives no compensation for serving on the Board. The other directors are each paid $20,000 per year in their capacities as directors. This is the sole compensation payable to the directors.
Board Leadership Structure. The current Board Chairman, Dr. Raymond V. Damadian, is also the current President and Chief Executive Officer of the Company. In addition, although the Company has not selected a lead independent director, Charles N.
O'Data,O’Data, in his capacity as Chairman of the Audit Committee, effectively functions as such. The Company believes that theCompany'sCompany’s current model of the combined Chairman/Chief Executive Officer role is the appropriate leadership structure for the Company at this time. The Company believes that each of the possible leadership structures for a board has its particular pros and cons, which must be considered in the context of the specific circumstances, culture and challenges facing a company, and that such consideration fall squarely on the shoulders of acompany'scompany’s board and necessitates a diversity of views and experiences. The combined Chairman/Chief ExecutiveOfficersOfficer model is a leadership model that has served our shareholders well since the inception of the Company.The lead independent director, Charles N.
O'Data,O’Data, is the Chairman of the Audit Committee. As such he plays a leading role in the engagement of auditors and the review of theCompany'sCompany’s financial statements. Under certain circumstances, he also serves as a contact point for employees.The Company believes the combined Chairman/Chief Executive Officer position has certain advantages over other board leadership structures that continue to best meet the
Company'sCompany’s current needs, including:-Efficient communication between management and the Board;
-Clarity for the
Company'sCompany’s stockholders on corporate leadership and accountability;-The Chairman of the Board possessing the best knowledge of the
Company'sCompany’s strategy, operations and financial conditions; and-Continuity in the
Company'sCompany’s leadership, as Dr. Damadian founded the Company in 1978.The Company's Board of Directors has an audit committee. There is no standing compensation committee, nominating committee or other committee of the Board.
In accordance with the Nasdaq Marketplace Rules, the Board of Directors adopted a written charter for the audit committee which took effect in June, 2001 and was revised on November 17, 2004.
A copy of the charter is attached as Exhibit A to this proxy statement.All of the directors on the audit committee are independent.Stockholders may communicate with directors by writing to them at the Company in accordance with the
Company'sCompany’s corporate governance policies and code of conduct, or in any other manner the particular director may provide. Depending on the sensitivity and timing of a matter raised by a stockholder and the need for disclosure of matters to be made not to just one stockholder, but to the stockholders as a whole, it may not be possible for the director to reply to the stockholder.Due to the shareholdings of the
Company'sCompany’s Chairman of the Board and Chief Executive Officer, Dr. Raymond V. Damadian, which total more than 50% of the voting power of the Company, the Company is a controlled company for purposes of NASDAQ Marketplace Rule 4350(c).AUDIT COMMITTEE
The Audit Committee, which is comprised solely of independent directors, is governed by a Board approved charter that contains, among other things, the
Committee'sCommittee’s membership requirements and responsibilities. The audit committee oversees theCompany'sCompany’s accounting, financial reporting process, internal controls and audits, and consults with management and the independent public accountants on, among other items, matters related to the annual audit, the published financial statements and the accounting principles applied. As part of its duties, the audit committee appoints, evaluates and retains theCompany'sCompany’s independent public accountants. It also maintains direct responsibility for the compensation, termination and oversight of theCompany'sCompany’s independent public accountants and evaluates the independent publicaccountants'accountants’ qualifications, performance and independence.Financial Expert on Audit Committee: The Board has determined that Mr. Charles N.
O'Data,O’Data, who currently is a financial consultant to various entities and previously was the Vice President for Development for Geneva College, is the audit committee financial expert. The Board made a qualitative assessment of Mr.O'Data'sO’Data’s level of knowledge and experience based on a number of factors, including his formal education and experience.Board Oversight of Risk Management. The Company faces risk in many different areas, including business strategy; government regulation; financial condition; health care compliance; product research and development; competition for talent; business vitality; operational efficiency; quality assurance; reputation; intellectual property; and trade secrets, among others. The oversight function is carried out in the quarterly and annual Audit Committee meetings and by communication and meetings with the
Company'sCompany’s Chief Executive Officer, who also serves as Chairman of the Board and exercises the principal responsibility for oversight of risk management.AUDIT COMMITTEE REPORT
The audit committee has (a) reviewed and discussed the audited financial statements with management, (b) discussed with the independent auditors the matters required to be discussed by SAS 61 (Statement on Auditing Standards No. 61) and (c) has received the written disclosures and the letter from the independent accountants required by Independence Standards Board, Standard No. 1 and has discussed with the independent accountants the independent
accountant'saccountant’s independence.Based on the foregoing review and discussions, the audit committee recommended to the Board of Directors that the audited financial statements be included in the
Company'sCompany’s Annual Report on Form 10-K for the fiscal year ended June 30,2011.2013.The members of the audit committee are Messrs. Charles N.
O'Data,O’Data, Robert J. Janoff andsince April 2012,Ronald G. Lehman. Messrs.O'DataO’Data, Janoff andJanoffLehman are independent directors, as defined in the Securities and Exchange Commission Regulations and Nasdaq Market Place Rules.During the time he served as a director, up to August 21, 2011, Mr. Robert Djerejian also served as a member of the audit committee.NOMINATING COMMITTEE
The Board of Directors does not believe it requires a separate standing nominating committee because the Board of Directors is relatively small and can make the nominations acting as a whole. The Board does not have a policy with regard to director candidates recommended by stockholders because the absence of such recommendations makes a formal policy unnecessary. Historically, there usually has not been a need to identify new nominees in the absence of the resignation or death of an existing director. The remaining directors evaluate a new nominee based on his integrity, loyalty, competence and experience, and how his background complements that of the remaining directors.
Promoting diversity in the selection of nominees has not yet been considered. Traditionally, the Board has followed a policy of nondiscrimination and equal opportunity.
COMPENSATION COMMITTEE
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors does not believe it requires a separate standing compensation committee because the management, under the authority of the Chairman of the Board and Chief Executive Officer, is best equipped to make compensation decisions. The Board reserves the right to change this policy at any time.
Dr. Raymond V. Damadian, who serves as Chairman of the Board, Chief Executive Officer and President of the Company, participates in deliberation and the determination of executive officer and director compensation.
VOTE REQUIRED AND BOARD RECOMMENDATION
The directors will be elected by the vote of a plurality of the votes represented at the meeting. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ALL OF THE NOMINEES FOR THE DIRECTORS OF THE COMPANY.
INFORMATION REGARDING BENEFICIAL OWNERSHIP OF PRINCIPAL STOCKHOLDERS, DIRECTORS, AND MANAGEMENT
The following table sets forth information regarding the beneficial ownership of the Company's common shares held by holders of at least 5% of the shares of any class, by the nominees for directors, the Company's Chief Executive Officer, and the directors and executive officers as a group as of April
27, 2012.Shares Name and Address of Beneficially Beneficial Owner (1) Owned Percent of Class Raymond V. Damadian, M.D. c/o FONAR Corporation Melville, New York Nominee for Director, Director, President, PEO, PFO 5% + Stockholder Common Stock 120,302 2.05% Class C Stock 382,447 99.98% Class A Preferred 19,093 6.09% Claudette Chan Nominee for Director, Director and Secretary Common Stock 106 * Class A Preferred 32 * Robert J. Janoff Nominee for Director and Director Common Stock 3,000 * Class A Preferred 79 * Charles N. O'Data Nominee for Director and Director Common Stock 528 * Ronald G. Lehman, Nominee for Director and Director Common Stock 0 * Robert Djerejian Director until 8/21/2011 Common Stock 0 * All Officers, Directors and Nominees as a Group (6 persons) Common Stock 123,936 2.11% Class C Stock 382,447 99.98% Class A Preferred 19,204 6.13% -------------------------28, 2014.
Name and Address of Beneficial Owner (1) Shares Beneficially Owned Percent of Class Renaissance Technologies Corp.
600 Route 25A
East Setauket, NY 11733
5% + StockholderCommon Stock** 526,316 8.74 %
Raymond V. Damadian, M.D.
c/o FONAR Corporation
Melville, New York
Nominee for Director, Director,
President, PEO, PFO
5% + StockholderCommon Stock 112,952 1.87 % Class C Stock 382,447 99.98 % Class A Preferred 19,093 6.09 %
Claudette Chan Nominee for Director, Director and SecretaryCommon Stock 106 * Class A Preferred 32 *
Robert J. Janoff Nominee for Director and DirectorCommon Stock 2,000 * Class A Preferred 79 *
Charles N. O'Data Nominee for Director and DirectorCommon Stock 528 *
Ronald G. Lehman, Nominee for Director and DirectorCommon Stock 0 *
All Officers, Directors and Nominees as a Group (6 persons)Common Stock 115,586 1.92 % Class C Stock 382,447 99.98 % Class A Preferred 19,204 6.13 % ___________________________
* Less than one percent
** Shares reported as of 12/31/13; Renaissance Technologies is commonly described as a
Hedge Fund and does not participate in the control or management of the Company.
1. Address provided for each beneficial owner owning more than five percent of the voting securities of the Company.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Item 13,
"Certain“Certain Relationships and RelatedTransactions"Transactions” of theCompany'sCompany’s Annual Report on Form 10-K for the fiscal year ended June 30,20112013 which is specifically incorporated by reference herein. A copy of the Form 10-K is included in the Annual Report to Stockholders which is being sent to theCompany'sCompany’s stockholders with this Proxy Statement.)The Company believes that each of the related transactions described therein were on terms at least as favorable to the Company as were available from non-affiliated parties.
COMPENSATION DISCUSSION AND ANALYSIS OF DIRECTORS AND EXECUTIVE OFFICERS
With the exception of the Principal Executive Officer and Principal Financial Officer, Dr. Raymond V. Damadian, the compensation of the
Company'sCompany’s executive officers is based on a combination of salary and bonuses based on performance. Decisions concerning compensation are made on a case by case basis and not pursuant to standardized formulas, programs, policies or criteria. Dr. Damadian, who serves as both the Principal Executive Officer and Principal Financial Officer, receives compensation which consists only of a salary, which has remained at modest levels to conserve funds. The Board of Directors does not have a compensation committee and does not believe such a committee is required, in view of the manner in which compensation matters are handled. Dr. Raymond V. Damadianis the onlyand Claudette J.V. Chan are executiveofficer who is a memberofficers as well as members of the Board of Directors. Dr. Damadian, who also has voting control of the Company and serves as Chairman of the Board and President, participates in the determination of executive compensation for theCompany'sCompany’s officers.As noted above, the Company's compensation policy is primarily based upon the practice of pay-for-performance. Section 162(m) of the Internal Revenue Code imposes a limitation on the deductibility of nonperformance-based compensation in excess of $1 million paid to the Principal Executive Officer. No officer of the Company received compensation in excess of $1 million in fiscal
20112013 or in any previous fiscal year. The Board currently believes that the Company should be able to continue to manage its executive compensation program for others so as to preserve the related federal income tax deductions.The Company does not believe that there are any risks arising from its compensation policies and practices for its employees that are likely to have a material adverse effect on the Company.
The Company maintains no pension or deferred compensation plans except for a noncontributory 401(k) plan.
SUMMARY COMPENSATION TABLE
--------------------------The following table discloses compensation received for the three years ended June 30,
20112013 by theCompany'sCompany’s Principal Executive Officer and Principal Financial Officer.--------------------------------------------------------------------------------Plans, Stock Pension, All and Option Deferred Other Year Salary Bonus Awards Compensation Compensation Total ---- ---------- ----- ------ ------------ ------------ ---------- 2011 $35,934.29 0 0 0 0 $35,934.29 2010 $57,358.12 0 0 0 0 $57,358.12 2009 $72,285.12 0 0 0 0 $72,285.12
Name and Principal Position, Position Year Salary Stock and Option Awards Plans, Pension, Deferred Compensation All Other Compensation Total
Raymond V. Damadian$ 36,002.26 0 0 0 0 $ 36,002.26 Chairman of the Board; President; $ 36,111.42 0 0 0 0 $ 36,111.42 Acting Principal Financial Officer; Director $ 35,934.29 0 0 0 0 $ 35,934.29 No executive officer has a written or unwritten employment agreement with the Company.
Salaries, bonuses and discretionary stock and stock option awards comprise the full amount of total compensation. The only exceptions are commissions, based on a percentage of the sales prices, payable to salesmen.
Compensation Pursuant to Stock Options and SAR Grants
No stock options or stock appreciation rights were granted to the
Company'sCompany’s Principal Executive Officer and Principal Financial Officer during fiscal2011.2013.Option/SAR Exercises and Year End Values
No options or stock appreciation rights were exercised by the
Company'sCompany’s Chief Executive Officer during fiscal2011.2013. TheCompany'sCompany’s Chief Executive Officer did not hold any unexercised stock options or stock appreciation rights at the end of fiscal2011.2013.DIRECTOR COMPENSATION
The following table shows the compensation paid to the Directors for fiscal
2011 --------------------------------------------------------------------------------
| Name (a) |
Fees earned or paid in cash ($) | Stock awards ($) (c) | Option awards ($) (d) | Non-equity incentive plan compensation ($) (e) | Nonqualified deferred compensation earnings ($) | All other compensation ($) (g) | Total ($) | |||||||||||||||||||||
| Claudette J.V. Chan | $ | 20,000.24 | 0 | 0 | 0 | 0 | 0 | $ | 20,000.24 | |||||||||||||||||||
| Charles N. O’Data | $ | 20,000.24 | 0 | 0 | 0 | 0 | 0 | $ | 20,000.24 | |||||||||||||||||||
| Robert Janoff | $ | 20,000.24 | 0 | 0 | 0 | 0 | 0 | $ | 20,000.24 | |||||||||||||||||||
| Ronald G. Lehman | $ | 20,000.24 | 0 | 0 | 0 | 0 | 0 | $ | 20,000.24 | |||||||||||||||||||
With the exception of Dr. Damadian who receives no compensation for serving as a director, each director is entitled to receive $20,000 per annum for his or her services as a director of the Company, including service on any committee of the Board of Directors. No other fees are paid to the directors for their services as directors of the Company.
2. ADVISORY VOTE ON COMPENSATION OF THE COMPANY’S NAMED EXECUTIVE OFFICERS
The following proposal provides the Company’s stockholders with an opportunity to vote to approve, on an advisory basis, the compensation of the Company’s named executive officers, as disclosed in this proxy statement. In considering your vote, you may wish to review with care the “Compensation Discussion and Analysis” section beginning on page 9, which provides details as to the Company’s compensation policies, procedures and decisions, as well as the Summary Compensation Table and other related compensation tables, notes and narrative disclosures under the executive compensation section of this proxy statement. This vote is not intended to address any specific element of the Company’s executive compensation program, but rather the overall compensation program for the Company’s named executive officers.
In accordance with Section 14A of the Securities Exchange Act of 1934, we are asking stockholders to approve the following advisory resolution at the Annual Meeting of Stockholders:
RESOLVED, that the stockholders of Fonar Corporation (the “Corporation”) approve, on an advisory basis, the overall compensation of the Corporation’s named executive officers disclosed in the Compensation Discussion and Analysis, Summary Compensation Table and related compensation tables, notes and narrative discussion in this Proxy Statement for the Annual Meeting of Stockholders.
The Board of Directors recommends a vote FOR this resolution because it believes that the policies and practices described in the Compensation Discussion and Analysis are effective in achieving the Company’s goals of rewarding sustained financial and operating performance and leadership excellence and aligning the executives’ long-term interests with those of the stockholders, as well as motivating the executives to remain with the Company for long and productive careers.
This advisory resolution, commonly referred to as a “say-on-pay” resolution, is non-binding on the Board of Directors. Although non-binding, the Board will review and consider the voting results when evaluating our executive compensation program.
3. RATIFICATION OF SELECTION OF AUDITORS
The Board of Directors selected Marcum LLP, as the Company's independent auditors for the fiscal year ending June 30, 2012.2014. The stockholders will be asked to ratify this action by the Board. Marcum LLP were the Company'sCompany’s auditors for the fiscal years ended June 30, 2009,2011, June 30, 20102012 and June 30, 2011.
2013.
One or more representatives of Marcum LLP, are expected to be present at the Meeting with the opportunity to make a statement if they desire to do so, and to be available to respond to appropriate questions.
The affirmative vote of shares holding a majority of the votes represented at the meeting is required to ratify the selection of auditors by the Board of Directors. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL.
AUDIT FEES
The aggregate fees billed by Marcum LLP for the audit of the Company'sCompany’s annual financial statements for the fiscal year ended June 30, 20102013 and the reviews of the financial statements included in the Company'sCompany’s Forms 10-Q for the fiscal year ended June 30, 20112013 were $417,480.
$423,564.
The aggregate fees billed by Marcum LLP for the audit of the Company'sCompany’s annual financial statements for the fiscal year ended June 30, 2010,2012, and the reviews of the financial statements included in the Company'sCompany’s Forms 10-Q for the fiscal year ended June 30, 20102012 were $465,006.
$404,866.
All work on the audits in each of the last two fiscal years was performed by full-time permanent employees of Marcum LLP.
AUDIT-RELATED FEES
No audit-related fees were billed by Marcum LLP for the fiscal years ended June 30, 20112013 and June 30, 20102012 for services related to the audit or review of our financial statements that are not included under the caption "AUDIT FEES"“AUDIT FEES”.
TAX FEES
The aggregate fees billed by Marcum LLP for tax compliance, tax advice and tax planning in the fiscal years ended June 30, 20112013 and June 30, 20102012 were $82,438$104,301 and $116,439,$122,675, respectively.
ALL OTHER FEES
The aggregate fees billed by Marcum LLP for all other services rendered by them during the fiscal years ended June 30, 20112013 and June 30, 20102012 were $63,138$95,929 and $59,294,$7,597, respectively, which included services in connection with the registration of securities, employee benefit plans and reviews and procedures that we requested Marcum LLP to undertake to provide assurances on matters not required by laws or regulations.
No fees were billed by Marcum LLP for the fiscal years ended June 30, 20112013 or June 30, 20102012 for designing, operating, supervising or implementing any of our financial information systems or any hardware or software systems for our financial information.
Since January 1, 2003, the audit committee has adopted policies and procedures for pre-approving all non-audit work performed by its 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.
The Company'sCompany’s audit committee believes that the provision by Marcum LLP of services in addition to audit services in fiscal 20112013 and 20102012 were compatible with maintaining their independence. The services to be performed are presented by Marcum LLP to the committee or its chairman. The matter is then evaluated and a decision made.
PROPOSALS OF STOCKHOLDERS
Proposals of stockholders intended to be presented at next year'syear’s annual meeting of stockholders must be received by the Company no later than January 16, 2013February 20, 2015 to be included in the Company's proxy statement and form of proxy related to that meeting.
SOLICITATION OF PROXIES
The proxy accompanying this proxy statement is solicited by the Board of Directors of the Company. Proxies may be solicited by officers, directors, and regular supervisory and executive employees of the Company, none of whom will receive any additional compensation for their services. Such solicitations may be made personally, or by mail, e-mail, facsimile, telephone, telegraph, or messenger. The Company will pay persons holding shares of stock in their names or in the names of nominees, but not owning such shares beneficially, such as brokerage houses, banks, and other fiduciaries, for the expense of forwarding solicitation materials to their principals. All of the costs of solicitation of proxies will be paid by the Company.
VOTING TABULATION
The election of the Company's directors requires a plurality of the votes represented in person or by proxy at the meeting. The ratification of proposals and the selection of auditors requires the affirmative vote of a majority of the votes represented in person or by proxy at the meeting. Votes cast by proxy or in person at the meeting will be tabulated by the Company.
A stockholder who abstains from voting on any or all proposals will be included in the number of shareholders present at the meeting for the purpose of determining the presence of a quorum. Abstentions will not be counted either in favor of or against the election of the nominees or other proposals. Under the rules of the National Association of Securities Dealers, brokers holding stock for the accounts of their clients who have not been given specific voting instructions as to a matter by their clients in certain cases may vote their clients' proxies in their own discretion. Where a proposal requires a majority of the votes present for its passage, an abstention or broker non-vote will have the same effect as a negative vote.
OTHER MATTERS
The Board of Directors does not intend to bring any other business before the meeting, and so far as is known to the Board, no matters are to be brought before the meeting except as specified in the notice of the meeting. However, as to any other business which may properly come before the meeting, it is intended that proxies, in the form enclosed, will be voted in respect thereof in accordance with the judgment of the persons voting such proxies, where the authorization to do so has been granted.
DATED: Melville, New York, May 11, 2012
9, 2014
A COPY OF THE COMPANY'S FORM 10-K REPORT FOR FISCAL YEAR 2011,2013 CONTAINING INFORMATION ON OPERATIONS, FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, IS AVAILABLE UPON REQUEST. PLEASE WRITETO:
INVESTOR RELATIONS DEPARTMENT
FONAR CORPORATION
110 MARCUS DRIVE
MELVILLE, NEW YORK 11747
EXHIBIT A
FONAR CORPORATION
REVISED AUDIT COMMITTEE CHARTER
This Audit Committee Charter, as most recently revised, adopted by the Board of
Directors (the "Board") of Fonar Corporation (the "Company").
1. PURPOSE
The Audit Committee (the "Committee") shall assist the Board of Directors (the
"Board") in fulfilling its responsibility to oversee (i) management's conduct
of: the Company's financial reporting, including by overviewing the integrity of
the financial reports and other financial information provided by the Company to
any governmental or regulatory body, the Company's securityholders and other
users thereof; (ii) management's establishment and conduct of the Company's
systems of internal accounting and financial controls, including the Company's
internal audit function; (iii) the qualifications, engagement, compensation,
independence and performance of the Company's independent auditors, the conduct
of the annual audit and any other audit, attest or review services, and the
engagement of the independent auditors to provide any non-audit services; (iv)
the preparation of the audit committee report required by U.S. Securities and
Exchange Commission ("SEC") rules; (v) the Company's legal and regulatory
compliance; and (vi) the Company's codes of conduct, as established by
management and the Board. The Committee's role shall apply equally with respect
to any subsidiary of the Company (including any partnership or joint venture)
whose financial results are consolidated with the financial results of the
Company and any other subsidiary which is directly or indirectly controlled by
the Company and also with respect to any separate financial reports of any such
subsidiary.
In discharging its role, the Committee is empowered to investigate any matter
that comes to its attention and shall have access to all books, records,
facilities and personnel of the Company which are necessary in order for the
Committee to perform its duties hereunder. The Committee has the power to retain
legal counsel, auditors or other experts as it determines appropriate to carry
out its role and responsibilities and shall be provided adequate funding from
the Company to engage such advisors and for the administration of the
Committee's affairs. The Company shall compensate the independent auditor for
its audit, review and attest services as determined and directed by the
Committee.
The Committee shall report regularly to the Board on the Committee's activities,
including all actions taken by the Committee on behalf of the Company and on any
material issues that arise with respect to the quality or integrity of the
Company's financial statements, the performance and independence of the
independent auditor, the performance of the internal audit function, the
Company's compliance with legal or regulatory requirements and the adequacy of
and compliance with the Company's codes of conduct to the extent such codes of
conduct relate to the duties and purposes of the Audit Committee as described
herein and any other matters the Committee reasonably deems appropriate in
connection with the performance of its duties hereunder or which the Board
requests. The Committee shall report to the Board at least annually on its
expenses, including the compensation of the independent auditor.
II. COMMITTEE MEMBERSHIP
The Committee shall consist of three or more members of the Board, as shall be
determined by the Board, each of whom has been determined by the Board to be
"independent" in accordance with the applicable listing standards of the NASD.
All members of the Committee shall meet the applicable financial literacy
requirements of the NASD and at least one member shall be an "audit committee
financial expert" as such term is defined under applicable SEC rules. No member
of the Committee may serve on the audit committee of more than three public
companies, including the Company, unless the Board of Directors has determined
that such simultaneous service would not impair the ability of such member to
effectively serve on the Committee.
III. COMMITTEE MEETINGS; SUBCOMMITTEES
The Committee shall meet on a regularly-scheduled basis at least four times per
year or more frequently as circumstances dictate. The Committee's meetings shall
include, on at least a quarterly basis, an executive session with the
independent auditor to provide the opportunity for full and frank discussion of
the Company's financial reporting without any member of senior management
present, except for the Company's General Counsel if the Committee so desires.
IV. RESPONSIBILITIES AND FUNCTIONS
The Committee's role is one of oversight. The Committee's primary responsibility
relates to the Company's financial reporting and its other responsibilities and
functions as stated herein, while important in their own right, are ancillary to
the accurate and complete presentation of the Company's financial position and
prospects. The Company's management is responsible for preparing the Company's
financial statements, for assuring the Company's compliance with its legal and
regulatory obligations and for the adherence by Company personnel with the
Company's business policies and codes of conduct. The Company's independent
auditor is responsible for auditing the Company's financial statements and
assessing the adequacy of the Company's internal controls. The Company's
management and independent auditor have more knowledge and detailed information
about the Company, greater expertise in financial reporting, internal control
matters, the legal and regulatory obligations of the Company and the details of
the Company's codes of conduct and business policies, and greater opportunity to
analyze financial reporting issues facing the Company than do Committee members.
Consequently, in carrying out its oversight responsibilities, the Committee does
not provide any expert or special assurance as to the Company's financial
statements, internal controls, legal compliance or adherence to its codes of
conduct and business policies or any professional certification as to the
independent auditor's work.
The following functions of the Committee are specified as a guide, with the
understanding that the Committee will exercise its judgment in determining the
specific activities the Committee may undertake at any time and in its
activities may diverge from this guide as appropriate given the circumstances.
The Committee is authorized to carry out these and such other functions and
responsibilities as are assigned by the Board from time to time and to take any
actions reasonably related to the Committee's responsibilities as mandated by
this Charter.
To fulfill its purpose, the Committee shall:
1. appoint, subject to ratification of the appointment by the shareholders,
and, if appropriate, dismiss the accounting firm which shall audit the
Company's annual financial statements and any other accounting firm which
shall provide to the Company any other audit, attest or review services
(each of which shall be considered an "independent auditor" for purposes
for this Charter), and evaluate the performance, determine the
compensation and oversee the work of the independent auditors; the
independent auditors shall report directly to the Committee and the
Committee shall resolve any disagreement between management and the
independent auditors regarding financial reporting In connection with the
appointment of the Company's independent auditors, the Committee shall on
an annual basis:
(a) receive and review a formal written statement from the accounting
firm to be retained as the Company's independent auditor delineating
all relationships between the accounting firm and the Company
(consistent with Independence Standards Board Standard No. 1 and any
additional or successor standard established by the Public Company
Accounting Oversight Board) and also delineating any services the
accounting firm has provided to the Company's chief executive, chief
financial and chief accounting officer; the Committee shall actively
engage in a dialogue with such accounting firm with respect to any
disclosed relationships or services that may impact the objectivity
and independence of the accounting firm and take appropriate action
in response to the accounting firm's report to satisfy itself of the
auditor's independence;
(b) consider whether, in the interest of assuring continuing
independence of the independent auditor, the Company should
regularly rotate the accounting firm that serves as its independent
auditor;
(c) set clear policies with respect to the Company's hiring of employees
or former employees of the independent auditors;
(d) receive and review a report from the independent auditors
describing: (i) such firm's internal quality-control procedures and
(ii) any material issues raised by the most recent internal
quality-control review, peer review, or Public Company Accounting
Oversight, Board Review of such firm, or by any inquiry or
investigation by governmental or professional authorities, within
the preceding five years, regarding one or more independent audits
carried out by the firm, and any steps taken to deal with any such
issues;
2. review and approve any auditing and non-auditing services to be provided
by the Company's independent auditors, including the adoption by the
Committee of any policies and procedures detailing services which the
independent auditors are permitted to provide to the Company without
specific advance approval by the Committee, if any, except that if
services rendered by the auditors were not recognized as non-audit
services at the time of the independent auditor's engagement, such
services shall be promptly brought to the attention of the Committee and
approved by the Committee prior to the completion of the audit.
3. review and discuss with management and the independent auditor on a
regular basis: (i) the adequacy of the Company's internal and disclosure
controls and procedures, including computerized information system
disclosure controls and procedures and security; (ii) any significant
deficiencies or material weaknesses in the design or operation of the
Company's internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial data that are
reported to the Committee; (iii) any fraud, whether or not material, that
involves management or other employees who have a significant role in the
Company's internal controls that are reported to the Committee; and (iv)
any findings and recommendations of the independent auditor with regard to
such matters, together with management's responses;
4. review and discuss with management, including the chief financial officer
and chief accounting officer, and the independent auditor (i) any
significant audit findings during the year, including the status of
previous audit recommendations; (ii) any audit problems or difficulties
encountered in the course of the auditor's work, including any
restrictions on the scope of activities or access to required information;
(iii) any changes required in the scope of the audit plan; (iv) the audit
budget and staffing; and (v) the coordination of audit efforts in order to
monitor completeness of coverage, reduction of redundant efforts, and the
effective use of audit resources;
5. review and discuss with management and the independent auditor accounting
policies that may be viewed as critical; review and discuss significant
changes in Company accounting policies and any accounting and financial
reporting proposals (including changes in generally accepted accounting
principles) that may have a material impact on the Company's financial
reports; inquire as independent auditor's view of the accounting treatment
related to significant new Company transactions or other significant
matters or events not in the ordinary course of the Company's business and
inquire as to the independent auditor's views about whether Company
accounting principles as applied are conservative, moderate, or aggressive
from the perspective of income, asset, and liability recognition, and
whether or not those principles reflect common or minority practices;
6. review and discuss with management and the independent auditor any
financial or non-financial arrangements that do not appear in the
financial statements of the Company but are material to the Company's
financial position or performance; and review, discuss with management and
the independent auditor, and approve, any transactions or courses of
dealing with related parties (e.g., including significant shareholders of
the Company, directors, corporate officers or other members of senior
management or their family members) that are material in size or involve
terms or other aspects that differ from those that would likely be
negotiated with independent parties, as determined by the Committee to
warrant review by the Committee;
7. review and discuss with the independent auditor: (i) any accounting
adjustments that were noted or proposed by the independent auditor but
were "passed" (as immaterial or otherwise), (ii) any communications
between the audit team and the audit firm's national office respecting
auditing or accounting issues presented by the engagement and (iii) any
"management" or "internal control" letter issued, or proposed to be
issued, by the independent auditor to the Company;
8. review and discuss with management, including the chief financial officer
and chief accounting officer, and the independent auditor any significant
risks or exposures to which the Company is subject and assess the
Company's underlying policies with respect to risk assessment and risk
management and the steps management has taken to minimize risks;
9. review the Company's financial statements, including: (i) prior to public
release, reviewing and discussing with management and the independent
auditor the Company's annual and quarterly financial statements to be
filed with the SEC, including (a) the Company's disclosures under
"Management's Discussion and Analysis of Financial Condition and Results
of Operations", (b) the certifications regarding the financial statements
or the Company's internal accounting and financial controls and procedures
and disclosure controls or procedures filed with SEC by the Company's
chief executive and financial officers and personnel and any
qualifications thereon, (c) the matters required to be discussed with the
independent auditor by Statement of Auditing Standards No. 61 or No. 71;
(ii) with respect to the independent auditor's annual audit report and
certification, before release of the annual audited financial statements,
meet separately with the independent auditor without any management member
present and discuss the independent auditor's assessment of the adequacy
of the Company's system of internal accounting and financial controls and
the appropriateness of the accounting principles used in and the judgments
made in the preparation of the Company's audited financial statements and
the quality of the Company's financial reports; (iii) also in connection
with the release of the Company's audited annual financial statements,
meet separately with management and the Company's financial personnel and
discuss management's evaluation of the adequacy of the Company's system of
internal accounting and financial controls and the appropriateness of the
accounting principles used in and the judgments made in the preparation of
the Company's audited financial statements and the quality of the
Company's financial reports; (iv) make a recommendation to the Board of
Directors regarding the inclusion of the audited annual financial
statements in the Company's Annual Report on Form 10-K to be filed with
the SEC; and (v) prior to submission to any governmental authority of any
financial statements of the Company with the SEC, review such financial
statements and any report, certification or opinion thereon provided by
the independent auditor;
10. discuss with management and the independent auditor, as appropriate,
earnings press releases and financial information and earnings guidance
provided to analysts and to rating agencies;
11. establish and maintain procedures for the receipt, retention and treatment
of complaints regarding accounting, internal accounting controls or
auditing matters, and the confidential, anonymous submission by employees
of concerns regarding questionable accounting or auditing matters;
12. review periodically with the General Counsel: (i) legal and regulatory
matters that may have a material impact on the Company's financial
statements and (ii) the scope and effectiveness of the Company's legal
compliance policies and programs;
13. receive and act upon any reports of a material violation of law received
from any attorney for the Company in accordance with the SEC's Rule of
practice, any reports from legal counsel appointed or retained, with the
authorization of the Committee, to investigate any such report and any
reports of the General Counsel on any proceeding relating to such reports;
14. review periodically with management the adequacy of the Company's codes of
conduct (including the Company's policies and procedures concerning
trading in Company securities and use in trading of proprietary or
confidential information) and the compliance therewith by Company
personnel and review and approve any waivers sought under such codes with
respect to directors, executive officers and senior financial officers)
but any waiver reviewed by the Committee shall be reported by the
Committee to the Board and approval of the Board as well shall be required
for any such waiver to any officer who is a member of the Board;
15. review and advise the Board with respect to the appointment, reassignment,
replacement or dismissal of the chief financial officer and chief
accounting officer and other financial or accounting personnel and consult
with the Compensation Committee, if any, regarding any reduction in the
salary or benefits of, the terms of participation in any incentive
compensation program by and any discretionary bonus or incentive award to
the chief financial officer and chief accounting officer;
16. prepare a report to be included in the Company's annual proxy statement
stating whether or not the Committee: (i) has reviewed and discussed the
Company's audited financial statements with management; (ii) has discussed
with the independent auditor the matters required to be discussed by SAS
No. 61 and 90; (iii) has received the written disclosure and letter from
the independent auditor (delineating all relationships such firm has with
the Company) and has discussed with such firm its independence; and (iv)
based on the review and discussions referred to above, the members of the
Committee recommended to the Board that the audited financials be included
in the Company's Annual Report on Form 10-K for filing with the U.S.
Securities and Exchange Commission;
17. conduct an annual self-evaluation of the performance of the Committee,
including its compliance with this Charter, and review and reassess the
adequacy of this Charter; and
18. maintain minutes and other records of Committee meetings and activities.
FONAR CORPORATION
Proxy - Annual Meeting of Stockholders for fiscal year 2014 -
Monday, June 25, 201223, 2014 10:00 AM
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned, a stockholder of Fonar Corporation (the "Company"), hereby revoking any proxy heretofore given, does hereby appoint Raymond V. Damadian, Ronald G. Lehman, Luciano Bonanni, Kurt Reimann, and Daniel Culver and Ellen Yeske, and each of them, proxies with full power of substitution, for and in the name of the undersigned to attend the Annual Meeting of the Stockholders of the Company to be held at the Double Tree Hotel, Wilmington Downtown, 700 King Street, Wilmington, Delaware on Monday, June 25,
201223, 2014 at 10:00 a.m., local time, and at any adjournment(s) thereof, and there to vote upon all matters specified in the notice of said meeting, as set forth herein, and upon such other business as may properly and lawfully come before the meeting, all shares of stock of the Company which the undersigned would be entitled to vote if personally present at said meeting.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS GIVEN, SUCH SHARES WILL BE VOTED FOR ALL PROPOSALS.
THE BOARD OF DIRECTORS RECOMMENDS YOU VOTE FOR THE FOLLOWING:
The Board of Directors Recommends you vote for the following:
No. 1. Election of Directors
FOR ALL WITHHOLD ALL FOR ALL EXCEPT
__________ __________ __________
[ ] [ ] [ ]
[ ] [ ] [ ]
[__________] [__________] [__________]
FOR ALL | WITHOLD ALL | FOR ALL EXCEPT | ||||
INSTRUCTION: To withhold authority to vote for any individual nominee(s), mark "FOR ALL EXCEPT" and circle or cross out the name(s) of those nominee(s).
01 - Raymond V. Damadian, 02 - Claudette J. V. Chan, 03 - Robert J. Janoff,
04 - Charles N. O'Data, 05 -– Ronald G. Lehman
THE BOARD OF DIRECTORS RECOMMENDS YOU VOTE FOR THE FOLLOWING PROPOSALS:
The Board of Directors recommends you vote for proposals 2, 3 and 4:
No. 2. On an advisory basis, to approve the executive compensation.
| FOR | AGAINST | ABSTAIN | ||||
No. 3. To ratify the selection of Marcum LLP as the Company's independent auditors for the fiscal year ended June 30, 2012.
FOR AGAINST ABSTAIN
__________ __________ __________
[ ] [ ] [ ]
[ ] [ ] [ ]
[__________] [__________] [__________]
2014.
| FOR | AGAINST | ABSTAIN | ||||
No. 3.4. In their discretion, the Proxies are authorized to vote upon such other business as may properly come before the meeting.
FOR AGAINST ABSTAIN
__________ __________ __________
[ ] [ ] [ ]
[ ] [ ] [ ]
[__________] [__________] [__________]
__________________________________ _______________________
Signature Date
__________________________________ _______________________
Signature (Joint owners) Date
| FOR | AGAINST | ABSTAIN | ||||
| Signature | Date | ||
| Signature (Joint owners) | Date |
Please sign exactly as your name(s) appear(s) hereon or on your stock certificate(s). When signing as an attorney, executor, proxy, administrator, trustee, guardian or other fiduciary, please give full title as such. Joint owners should each sign personally. All holders must sign. If a corporation, or a partnership please sign in full corporate or partnership name, by an authorized officer.
FONAR 2013 ANNUAL REPORT
FONAR PRESIDENT’S LETTER TO SHAREHOLDERS
May 2014
Dear Shareholders:
I am pleased to report to our shareholders that business for FONAR continues to be robust and healthy. Fiscal 2013 proved to be more profitable than fiscal 2012. In fiscal 2013 we reported profits of $7.5 million from operations, compared to $7.2 million in fiscal 2012, net income of $10.3 million compared to $6.9 million for fiscal 2012 and revenues of $49.1 million compared to $39.4 million in fiscal 2012.
At the conclusion of our second fiscal quarter at December 31, 2013, FONAR had 15 straight quarters of positive net income and income from operations, of which the past ten quarters each showed profitability greater than $1.5 million. Revenues increased to $34.4 million for the first six months of fiscal 2014, compared to $19.1 million for the first six months of fiscal 2013.
On a per share basis, FONAR earned $0.91 of diluted net income per common share available to common stockholders during fiscal 2012, $1.34 for fiscal 2013 and $0.70 for the first six months of fiscal 2014.
The Company stock, which is listed on the NASDAQ Capital Markets under the symbol FONR, has had substantial interest by institutions. In fact, institutional ownership for the company grew from 3% at December 31, 2011 to over 21% one year later.
I am very pleased with these results. Our Company has always had great promise for its investors but now it has been achieving long sought goals.
A Brief Overview of FONAR
FONAR is the Original MRI Company – the first-ever to produce an MRI scanner. With great pride, we call ourselves the inventor of the MRI scanner. We incorporated in 1978 and introduced the first commercial MRI scanner (the QED 80) in 1980. We have installed nearly 300 recumbent-OPEN MRIs and 157 FONAR UPRIGHT® Multi-Position™ MRIs world-wide. The company, headquartered on Long Island, New York, became a publicly traded company in 1981.
Our primary product is the FONAR UPRIGHT® Multi-Position™ MRI (also known as the STAND-UP® MRI), the only whole-body MRI that performs Position™ Imaging (pMRI™) and scans patients in numerous weight-bearing positions, i.e. standing, sitting, bending, in flexion and extension, as well as the conventional lie-down position. The FONAR UPRIGHT® Multi-Position™ MRI often detects patients’ problems that lie-down MRIs cannot.
Only the FONAR UPRIGHT® Multi-Position™ MRI Offers a Nearly Perfect Patient Experience
The FONAR UPRIGHT® Multi-Position™ MRI has a near-zero claustrophobic rejection rate by patients. Approximately 85% of patients are scanned sitting while they can watch a 42” flat-screen TV. Patients in need of an MRI scan have driven long distances to the nearest Upright® MRI in order to avoid being scanned in one of our competitor’s highly claustrophobic “tube” or “tunnel” MRIs. This alone is a major reason for the success of this scanner over the conventional recumbent-only MRI technology, but there is much more to offer medically.
FONAR Plan to Cut Costs and Focus on Revenue Producing Segments
FONAR has been able to withstand the difficulties or recent years by making some deep cost-saving cuts and by redirecting its resources to two of its main divisions – the Field Service Division and most significantly the company’s MRI facility management subsidiary, Health Management Corporation of America (HMCA), which has been experiencing vigorous growth from one year to the next.
The key to HMCA’s success is that nearly every one of the diagnostic imaging centers it manages is equipped with the FONAR UPRIGHT® Multi-Position��� MRI, also known as the STAND-UP® MRI. The clinical importance of Position-of-Symptoms MRI and Weight-Bearing MRI has been steadily gaining momentum in the medical community. And, of course, the extraordinarily spacious, “non-claustrophobic”, patient environment of the scanner has enormous appeal among patients everywhere. HMCA-managed MRI facilities completed roughly 30,000 MRI scans in 2009; 35,000 MRI scans in 2010; 41,000 in 2011; 45,000 in 2012; and together with its new subsidiary, Health Diagnostics Management (HDM), 114,000 scans in 2013.
Key Acquisition Bolsters HMCA’s Patient Throughput
On March 5 of 2013, FONAR and its subsidiary HMCA acquired a majority interest (50.5%) in a newly formed limited liability company, Health Diagnostics Management, LLC (HDM). Prior to the acquisition, HMCA was managing 11 STAND-UP® MRI diagnostic centers – 8 in New York and 3 in Florida, collectively completing 45,000 scans in 2012. In one giant step, HMCA grew by fourteen (14) MRI facilities under HMCA management - 10 in New York and 4 in Florida, 12 of them equipped with STAND-UP® MRIs. Those 14 centers completed 68,000 MRI scans in 2012. Together the two groups of centers completed 113,000 scans in 2012, a strong indicator of the merits of the acquisition.
In 2013, the centers managed by HMCA and HDM completed 114,000 scans. The seamless combination of the two business owing to the hard work and unparalleled talent of the employees at all levels was the key to the success of this acquisition. By combining the resources of HMCA and HDM, we enjoyed the benefits of 1) economies of scale, 2) shared administrative and technical expertise and capabilities, and 3) joint marketing strategies. HMCA’s 11 STAND-UP® MRIs together with HDM’s STAND-UP® MRI’s form a network of 23 STAND-UP® MRIs, the largest in the world.
But we’re not finished growing. We will continue to pursue additional management contracts, primarily in New York and Florida.
FONAR UPRIGHT® MRI Opens a New Medical Frontier With Cinematography of Upright CSF Flow
The FONAR UPRIGHT® Multi-Position™ MRI imaging has a new and powerful imaging tool that makes motion pictures of CSF (cerebrospinal fluid) flow as it moves in and out of the vertically positioned brain, i.e. as it flows out of the lateral ventricles of the vertical weight-bearing brain, down through the Foramen of Monro into the 3rd ventricle, down the Aqueduct of Sylvius into the 4th ventricle and down the full length of the spinal canal and back up into the vertical weight-bearing brain. This new vertical position imaging technology, created and introduced by FONAR's UPRIGHT® Multi-Position™ MRI, opens a new frontier in clinical medicine.
This cinematography of CSF flow in the Upright position, in and out of the brain, has proven uniquely sensitive to the visualization of any impairments of CSF flow, often indicating the etiology of cervical anatomy dislocation that might be contributing to the symptoms of the patient.
In football, for example, "U.S.-style football sends more athletes to emergency rooms for neck injuries than ice hockey or soccer according to a new study" (WebMD,Health News, April 20, 2005). For the period 1990 to 1999, "there were an estimated 5,038 neck injuries from ice hockey, 19,341 from soccer, and 114,706 from American football." "The rates for total neck injuries and combined neck contusions, sprains or strains were higher for (American) football than for ice hockey, or soccer in all years for which data were available" (Br. J. Sports Med. 2005;39:189).
Recognizing that such neck injuries may result in obstructions of the normal vertical cerebrospinal fluid (CSF) flow from the brain down the spinal column to the sacrum and back into the brain, it is critical that symptomatic professional athletes, football players, in particular, have FONAR UPRIGHT® Multi-Position™ MRI examinations of their head and neck and vertical cerebrospinal fluid (CSF) flow cinematography of the cranio-cervical junction and cervical spine to assure that CSF is flowing up and down the spinal column normally and that there are no obstructions to flow.
Normal Pressure Hydrocephalus (NPH) and Ventriculomegaly
Cinematography of CSF flow allows visualization of a neurologic syndrome called normal pressure hydrocephalus (NPH). It is determined when a measurement by lumbar puncture of CSF pressure in the lumbar spinal canal is found to be normal. It is determined to be hydrocephalus when the ventriculomegaly is observed on an MRI. However, this is a quandary. What explains the coexistence of these two diametrically opposed conditions? If there is no measured increase in intracranial pressure (ICP), what accounts for the observed vertriculomegaly? Among the proposed explanations for the normal measured pressure of NPH is the possibility that the CSF pressure measurement in the lumbar canal is being obtained below a higher-up obstruction in the spinal canal (e.g. a cervical CSF flow obstruction) and is not therefore elevated, while the CSF pressure above the obstruction (e.g. in the brain) is elevated but not readily measured. This dilemma is now addressable by FONAR’s new UPRIGHT® CSF flow ciné technology, which can readily image the integrity of CSF flow throughout the full length of the spinal canal and quantify it. Thus the CSF flow obstructions causing the ICP (intracranial pressure) increases responsible for the hydrocephic ventriculomegalies can now be directly visualized so they can be therapeutically addressed surgically or non-surgically.
A common current treatment of NPH is the VP (Ventriculo-Peritoneal) shunt. While such shunts are effective in relieving many of the dire symptoms of NPH, their current difficulty is their tendency to become obstructed within two years of installation (50%). This difficulty is addressable by the FONAR UPRIGHT® Multi-Position™ MRI, since the vertical CSF flows of these VP shunts can now be visualized and monitored by FONAR's UPRIGHT® Multi-Position™ CSF video technology, to enable a shunt maintenance program. Signs of any shunt flow impairment can now be detected as soon as they occur, to assure that VP shunt flow is being optimally maintained.
A Case-Control Study of Cerebellar Tonsillar Ectopia [Chiari] and Head/Neck Trauma [Whiplash]
We reported in July 2010 that the medical journal “Brain Injury” published a significant study of 1200 neck pain patients comparing the FONAR UPRIGHT® Multi-Position™ MRI to a conventional recumbent MRI and the ability to diagnose whiplash trauma from a motor vehicle accident. Four groups, including two control groups, were used and the reading radiologists were blinded as to who belonged to which group. Recumbent MRI images were obtained in a conventional recumbent MRI and the upright images were obtained in the FONAR UPRIGHT® Multi-Position™ MRI aka The STAND-UP® MRI. The “Brain Injury” study showed that the fallen cerebellar tonsils (CTE) caused by motor vehicle whiplash injuries were being missed 60% of the time where the patient was scanned recumbent-only in a conventional “lie-down MRI” and not scanned upright. As a result of this study, the medical evidence indicated that the fallen cerebellar tonsils of a whiplash injury patient can now be reliably visualized by using the FONAR UPRIGHT® Multi-Position™ MRI. I believe that this study adds significant substance to the proposal that this needs to be the "new standard of care" for whiplash injury patients.
Breakthrough in the Diagnoses of Multiple Sclerosis
In February 2011, I scanned a patient who had multiple sclerosis (MS). So I scanned her head and neck including CSF Flow studies in the Upright and recumbent positions. I noticed that her MS lesions seemed to be directly connected to the CSF in the adjacent brain ventricles. I reviewed the literature and then scanned seven other patients with MS. The first important observation was that all eight MS patients who were scanned, as they arrived with no patient selectivity of any kind having been exercised, had prior histories of serious trauma to the neck.
On September 20, 2011, I and co-author, FONAR scientist David Chu, PhD., published a paper titled “The Possible Role of Cranio-Cervical Trauma and Abnormal CSF Hydrodynamics in the Genesis of Multiple Sclerosis," in the journalPhysiological Chemistry and Physics and Medical NMR (Sept. 20, 2011, 41: 1-17).
We reported a possible breakthrough in the etiology of multiple sclerosis (MS) based on observations of those eight patients and our unique UPRIGHT® Multi-Position™ (STAND-UP®) MRI. The findings revealed that the cause of multiple sclerosis may be biomechanical and related to earlier trauma to the neck, which resulted in the obstruction of the flow of cerebrospinal fluid (CSF) produced in the central anatomic structures of the brain known as the ventricles. Since the ventricles produce a large volume of CSF each day (500 cc), an outflow obstruction of CSF can result in increases in intracranial pressure (ICP) which in turn can result in leakage of the CSF into the surrounding brain tissue. Since the CSF contains approximately 300 polypeptides, 9 of which are antigenic, they could be the sources of the antigens known to stimulate the auto-immune reaction (antigen-antibody complexing) responsible for generating the MS lesions seen in the MRIs of the brain of MS patients.
The complete study in which the diagnostic breakthrough was reported can be viewed at www.fonar.com/pdf/PCP41_damadian.pdf. To be found at www.fonar.com are images related to the study.
Most recently there is a published report (Magnano C., et al., "Cine Cerebrospinal Fluid Imaging in Multiple Sclerosis",J. Magn. Reson. Imaging 2012 Oct;36(4):825-34. doi: 10.1002/jmri. 23730. Epub 2012 Jun 25) corroborating our findings of the presence of CSF flow obstructions in MS patients. In their study of 67 MS patients, the authors reported significant obstruction of CSF flow in the Aqueduct of Sylvius in 67 MS patients as well as the simultaneous heightening of CSF flow during systole in these patients. In addition, there is also a newly published report of results that appears to confirm CSF "leakages" as playing a significant role in the genesis of multiple sclerosis. As we had pointed out, the study reports a generalized increase in the sodium content of the brain tissues of patients with multiple sclerosis (Radiology, July 17, 2012). This finding would be consistent with the CSF "leakages" seen in MS and reported inPhysiol. Chem. Phys. & Med. NMR, Sept. 20, 2011, 41: pp 1-17. The significant sodium content of "leaked" CSF (140mm/L) is likely to be the source of the elevated sodium content that was observed in the brain tissues of the multiple sclerosis patients studied.
An Advancement of Image Guided Therapy
We used the UPRIGHT® MRI to view the flow of cerebrospinal fluid in and out of the brain with the patients scanned Upright and also scanned lying down. The UPRIGHT® MRI also revealed that these obstructions were the result of structural deformities of the cervical spine, induced by trauma earlier in life. The findings are based on viewing the real-time flow of cerebrospinal fluid in a series of the eight randomly chosen patients with multiple sclerosis. These invaluable dual observations have only been possible since the invention by FONAR of an MRI capable of imaging the patient Upright.
One of the eight MS patients in the study was treated by Dr. Scott Rosa, DC, BCAO, Trauma Imaging Foundation, Rock Hill, NY using his image guided (UPRIGHT® MRI), patented, proprietary, non-invasive method. Her symptoms subsided. FONAR reported on the case study on November 2, 2011. It appears that the biomechanical barriers seen on her images, i.e. cerebellar tonsillar ectopia (CTE), were responsible for the significant CSF "leakages" visualized on her brain MRIs. The observed CSF "leakages" were directly connected to her MRI visualized MS lesions, suggesting the possibility that the CSF "leakages" were playing a role in generating her MS lesions. Dr. Rosa eliminated the biomechanical barrier which allowed CSF to flow freely, and subsequently the patient’s symptoms subsided. The patient is currently being maintained free of MS symptoms (vertigo and vomiting on recumbency) with continued care.
Accordingly, in the minds of the researchers who performed the vertical position examinations of these MS patients, there now exists a genuine hope that if MS patients can have their vertical position CSF flow and intracranial pressure (ICP) monitored and restored to normal, there is the prospect that these multiple sclerosis patients can be improved.
It is exciting that our FONAR UPRIGHT® MRI may now be responsible for helping out patients with severe illness and the prospect of being able to deliver these benefits to the patient non-invasively.
The Cranio-Cervical Syndrome (CCS)
One deficiency of the current universal MRI scanner protocols for imaging the neck came to our attention in the course of these UPRIGHT® positional cervical studies of patients. Current MRI protocols of the neck do not provide axial images of the cervical spine above the C2/C3 cervical junction, i.e. axial cuts of the cranio-cervical junction (CCJ) that visualize the axial positioning of C-1 and C-2. These key axial images of the cranio-cervical junction are therefore not available for two of the seven vertebra of the cervical spine with conventional MRI scanning of the cervical spine. The new Fonar axial visualization of C-1 and C-2 enables direct visualization of any C-1 or C-2 malalignments or malrotations that exist which cannot be visualized by conventional recumbent MRI. The FONAR UPRIGHT® Multi-Position™ MRI has therefore added this key cranio-cervical junction (CCJ) scan to its cervical spine scanning protocol. The C1/C2 junction provides for a 70% rotation of the head and neck while the cerebral C1 junction only enables a 40% rotation. The C1/C2 rotation of the skull enabled by the rotary stylus or dens, provided by C-2 (the Axis) is further enabled by the rotation enabling alar and transverse ligaments that are increasingly being recognized as key structures in cranio-cervical mobility, which when traumatized can result in cervical junction malalignment and the obstruction of CSF flow. We have named the syndrome resulting from these cervical malalignments and malrotations the Cranio-Cervical Syndrome (CCS).
On April 6, 2013, we held in Manhattan, Symposium 2013 "The Cranio-Cervical Syndrome (CCS): The Vulnerability of the Human Neck and Its Impact on Cerebrospinal Fluid (CSF) Flow." Its principal purpose was to bring the existence of this Cranio-Cervical Syndrome and its pandemic dimension ["1.2 million whiplash injuries per year per 315 million U. S. population" - U.S. Census Bureau Jan. 2013: Pub Med Central (PMC) – National Institutes of Health:(www.ncbi.nlm.nih.gov/pmc/articles/pmc2684148)] to the attention of the medical community.
The scheduled speakers were myself and:
· William G. Bradley, Jr, MD, PhD, FACR, Professor and Chair, Department of Radiology, University of California San Diego and Author of “Magnetic Resonance Imaging,” Mosby, Principal Textbook of MRI
· Scott Rosa, DC, BCAO, Executive Director Trauma Imaging Foundation, Chairman of Research, Upper Cervical Council, Vice President, R. W. Sweat Research Foundation
· Joseph C. Maroon, MD, FACS, Heindl Scholar, Professor and Vice Chairman, Department of Neurosurgery, University of Pittsburgh Medical Center, Team Neurosurgeon Pittsburgh Steelers
· Francis W. Smith, MD, Consultant Radiologist, Grampian University Hospitals NHS Trust, Scotland, UK
· Noam Alperin, PhD, VC for Research, Department of Radiology, Miller School of Medicine, University of Miami
· And last, but not least, Garo Yepremian, President – The Garo Yepremian Foundation, 2 - Time NFL Super Bowl Champion with the Miami Dolphins
In addition, an unscheduled guest presented. Joel I. Franck, MD, Neurosurgery, Bay Neurosurgical & Spinal Institute, reported to have treated, often surgically, approximately 50 patients with Cranio-Cervical Syndrome.
Symposium 2013 was recorded by video and audio. To see it online visit:
https://www.youtube.com/user/FonarMRIimaging
FONAR UPRIGHT MRI Scan Leads to Successful Treatment for Former NFL Quarterback
After being diagnosed in November 2012 on the FONAR UPRIGHT® Multi-Position™ MRI (aka STAND-UP MRI®), former NFL quarterback Jim McMahon, who suffered from post concussion dementia, was able to receive appropriate treatment and relief of his symptoms.
Jim McMahon, the former NFL quarterback who guided the Chicago Bears to victory at the 1985 Superbowl, has benefited from having used the FONAR UPRIGHT® MRI scanner at FONAR's Melville corporate headquarters. Mr. McMahon had severe headaches, body pain, dementia and other debilitating symptoms. FONAR's new technology for making cinés of the cerebrospinal fluid (CSF) as it flows in and out of the brain when the patient is in the Upright position was a promising candidate to help Mr. McMahon. Through a mutual friend, former Fonar Senior Vice President David Terry contacted Mr. McMahon and scheduled him for an UPRIGHT® CSF flow study at FONAR's Melville MRI facility. The FONAR UPRIGHT® CSF flow video demonstrated a significant obstruction of CSF flow and an increased intracranial pressure secondary to prior football injuries to Mr. McMahon’s neck (cervical spine). Subsequently he was treated by Dr. Scott Rosa, of the Trauma Imaging Foundation, www.traumaimagingfoundation.com. Dr. Rosa treated Mr. McMahon with his patented IGAT (Image Guided Atlas Treatment) method. Mr. McMahon gives much credit to Dr. Raymond Damadian, M.D., the FONAR UPRIGHT® Multi-Position™ MRI (Stand-Up® MRI) and Dr. Scott Rosa, for the wonderful elimination of his pain and dementia symptoms. His experiences are reported and found online by The Stamford Advocate (Jan. 17, 2014) and The Yankees Yes Network.
FONAR’s UPRIGHT® MRI technology has opened a new frontier in medical imaging. It is the power to make MRI motion pictures (cinés) of the cerebrospinal fluid (CSF) in the spinal canal as it flows into and out of the brain of the patient while the patient is Upright and weight-bearing. These cinés MRIs of flowing CSF as it enters and leaves the upright brain uniquely visualize any obstructions of CSF flow that might exist, thereby enabling the cervical vertebra malalignments responsible for them to be realigned and maintained in alignment utilizing monitoring by the FONAR UPRIGHT® Multi-Position™ MRI (Stand-Up® MRI). A CSF flow scan was among those done on Jim McMahon when he came to FONAR for his UPRIGHT® MRI scan in November, 2012.
The Link to the Stamford Advocate is:
http://www.stamfordadvocate.com/sports/article/Jim-McMahon-says-NFL-lawsuit-delay-a-blessing-and-5150813.php
The Link to the story featured in the Yankee Yes Network is:
https://www.youtube.com/watch?v=7j9PLWaPWQk
UPRIGHT® Multi-Position™ MRI Sales and Installations
The Company continues to market its FONAR UPRIGHT® Multi-Position™ MRI. Installations during the past year occurred in London, UK, St. Louis, MO, and Wantagh, NY.
I am committed to seeing to it that the advantages of this new FONAR UPRIGHT® technology be brought to the benefit of as many persons in need of it, as quickly as possible.
Conclusion
A result of FONAR's multiple sclerosis findings and the new understanding of the role that cervical trauma plays in the etiology of disease, it is imperative to certify that the sustained neck or head injuries of professional athletes such as NFL football players, whiplash patients and others with severe neck trauma, have not resulted in any obstructions of CSF flow or heightened ICP, which would eventually lead to the symptomatology we have reported as related to the Cranio-Cervical Syndrome. This in turn will lead to a resurgence of FONAR UPRIGHT® Multi-Position™ MRI sales.
In conclusion, the FONAR UPRIGHT® Multi-Position™ MRI is a truly unique technology producing exquisite images in all positions of the body. Therefore, in addition to providing all the routine scans of the conventional lie-down-only MRI, it not only yields a whole new treasure of new medical applications in such calamitous medical categories as multiple sclerosis, and other dementia, but it also possesses the strong potential to provide fresh new insights into the debilitating chronic consequences of sports injuries, the current epidemic of automobile whiplash injuries (approximately 1 million/year in the U.S.), low back injuries, pediatric disabilities and pathologies in need of pediatric imaging, and many more yet to be unearthed.
The Company has installed 157 UPRIGHT® Multi-Position™ MRI scanners. We continue to help thousands upon thousands of patients across the country, even across the globe, with the extraordinary diagnostic power and unmatched comfort of the FONAR UPRIGHT®, Weight-Bearing, Multi-Position™ MRI. Behind the scenes we have maintained our product for our users, improved it, and discovered exciting new applications that only our product can provide.
I remain grateful to our stockholders, customers and employees for their loyal support.
Sincerely,
Raymond V. Damadian
President and Chairman
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
_____________________
FORM 10-K
_____________________
[X]
[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, 2011
2013
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
(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)
____________________________________________________
| DELAWARE | 11-2464137 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| Incorporation or organization) | Identification No.) | |
| 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_
__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_
__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____X___ No ___
_______
Indicate by check mark whether the registrant (1) has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes _X____X____ No ___
______
Indicate by check mark if disclosure of delinquent filers, pursuant to Item 405 of Regulation S-K, {section}229.405§229.405 of this Chapter, is not contained, and will not be contained, to the best of the registrant'sregistrant’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“large accelerated filer"filer”, "accelerated“accelerated filer and "smaller“smaller reporting company"company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer _______ Accelerated filer _______ Non-accelerated filer ___
____Smaller reporting company _X_
(Do X
(Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes _______ No _X_
__X_
The aggregate market value of the shares of Common Stock held by non-affiliates as of December 31, 20102012 based on the closing price of $1.30$4.33 per share on such date as reported on the NASDAQ System, was approximately $6.6$25.2 million. The other outstanding classes do not have a readily determinable market value.
As of September 8, 2011, 5,677,5285, 2013, 5,987,575 shares of Common Stock, 158146 shares of Class B Common Stock, 382,513 shares of Class C Common Stock and 313,438 shares of Class A Non-voting Preferred Stock of the registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
FONAR CORPORATION AND SUBSIDIARIES
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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-
2929.631-694-2929. Fonar also maintains a WEB site at www.Fonar.com.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. Our medical equipment segment is conducted directly through Fonar. Our physician management and diagnostic services segment is conducted through our subsidiary Health Management Corporation of America.
MEDICAL EQUIPMENT SEGMENT
America (“HMCA”). HMCA performs services through two subsidiaries. In fiscal 2011, HMCA assigned its assets and liabilities to a limited liability company, Imperial Management Services, LLC (“Imperial”) for a controlling interest in Imperial. In addition to Imperial, in fiscal 2013, HMCA purchased a 50.5% interest in another limited liability company, Health Diagnostic Management, LLC (“HDM”). HMCA provides management services, administrative services, billing and collection services, office space, equipment, repair, maintenance service, and clerical and other non-medical personnel to medical providers.
Fonar is engaged in the business of designing, manufacturing, selling and servicing magnetic resonance imaging scanners, also referred to as "MRI" or "MR", scanners, which utilize MRI technology for the detection and diagnosis of human disease, abnormalities, other medical conditions and injuries. Fonar'sFonar’s founders built the first scanner in 1977 and Fonar introduced the first commercial MRI scanner in 1980. Fonar is also the originator of the iron-core non-superconductive and permanent magnet technology.
Fonar's
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"“open” MRI, introducing most recently the Upright(R) Multi-positional(R)Upright® Multi-Position™” MRI scanner (also referred to as the "Upright(R)"“Upright®” or "Stand-Up(R)"“Stand-Up®” MRI scanner) and the Fonar 360(TM)360™ MRI scanner.
The product we are now most vigorously promoting is our Upright(R)Upright® MRI. The
Upright(R)Our patented Upright® MRI is unique in the industry in that it allows patients to be scanned in a fully weight-bearing condition,conditions, such as standing, sitting or bending in any position that causes adverse symptoms. This means that an abnormality or injury, such as a slipped disk can be visualized where it may not have been with the patient lying down. We have introduced the name "Upright(R)"“Upright®” as an alternative to "Stand-UP(R)"“Stand-UP®” because of the multiplicity of positions in which the patient may be scanned where the patient is not standing.
PHYSICIAN MANAGEMENT AND DIAGNOSTIC SERVICES SEGMENT
Health Management Corporation of America, which we sometimes refer to as "HMCA",
was formed by Fonar in March 1997 as a wholly-owned subsidiary in order to
enable us to expand into the business of providing comprehensive management
services to medical providers. HMCA provides management services, administrative
services, billing and collection services, office space, equipment, repair,
maintenance service and clerical and other non-medical personnel to medical
providers. Since July 28, 2005, following the sale of HMCA's physical therapy
and rehabilitation business, HMCA has elected to provide its services solely to
diagnostic imaging centers.
The Company completed a private placement of equity and succeeded in raising
$6,000,000 by May 2, 2011. The offering consisted of Preferred Class A
membership interests in a newly formed limited liability company, Imperial
Management Services, LLC ("Imperial"). Class B membership interests, all of
which were retained by the Company's subsidiary, HMCA, holds a 75% equity
interest in Imperial. The Class A membership interests are entitled to receive a
dividend of 18% per annum of their cash capital contribution of $6,000,000 to
the limited liability company. HMCA contributed all of its assets, together with
its liabilities, to Imperial as HMCA's capital contribution. The Imperial
operating agreement provides for the Class A members to receive priority
distributions until their original capital contributions are returned. As of
June 30, 2011, Imperial manages 10 diagnostic imaging facilities located in
states of New York and Florida. On October 1, 2010, the Company purchased 100%
of the stock of Fair Haven Services Inc., an entity wholly owned by Raymond
Damadian. The entity is in the business of leasing medical equipment to various
unrelated PC's. During the year, the Company purchased a 50% controlling
interest in an entity from an unrelated party that provides management services
to a diagnostic center in the New York Metropolitan area. The Company also has
another 50% controlling interest in an entity that will provide management
services to a diagnostic center in New York. The center is in the process of
being installed.
See Note 2217 to the Consolidated Financial Statements for separate financial information respectingregarding our medical equipment and physician and diagnostic management services segments.
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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)Upright® MRI (also known as the “Stand-Up® MRI”) and the Fonar 360(TM)360™.
The Upright(R)Upright® MRI permits, for the first time, MRI diagnoses to be made in the weight-bearing state. The Upright(R)Upright® MRI is the only MRI scanner that allows patients to be scanned while standing, sitting, bending or lying down. This means that an abnormality or injury, such as a slipped disk, will be able to be scanned under full weight-bearing conditions, which is more often than not the position in which the patient experiences pain. An adjustable bed allows patients to stand, sit or lie on their backs, sides or stomachs. The Upright(R)Upright® MRI may also be useful for MRI-guided interventional procedures.
An important application of the Fonar Upright(R)Upright® 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 there is 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. The brain structure “entrapped” in Chiari Syndrome are the lowest lying structures of the brain, the tonsils of the cerebelium. The Chiari Syndrome is therefore alternately named Cerebellar Ectopia (CTE) indicating the displacement (ectopia) of these Cerebellar tonsils in this syndrome. Classic symptoms of the Chiari syndromeSyndrome include the "drop“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 temporary neuromuscular paralysis which then subsides while the patient is lying in a horizontal position.
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The Fonar Upright(R)Upright® MRI has demonstrated its key value on two current patients with Chiari syndrome establishingSyndrome showing that the conventional lie-down MRI scanners cannot make an adequate evaluation where the patient'spatient’s pathology is most visible and where symptoms are most acute when the patient is upright. A recent publication in the Journal “Brain Injury” (Brain Injury 2010, 24 (7-8) 988-994) of 1,200 neck pain patients reported that the fallen cerebellar tonsils of the brain (CTE) were missed 75% of the time when the patient was scanned only in the recumbent position. 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.
The Upright(R) is emerging as the MRI of choice for diagnosing spinal pathology.
In September, 2006, FONAR sold 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 diagnoses and treats 25,000 patients with orthopedic problems
annually. In placing the 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."
In February 2011, FONAR sold an UPRIGHT(R)UPRIGHT® MRI to a Neuroscience Spine Instituteneuroscience spine institute in the Northeast. The group that purchased the MRI said they wanted the best diagnostic device available to allow them to be a "center“center of excellence for the spine."” They had considered other state-of-the-art MRI scanners including those with field strengths of 1.5 and 3.0 Tesla, but those were single-position (recumbent only )only) and not weight-bearing systems. The buyers firmly believed that in order for them to be a "center“center of excellence for the spine,"” it was crucial for them to have an MRI that could evaluate the spine in its full range of dynamic weight-bearing positions.
In June 2011, FONAR sold an Upright(R)Upright® MRI to another medical practice dedicated to being a "center“center of excellence for the spine".spine.” Hoorman M. Melamed, MD, FAOOS, a board-certified orthopaedic spine surgeon, and a principal at the Bakersfield UPRIGHT MRI Center, said, "Selection“Selection of the FONAR UPRIGHT(R) Multi- Position(TM)UPRIGHT® Multi-Position™ MRI for our group was a very careful and deliberate decision. We recognize that the UPRIGHT(R)UPRIGHT® MRI offers capabilities beyond that of a recumbent-only MRI. The UPRIGHT(R)UPRIGHT® MRI allows for scanning patients weight-bearing and the dynamic positions of flexion and extension. This allows us to see and evaluate the spine under load of a patient'spatient’s pathology thus enabling us to avoid underestimating a patient'spatient’s pathology and therefore obtaining a better diagnosis."
”
Another milestone in the utilization of the FONAR Upright(R)Upright® MRI was the publication in the medical journal "Brain Injury" (July 2010) of a study of 12001,200 neck pain patients. The study was published by 10 authors from distinguished universities in the United States and around the world. The study reported that Cerebellar Tonsil Herniation (CTE) was missed 60%75% of the time when the patient was scanned recumbent instead of upright. At the current rate of 1,000,000 automobile whiplash injuries in the U.S. per year, 600,000 patients each year would have the pathology responsible for their symptoms go undetected if they were examined solely in a conventional recumbent-only MRI.
We are vigorously promotingemphasizing sales of the Upright(R)Upright® MRI which we regard as our most promising scanner product. Revenues, however,Nevertheless, because of uncertain economic conditions and the resulting weakening demand, revenues recognized from the sale of Upright(R)Upright® MRI scanners decreased in fiscal 20112013 by 33% over49.2% from fiscal 2010 from
approximately $7.92012 (approximately $6.3 million in fiscal 20102012 compared to approximately $5.3$3.2 million in fiscal 2011 under present market conditions.2013). The following chart shows the revenues attributable to our different model scanners for the fiscal years ended June 30, 20102012 and June 30, 2011.2013. 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 or payments received.
Model Revenues Recognized
----------------------------
Fiscal 2010 Fiscal 2011
------------ ----------
Upright(R) $ 7,855,087 $5,345,932
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| FONAR CORPORATION AND SUBSIDIARIES |
| Model | Revenues Recognized | |||||||||
| Fiscal 2012 | Fiscal 2013 | |||||||||
| Upright® | $ | 6,335,198 | $ | 3,217,929 | ||||||
| Fonar 360™ | $ | 0 | $ | 0 | ||||||
The Company completed a private placement of equity and succeeded in raising $6,000,000 on May 2, 2011. The offering consisted of Preferred Class A membership interests in a newly formed limited liability company, Imperial Management Services, LLC (“Imperial”). Class B membership interests, all of which were retained by the Company’s subsidiary, HMCA, hold a 75% equity interest in Imperial. The Class A membership interests are entitled to receive a dividend of 18% per annum of their capital contributions to the limited liability company. HMCA contributed all of its assets, together with its liabilities, to Imperial as HMCA’s capital contribution. The Imperial operating agreement provides for the Class A members to receive priority distributions until their original capital contributions are returned. As of June 30, 2013, Imperial, through HMCA, managed 11 diagnostic imaging facilities located in the states of New York and Florida. Approximately 40% of the Class A membership interests had been redeemed as of the end of fiscal 2013 (equivalent to 11% of the A and B membership interests in the aggregate).
As a result of the transaction, Imperial also has a 50% controlling interest in an entity that provides management services to a diagnostic center in the New York Metropolitan area.
On February 13, 2013, HMCA entered into an agreement with outside investors to acquire a 50.5% controlling interest in a newly formed limited liability company, Health Diagnostics Management, LLC (HDM). During March 2013 HMCA contributed $20,200,000 to HDM for its controlling membership interest, and the outside investors contributed $19,800,000 for their non-controlling membership interests.
To fund HMCA’s capital contribution to HDM, Fonar 360(TM) $ 0 $ 0
Other $ 1,201,220 $1,336,365
"Other" revenue includes upgradesborrowed a total of $14 million from a bank in the form of a term loan aggregating $11 million and deinstallationsa revolving credit loan aggregating $3 million. The term loan is payable in 60 consecutive monthly installments, commencing October 1, 2013. The term loan bears interest at 4.75% per annum and is payable monthly. The revolving credit loan is due March 5, 2016. Fonar can prepay the loan in whole or in part in multiples of scanners.$100,000 at any time without penalty. The revolving credit note bears interest at a rate of 4% per annum and is payable monthly. All borrowings under the loan agreements are collateralized by substantially all of Fonar’s assets. The loan agreements also contain certain financial covenants that must be met on a periodic basis. In turn, Fonar 360(TM) includeslent the Open Sky(TM) MRI. We received our first orderfunds to HMCA, which then contributed the funds to HDM in exchange for HMCA’s 50.5% equity interest. As of June 30, 2013, Fonar had prepaid $600,000 of principal of the loan.
On March 5, 2013 HDM purchased from Health Diagnostics, LLC (“HD”) and certain of its subsidiaries, a business managing 14 MRI scanning centers, 12 of which have Upright MRI scanners, located in the States of New York and Florida for a Fonar 360(TM) scanner intotal purchase price (including consideration of $1.5 million to outside investors) aggregating $35.9 million. Concurrently with the first quarteracquisition, HDM entered into several consulting and non-competition agreements for a consideration of fiscal 2005. The magnet frame is
incorporated into the floor, ceiling and sidewalls$4.1 million.
As a result of the scan roomImperial and is open.
Consequently, physiciansHDM transactions, as of September 30, 2013, HMCA through Imperial and family members can walk inside the magnet to
approach the patient. The Open Sky(TM) versionHDM, managed a total of the Fonar 360(TM) is
decoratively designed so that it is incorporated into the panoramic landscape
that decorates the walls25 MRI scanning centers, 18 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 subsidiary of Fonar,
currently is managing 10 diagnostic imaging centersare located in New York and Florida.
All these centers,7 of which are equipped with Upright(R)located in Florida, and 23 of which have Upright MRI scanners. HMCA has
intensified its marketing efforts, including the hiring of additional marketers
and supervisory personnel. HMCA's objective is to increase HMCA's revenues not
only for HMCA's sake of promoting HMCA's profitability but to provide sufficient
revenues to support both segments of our business during times when MRI scanner
sales are weak.
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| FONAR CORPORATION AND SUBSIDIARIES |
MEDICAL EQUIPMENT SEGMENT
PRODUCTS
Fonar's
Fonar’s principal products areproduct is the Upright(R) MRI and the Fonar 360(TM).
Upright® MRI.
The Upright(R)Upright® MRI is a whole-body open MRI system that enables positional MRI (pMRI(R)(pMRI®) 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'ssystem’s MRI-compatible, three-dimensional, motorized patient handling system. Patients, lying horizontally, are placed into the magnet in the conventional manner. The system'ssystem’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-
backread-back of the table'stable’s position. Spines and extremities can be scanned in weight-
bearingweight-bearing states; brains can be scanned with patients either standing or sitting.
This capability of the Fonar Upright(R)Upright® technology has demonstrated its key value on patients with the Arnold-Chiari syndrome,Syndrome (CTE), 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'spatient’s pathology is most visible and the symptoms most acute when the patient is scanned in the upright weight-bearing position.
The Upright(R)Upright® 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)Upright® 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.
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| FONAR CORPORATION AND SUBSIDIARIES |
The Upright(R)Upright® 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'spatient’s point of view, the magnet'smagnet’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'sone’s face or over one'sone’s head. The only thing in front of the patient'spatient’s face during the scan is a very large (42"(42”) panoramic TV (included with the scanner) mounted on the wall. The bed is tilted back five degrees to stabilize a standing patient. Special coil fixtures, a patient seat, Velcro straps, and transpolar stabilizing bars are available to keep the patient comfortable and motionless throughout the scanning process.
Full-range-of-motion studies of the joints in virtually any direction are possible, an especially promising feature for sports injuries. Full Range of Motion(TM)Motion cines, or movies, of the lumbar spine will be achieved under full body weight.
The Upright(R)Upright® 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)360™ 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'sFonar’s patented Iron-Frame(TM)Iron-Frame™ technology which allows our engineers to control, contour and direct the magnet'smagnet’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)360™ is presently marketed as a diagnostic scanner and is sometimes referred to as the Open Sky(TM)Sky™ MRI. In its Open Sky(TM)Sky™ capacity, the Fonar 360(TM)360™ 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)Sky™ 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)360™ 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)360™ 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'ssignal’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.
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| FONAR CORPORATION AND SUBSIDIARIES |
The first Fonar 360(TM)360™ 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 2nd2nd 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)360™ 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'scanners’ open design, the Upright(R)Upright® and Fonar 360(TM)360™ 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'scanners’ design over their predecessors also include increased image-processing speed and diagnostic flexibility.
MRI directed interventions are made possible by the scanners'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'sFonar’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'sMRI’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)Upright® MRI and Fonar 360(TM)360™ scanners share much of the same fundamental technology and offer the same speed, precision and image quality. Fonar'sFonar’s scanners initiated the new market segment of high-field open MRI. High-field open MRIs operate at significantly higher magnetic field strengths and, therefore, produce more of the MRI image-producing signal needed to make high-quality MRI images (measured by signal-to-noise ratios, S/N).
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| FONAR CORPORATION AND SUBSIDIARIES |
The Upright(R)Upright® MRI and Fonar 360(TM)360™ 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'sFonar’s scanners, produces images of higher quality and clarity. Fonar'sFonar’s 0.6 Tesla open scanner magnets are among the highest field "open MRI" magnets in the industry.
The Upright(R)Upright® MRI and Fonar 360(TM)360™ scanners are designed to maximize image quality through an optimal combination of signal-to-noise (S/N) and contrast-
to-noisecontrast-to-noise (C/N) ratios. The technical improvements realized in the scanners'scanners’ design over their lower field predecessors also include increased image-
processingimage-processing speed and diagnostic flexibility.
Several technological advances have been engineered into the Upright(R)Upright® MRI and Fonar 360(TM)360™ 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)Upright® MRI and Fonar 360(TM)360™ scanners operate squarely in the optimum C/N range.
The Upright(R)Upright® MRI and Fonar 360(TM)360™ provide various features allowing for versatile diagnostic capability. For example, SMART(TM)SMART™ 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)Oblique™ (MAO) imaging, and oblique imaging.
The console for these scanners includes a mouse-driven, multi-window interface for easy operation and a 19-inch, 1280 x 1024-pixel, 20-up, high-resolution image monitor with features such as electronic magnifying glass and real-time, continuous zoom and pan.
The predecessors of the Upright(R) MRI and Fonar 360(TM) were FONAR's QUAD(TM)
scanner, Ultimate(TM) 7000 scanner and Beta(TM) scanner. The Beta(TM) 3000
scanner utilized a permanent magnet. The Beta(TM) 3000M scanner utilized an iron
core electromagnet. All of our current and earlier model scanners create
cross-sectional images of the human body.
During fiscal 2011,2013, sales of our Upright(R)Upright® MRI scanners accounted for approximately 16.1%6.5% of our total revenues and 30.0%21.6% of our medical equipment revenues, as compared to 24.7%16.1% of total revenues and 37.9%33.9% of medical equipment revenues in fiscal 2010.2012. These results reflect the decrease in our sales of scanners.
During fiscal 20112013 and fiscal 2010,2012, we had no revenues attributable to sales of our Fonar 360(TM)360™ scanner.
Our principal selling, marketing and advertising efforts have been focused on the Upright(R)Upright® 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 2011, weWe expect to continue our focus on the Upright(R)Upright® MRI in the immediate future. We are optimistic that in the long run the Fonar 360(TM)360™ and our other products and works in progress will also contribute to increased product sales.
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| FONAR CORPORATION AND SUBSIDIARIES |
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 in x-ray 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"“microcalcifications” instead of being able to "see"“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'sbody’s soft tissues are maximally 4%. Their contrast by MRI is 32.5 times greater (130%).
The soft tissue contrasts with which to distinguish cancers on images by MRI are up to 180%. In the case of cancer these contrasts can be even more marked making cancers readily visible and detectable anywhere in the body. This is because the nuclear resonance signals from the body's tissues differ so dramatically. Liver cancer and healthy liver signals differ by 180% for example. Thus there is some urgency to bring to market an MRI based breast scanner that can overcome the x-ray limitation and assure that mammograms do not miss serious lesions. The added benefit of MRI mammography relative to x- rayx-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)Upright® 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)360™ MRI scanner would also be ideal for breast examinations.
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| FONAR CORPORATION AND SUBSIDIARIES |
PRODUCT MARKETING
The principal markets for the Company's scanners are private diagnostic imaging centers and hospitals.
Our internal sales force handles the domestic market. We continue to use independent manufacturer'smanufacturer’s representatives and distributors for foreign markets. None of Fonar'sFonar’s competitors are entitled to make the Fonar Upright(R)Upright® MRI scanner.
Fonar's
Fonar’s Website includes interactive product information for reaching customers.
Fonar exhibited its new products at the annual meeting of the Radiological
Society of North America ("RSNA") in Chicago from November 1995 through 2007 and
will consider attending RSNA meetings in future years.
Fonar has targeted orthopedic surgeons and neurosurgeons, particularly spine surgeons, as important markets for the Upright(R)Upright® MRI. Accordingly, Fonar has exhibited at annual meetings of The American Academy of Orthopaedic Surgeons (AAOS); the North American Spine Society (NASS); the American Association of Neurological Surgeons (AANS); and the Congress of Neurological Surgeons (CNS).
In addition, in 2007, Fonar attended the Global Health Care Expansion Congress
and the Abu Dahabi International Surgical Conference abroad.
Fonar's success in targeting surgeons was most evident in the sale, in September
2006, of an Upright(R) MRI scanner to the largest orthopedic hospital in the
Netherlands, the St. Maartenskliniek in Nijmegen. In addition to being a key
sale to a prestigious hospital, the medical conclusions reached and stated by
the buyer and the buyer's intention to conduct research and publish articles
concerning the Upright(R) technology, are a vital component to Fonar's objective
to prove to the medical community at large, insurers, governmental agencies and
others the benefits, if not the necessity of Upright(R) scanning. A Director of
St. Maartenskliniek and the Chairman of Spine Surgery stated that "We at St.
Maartenskliniek, the biggest orthopedic hospital in the Netherlands, are very
much looking forward to this new technology from Fonar which will enable us to
evaluate the spine anatomy in the fully weight-bearing state and in multiple
positions. We expect these new multi-position capabilities to lead to more
accurate diagnosis and better surgery outcomes for patients. Once our active
research program has discovered the benefits of this new Fonar technology for
patients, we intend to publish the results in a lot of peer reviewed scientific
journals." The Chairman stated further "that once Fonar made available upright
weight-bearing MRI imaging technology, owning one for the St. Maartenskliniek
"Spine Center" was not optional but mandatory. For our hospital to continue to
engage in spine surgery without it, once this new technology became available,
was unacceptable".
Recognition of the importance of Fonar Upright(R)Upright® MRI continues to grow. Medserena, of Germany, announced in August, 2010 the purchase of its fourth Upright(R) Multi-Position(TM)Upright® Multi-Position™ MRI. CEO Matthais Schulz said, "The“The large number of requests coming from our physicians in Germany are arising because of the special medical need for FONAR'sFONAR’s unique technology. This is in spite of an intensely active MRI market in Germany, where there are already many conventional lie-down MRIs installed."
” Recently, Medserena has expanded its market to the United Kingdom with the opening of a Fonar Upright® MRI scanner in London.
Even high-field 3.0 Tesla MRI scanners cannot overshadow the importance of Fonar'sFonar’s unique technology. In August, 2010, a distinguished board-certified radiologist in Florida, the owner/operator of two multi-modality imaging centers equipped with MRIs, ordered a Fonar Upright(R)Upright® MRI. He initially considered purchasing a 3.0 Tesla lie-down MRI, but decided instead to buy the Fonar Upright(R) Multi-Position(TM)Upright® Multi-Position™ MRI when he became aware of its many unique imaging capabilities.
Fonar's
Fonar’s advertising strategy has been designed to reach key purchasing decision makers with information concerning our flagship product, the Upright(R)Upright® MRI. This has led to many inquiries and to some sales of the Upright(R)Upright® MRI scanner and is intended to increase Fonar'sFonar’s presence in the medical market. Fonar'sFonar’s advertising has been directed at four target audiences: neurosurgeons, orthopaedic surgeons, radiologists and physicians in general.
1) Neurosurgeons and Orthopaedic Surgeons: These are the surgeons who can most benefit from the superior diagnostic benefits of the Fonar Upright(R)Upright® MRI with its Multi-Position(R)Multi-Position® diagnostic ability. Advertisements to them have appeared in the journal Spine, The Journal of Neurosurgery, and the Journal of the American Academy of Orthopedic Surgery.
2) Radiologists: This segment of the campaign is aimed at the physicians who now have a new modality to offer their referring physicians. Our advertisements directed to them have appeared in Radiology and Diagnostic Imaging.
3) All Physicians: These advertising efforts have been directed to the total physician audience, so that the vast number of doctors who send patients for MRI'sMRI’s are aware of the diagnostic advantages of the Fonar Upright(R) Multi-
Position(R)Upright® Multi-Position® MRI. Advertisements directed to this audience have appeared in the Journal of the American Medical Association.
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| FONAR CORPORATION AND SUBSIDIARIES |
This advertising has featured a series of compelling messages. One advertisement pointed out that the AMA book, Guides to the Evaluation of Permanent Impairment, indicates that diagnosis must be performed upright in flexion and extension. Another advertisement was educational and headlined, "Discover“Discover the power of Upright Imaging"Imaging”. Fonar realizes that peer-to-peer communications is the most powerful way to speak to physicians. Consequently, testimonials from surgeons and radiologists have been used to promote our Upright(R)Upright® MRI scanner. The first such advertisement featured five surgeons and two radiologists, explaining the Multi-Position(R)Multi-Position® diagnostic benefits of the Fonar Upright(R)Upright® MRI scanner to them. Another advertisement featured a leading radiologist, telling why he bought 12 Fonar Upright(R)Upright® MRI scanners and planned to buy more.
Also, our advertising for HMCA also serves as advertising for Fonar MRI scanners. We have increased internet awareness of our product by driving patient traffic to the Upright(R)Upright® scanning centers we manage by installing Websites for every location. These websites and advertising give prospective customers of Upright(R)Upright® MRI scanners a view of operating Upright(R)Upright® MRI centers and the benefits of using an Upright(R)Upright® MRI scanner. The success of HMCA- managedHMCA-managed sites not only increases management fees to HMCA but encourages new sales for Fonar as well.
To meet the demand for high-field open MRI scanners, Fonar plans to devote its principal efforts to marketing the Upright(R)Upright® MRI. The Upright(R)Upright® MRI is the only scanner in the industry that has the unique capability of scanning patients under weight-bearing conditions and in various positions of pain or other symptoms. In addition we will continue to market our Fonar 360(TM)360™ MRI scanners. Utilizing a 6000 gauss (0.6 Tesla field strength) iron core electromagnet, the Upright(R)Upright® MRI and Fonar 360(TM)360™ scanner magnets are among the highest field "Open MRI" scanners in the industry.
The Upright(R)Upright® 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)Upright™ MRI scanner is the only MRI scanner which allows the patient to stand during the exam. The Fonar Upright(R)Upright® Scanner avoids radiation of the x-ray machines currently used for scoliosis, which have been reported by the National Cancer Institute to cause a 70% increase in the risk of breast cancer. Other important new applications are Upright(R)Upright® imaging of the pelvic floor and abdomen to image prolapses and inguinal hernias. Fonar has also developed the first non-invasive method to image the prostate: the patient simply sits on a flat, seat-like coil.
We also will seek to introduce new MRI applications for our scanners such as MRI-directed interventions.
Our areas of operations are principally in the United States. During the fiscal year ended June 30, 2011, 8.5%2013, 2.1% of the Company's revenues were generated by foreign sales, as compared to 11.9%6.2% for fiscal 2010.
2012.
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.
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SERVICE AND UPGRADES FOR MRI SCANNERS
Our customer base of installed scanners has been and will continue to be an additional source of income, independent of direct sales.
Income is generated from the installed base in two principal areas, namely, service and upgrades. Service and maintenance revenues from our external installed base were approximately $11.1$11.0 million in fiscal 20112013 and $11.1$11.8 million in fiscal 2010. We2012. Notwithstanding the decrease in service revenues in fiscal 2013, we expect service revenues to increasebe essentially stable under present circumstances as warranties expire on
previously sold scanners, and the customers then enter into service contracts.
contracts when the warranties on their scanners expire, replacing lost service contracts resulting from older scanners being taken out of service.
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)Upright® Imaging technology. New medical uses for MRI technology are constantly being discovered and are anticipated for the Upright(R)Upright® Imaging technology as well. New features can often be added to the scanner by the implementation of little more than versatile new software packages. For example, software can be added to existing MRI angiography applications to synchronize angiograms with the cardiac cycle. By doing so the dynamics of blood vessel filling and emptying can be visualized with movies. Such enhancements are attractive to end users because they extend the useful life of the equipment and enable the user to avoid obsolescence and the expense of having to purchase new equipment.
RESEARCH AND DEVELOPMENT
During the fiscal year ended June 30, 2011,2013, we incurred expenditures of $1,507,290, $67,258$1,438,560, none of which was capitalized, on research and development, as compared to $2,773,704, $315,362$1,242,646, none of which was capitalized, during the fiscal year ended June 30, 2010.
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.
2012.
Research and development activities have focused principally on software improvements to the user interface of the MRI scanner. The Windows-based Sympulse(TM)Sympulse™ platform controls all of the functions of the UPRIGHT(R)UPRIGHT® scanner except those of the versatile, multi-position patient table. Separate, dedicated, motion-control software is used to maneuver the UPRIGHT(R)UPRIGHT® bed, and development of this software is ongoing as well. The same Sympulse(TM)Sympulse™ platform running identical software underpins the operation of other FONAR MRI scanners,
including the FONAR 360(TM) and older units such as the Quad 12000(TM).
360™ unit.
In December 2010January 2013 FONAR completed and shipped Release 8.0. The signature feature
of Release 8.0 is the Centering Cursor, which enables the technologist to
position the target anatomy precisely at the center of the magnet by means of a
cursor that can be translated on scout or localizer images. The location of the
Centering Cursor is communicated directly8.1 to the patient table with a clickenthusiastic reviews on the part of the mouse. Because the UPRIGHT(R) bed enjoys three degrees of freedom in its
motion, unlike conventional recumbent MRI scanners that have but one (in and
out), the anatomy of interest can be scanned at magnet isocenter, where the
magnetic field is most uniform. This is critical for the successful
implementation of chemical-shift sensitive fat suppression techniques, such as
direct fat saturation and the Dixon method.
technologists.
While software improvements to the user interface are important in their own right, significant value is added to the MRI scanner by the modification of existing protocols for examining various parts of the body, and the development of new protocols that utilize new underlying capabilities of the pulse sequence software. For example, in Release 8.0, the Dixon method of fat suppression was extended
from gradient echo sequences to fast spin echo and spin echo sequences. This is
particularly important for musculoskeletal imaging because it enables
technologists to meet the demand of radiologists for true proton density-, T1-,
and T2-weighted imaging with fat suppression. Protocols employing this new
technique were released together with the user interface software in a bundled
package. Over time, FONAR users have become accustomed to the steady improvement in clinical protocols that accompany new software releases. More significantly, in recent years we have seen increasing adoption of FONAR- standardFONAR-standard clinical protocols over those developed on site. This is a testament to the superior image quality they produce in attractively short scan times.
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| FONAR CORPORATION AND SUBSIDIARIES |
The development of clinically practical scan protocols and software depends on close contact between research and development scientists and engineers, and end users. That close contact is facilitated in part by the subsidiary relationship with HMCA-IMPERIALHMCA and the scanning centers itHMCA manages. In addition to that collaboration, R&D staff have pursued a variety of novel and UPRIGHT(R)UPRIGHT® MRI-specific research projectsprojects. It is anticipated that it is anticipated,these will ultimately lead to new applications that are made available to existing customers as upgrade add-ons to their machines. For example, a multi-year collaboration with faculty and graduate students at
the University of Delaware has lead to the development of an open-geometry low-
impedance quadrature knee coil that is ideally suited to the weight-bearing
examinationThese range from studies of the knee, andeffects of gravity on the studyvelopharyngial structures in children to studies of a varietythe soft tissues around the ischial tuberosity for the purpose of pathologies such as
patellofemoral pain syndrome and osteoarthritis. This work is described in
doctoral dissertations and papers thatdesigning improved wheelchairs for patients who have been presented at conferences and
submitted for publication.
Two independent collaborations with plastic surgeons specializing in breast
implantation have yielded insights into the way in which various types of
implants coexist with surrounding tissues in the cosmetically significant
upright seated or standing posture. One or more publications authored by these
outside users are in progress.
suffered spinal cord injury.
A receiver coil and scanning protocols designed for rapid, x-ray free MRI evaluation of patients with scoliosis has already been made available to FONAR
customers.developed. FONAR image display software that enables the technologist to reformat the axial 3D data set into a coronal plane that follows the lordotic curve of the spine is enabled upon purchase of the coil. Papers describing this work have already been published.
Another important development is "Correlated“Correlated Slice Profile" (CSP(TM)Profile” (CSP™) Imaging which can be done for most spine patients. The patient having the spine scan is scanned in the four positions of Upright(R)Upright®-neutral, Upright(R)Upright®-flexion, Upright(R)Upright®-extension, and traditional recumbent. At the conclusion of the scan, the MRI technologist selects a center-slice sagittal view from each of the four positions. The four image positions are then displayed side by side. In this way, one can quickly comprehend how a patient'spatient’s pathology changes from position to position within the same anatomic slice. This multi-position weight-bearing imaging of the spine enables the patient'spatient’s physician to see all of the patient'spatient’s symptom-generating pathology so they can be correctly addressed therapeutically or surgically (if necessary).
BACKLOG
Our backlog of unfilled orders at September 20, 201126, 2013 was approximately $9.4$1.5 million, as compared to $14.9$7.4 million at September 28, 2010.14, 2012. It is expected that
a substantial portion of the existing backlog of orders will be filled within the 20122014 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.
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| FONAR CORPORATION AND SUBSIDIARIES |
We have significantly enhanced our patent position within the industry and now possesses a substantial patent portfolio which provides us, under the aegis of United States patent law, "the exclusive right to make, use and sell" many of the scanner features which Fonar pioneered and which are now incorporated in most MRI scanners sold by the industry. As of June 30, 2011, 1722013, 186 patents had been issued to Fonar, and approximately 2617 patents were pending. A number of Fonar'sFonar’s existing patents specifically relate to protecting Fonar'sFonar’s position in the high-field iron frame open MRI market. The patents further enhance Dr. Damadian's pioneer patent, the 1974 Patent, that initiated the MRI industry and provided the original invention of MRI scanning. The terms of the patents in Fonar'sFonar’s portfolio extend to various times.
We also have patent cross-licensing agreements with other MRI manufacturers.
PRODUCT COMPETITION
MRI SCANNERS
A majority of the MRI scanners in use in hospitals and outpatient facilities and at mobile sites in the United States are based on high field air core magnet technology while the balance are based on open iron frame magnet technology. Fonar'sFonar’s open iron frame MRI scanners are competing principally with high-field air core scanners. Fonar'sFonar’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“high field strength"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"“openness” provided by our scanners compensate for the lower field strength, certain customers will still prefer the higher field strength.
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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'sFonar’s original iron frame design, ultimately imitated by Fonar'sFonar’s competitors to duplicate Fonar'sFonar’s origination of "Open"“Open” MRI magnets, gave rise to current patient protected Upright(R)Upright® 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)360™ 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-Positionin 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)Upright® MRI technology or the Fonar 360(TM)'s 360 degree360™’s 360° full access interventional technology.
OTHER IMAGING MODALITIES
Fonar's
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.
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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'sFonar’s MRI scanners. The regulations can be classified as either pre-market or post-
market.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"“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'sFonar’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.
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.
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| FONAR CORPORATION AND SUBSIDIARIES |
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)360™ for diagnostic imaging, the Open Sky(TM)Sky™ version, and on October 3, 2000 received FDA clearance for the Upright(R)Upright® 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'sFonar’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.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.
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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.
| · | 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.
| · | 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
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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.
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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'sEU’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)360™ and Upright(R)Upright® 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'sagency’s personnel to the USA to perform the evaluation at our expense before exporting.
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Some countries, including many in Latin America and Africa, have very few regulatory requirements.
To date, Fonar has been able to comply with all foreign regulatory requirements applicable to its export sales.
HEALTH MANAGEMENT CORPORATION OF AMERICA
IMPERIAL MANAGEMENT SERVICES, LLC
HEALTH DIAGNOSTICS MANAGEMENT, LLC
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 FONAR in March 1997. HMCA was formed as a wholly-owned subsidiary which engages in the business of providing comprehensive management services to diagnostic imaging facilities. The services we provide include development, administration, leasing of office space, facilities and equipment, provision of supplies, staffing, training and supervision of non-medical personnel, legal services,credentialing, accounting, billing and collection, assistance with compliance matters and the development and implementation of practice growth and marketing strategies.
Subsequently, in
In May 2011, HMCA contributed all of its assets, liabilities and business to Imperial Management Services, LLC which is controlled but not wholly-owned by HMCA. Imperial is continuing the business of HMCA utilizing the same facilities, equipment and personnel as HMCA. This transaction did not result in a change of control or policy, but was solely a means to raise capital.
On February 13, 2013 , HMCA entered into an agreement with outside investors to acquire a 50.5% controlling interest in a newly formed limited liability company, Health Diagnostics Management, LLC (HDM). During March 2013 HMCA contributed $20,200,000 to HDM and the investors contributed an aggregate of $19,800,000 for their non-controlling membership interests.
To fund HMCA’s capital contribution to HDM, Fonar borrowed a total of $14 million from a bank in the form of a term loan aggregating $11 million and a revolving credit loan aggregating $3 million. The term loan is payable in 60 consecutive monthly installments, commencing October 1, 2013. The term loan bears interest at 4.75% per annum and is payable monthly. The revolving credit loan is due March 5, 2016. Fonar can prepay the loan in whole or in part in multiples of $100,000 at any time without penalty. The revolving credit note bears interest at a rate of 4% per annum and is payable monthly. All borrowings under the loan agreements are collateralized by substantially all of the Fonar’s assets. The loan agreements also contain certain financial covenants that must be met on a periodic basis. In turn, Fonar lent the funds to HMCA, which then contributed the funds to HDM in exchange for HMCA’s 50.5% equity interest. As of June 30, 2013, Fonar had made prepayments of principal in the amount of $600,000.
On March 5, 2013 HDM purchased from Health Diagnostics, LLC (“HD”) and certain of its subsidiaries, a business managing twelve (12) Stand-Up® MRI Centers and two (2) other scanning centers located in the States of New York and Florida for a total purchase price (including consideration of $1.5 million to outside investors) aggregating $35.9 million. Concurrently with the acquisition, HDM entered into several consulting and non-competition agreements for a consideration of $4.1 million.
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HMCA is the controlling, but not sole owner of these two limited liability companies, Imperial and HDM, through which HMCA conducts its business. The outside investors are passive investors, and do not have the right to participate in the management of either company. For the sake of simplicity and to avoid confusion, in making
comparisonsHMCA, Imperial and to show the continuity of the business, our physician management
and diagnostic services segment is sometimesHDM are, unless otherwise indicated referred to as "HMCA-IMPERIAL"“HMCA” for bothall periods before and after May 2, 2011.
HMCA-IMPERIAL currently manages 10 MRI facilities. Imperial and HDM transactions.
In April 2003, HMCA- IMPERIALHMCA sold the portion of its business which managed primary care medical practices, and in July 2005, HMCA-IMPERIALHMCA sold the portion of its business engaged in the management of physical therapy and rehabilitation practices. This was the result of HMCA-IMPERIAL'sHMCA’s decision to focus on management of MRI facilities, the business in which HMCA-IMPERIALHMCA is most experienced. As of September 30, 2013, HMCA managed a total of 25 MRI centers. For the 20112012 fiscal year, the revenues HMCA-IMPERIALHMCA recognized from the MRI facilities increased to $15.3$20.7 million, notwithstanding economic conditions and in contrast tofiscal 2013 the decline in
revenues recognized from scanner sales. For the 2010 fiscal year, the revenues
HMCA-IMPERIAL recognized from the MRI facilities were $11.1further increased to $34.3 million.
HMCA-IMPERIAL
HMCA GROWTH STRATEGY
HMCA-IMPERIAL's
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)Upright® MRI scanners. Presently,As a result, we presently have Upright(R)Upright® MRI scanners at all but two of the MRI facilities we manage.
On May 1, 2010, HMCA-IMPERIAL purchased a 15.2% interest from an unrelated party
of an entity that provides management services to a diagnostic center in the New
York Metropolitan area. On January 1, 2011, the Company purchased
In August 2013, HMCA added an additional 34.8% interest by the issuance of a promissory note of $400,000.
HMCA-IMPERIAL will soon be adding an eleventh Upright(R)Upright® MRI facility that it manages. HMCA-IMPERIAL also has a 50% controlling interestmanages in an entity that
will provide management services to a diagnostic center in the New York
Metropolitan area. This facility, which is located in WestchesterNassau County, New York is expected to open this fall.
In connection with its focus on managing only MRI facilities, HMCA-IMPERIAL sold
its business of managing physical therapy and rehabilitation practices on July
28, 2005 to Health Plus Management Services, L.L.C.
York.
PHYSICIAN AND DIAGNOSTIC MANAGEMENT SERVICES
HMCA-IMPERIAL's
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-IMPERIAL,HMCA, and all medical services are performed by the physicians and other medical personnel under the physician-owner'sphysician-owner’s supervision. HMCA-IMPERIALHMCA is the management company and performs services of a non-professional nature. These services include:
1. Offices and Equipment. HMCA-IMPERIALHMCA identifies, negotiates leases for and/or provides office space and equipment to its clients. This includes technologically sophisticated medical equipment. HMCA-IMPERIALHMCA also provides improvements to leaseholds, assistance in site selection and advice on improving, updating, expanding and adapting to new technology.
2. Personnel. HMCA-IMPERIALHMCA 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-IMPERIALHMCA processes the necessary tax, insurance and other documentation relating to employees.
3. Administrative. HMCA-IMPERIALHMCA assists in the scheduling of patient appointments, purchasing of office and medical supplies and equipment and handling of reporting, accounting, processing and filing systems. It prepares and files the physician portions of complex formsapplications to enable its clients to participate in managed care programs and to qualify for insurance reimbursement. HMCA-IMPERIALHMCA assists 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.
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4. Billing and Collections. HMCA-IMPERIALHMCA is responsible for the billing and collection of revenues from third-party payors including those governed by no-
faultNo-Fault and Workers' Compensation statutes. HMCA-IMPERIALHMCA is presently using a third party to perform its billing and collection services for its clients' no-
faultclients’ No-Fault and Workers'Workers’ Compensation scanning business.
5. Cost Saving Programs. Based on available volume discounts, HMCA-IMPERIALHMCA seeks to assist in obtaining favorable pricing for office and medical supplies, equipment, contrast agents, such as gadolinuim, and other inventory for its clients.
6. Diagnostic Imaging and Ancillary Services. HMCA-IMPERIALHMCA 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 its clients.
7. Marketing Strategies. HMCA-IMPERIALHMCA is responsible for developing and proposing marketing plans for its clients.
8. Expansion Plans. HMCA-IMPERIALHMCA assists the clients in developing expansion plans including the opening of new or replacement facilities where appropriate.
HMCA-IMPERIAL advises clients on all aspects of their businesses, including
expansion where it is a reasonable objective, on a continuous basis. HMCA-
IMPERIAL's
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-IMPERIAL
HMCA provides its services pursuant to negotiated contracts with its clients. While HMCA-IMPERIALHMCA believes it can provide the greatest value to its clients by furnishing the full range of services appropriate to that client, HMCA-IMPERIALHMCA would also be willing to enter into contracts providing for a more limited spectrum of management services. The exceptions to this general model of operation are three of the facilities acquired by HMCA from Health Diagnostics, LLC on March 5, 2013 in Florida. These Florida facilities are limited liability companies which conduct their operations directly and bill and collect their fees from the patients and third party payors.
The facilities enter into contracts with third party payors, including managed care companies. Neither HMCA-IMPERIAL'sNone of HMCA’s clients, nor HMCA-IMPERIALhowever, participate in any capitated plans or other risk sharing arrangements. Capitated plans are those HMO programs where the provider is paid a flat monthly fee per patient.
As of June 22, 2007, Dr. Robert Diamond purchased
The fees paid by the stock of the professional
corporations owning eight New York sites managed by HMCA-IMPERIAL, previously
owned by Dr. Raymond V. Damadian, the President, Chairman of the Board and
principal stockholder of Fonar. Dr. Diamond has been reading scans for HMCA-
IMPERIAL managed facilities for more than seven years. In connection with the
sale, new management agreements were substituted for the existing management
agreements, providing, for the same management services.to HMCA are flat monthly fees. The fees in fiscal 2009, however,2011 were flat monthly fees in the aggregate amount of $578,500$1,512,338 per month which increased in fiscal 2012 to an aggregate amount of $1,708,739 per month. The fees inIn fiscal 2010 were flat monthly fees in2013, the aggregate amount of $696,000management fees were the same, at $1,708,739 per month up to March 5, 2013. As a result of the HDM acquisition and in fiscal 2011the addition of 14 MRI scanning centers, the aggregate amount of management fees increased to $892,930$3,469,438 per month in the
aggregate. commencing March 5, 2013.
Fees under the management agreements are subject to adjustment by mutual agreement on an annual basis.
Dr. Damadian still owns three of the three MRI facilities in Florida managed by HMCA-
IMPERIAL.HMCA. The fees for thethese three sites in Florida owned by Dr. Damadian are flat monthly fees ranging from $137,444which are subject to $206,686 per month. No MRI facilities or
other medical facilities are ownedadjustment by HMCA-IMPERIAL.
HMCA-IMPERIALmutual agreement on an annual basis.
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HMCA contracts with Tritech Healthcare Management (Plainview, New York) to perform billing and collection for its clients' no-faultclients’ No-Fault and workers'
compensation business for aWorkers’ Compensation business. The monthly fee of 5% of all adjusted no-fault and workers'
compensation claims with a $30,000 monthly cap. HMCA-IMPERIALwas $85,000 in fiscal 2013. HMCA handles all of its clients'clients’ other billings and collections.
In June 2011, Health Diagnostics, LLC, outsourced its billing, collections and
credentialing operations for the sites that it manages to HMCA-IMPERIAL. The fee
is 5% of all adjusted deposits. The revenue received by HMCA-IMPERIAL in fiscal
2011 from this arrangement was $76,148.
Since the types of medical practices that Health Diagnostics manages are very
similar to those that HMCA-IMPERIAL manages, it is a natural expansion of HMCA-
IMPERIAL services. With HMCA-IMPERIAL's 14 years of experience in billing,
collecting and credentialing, this agreement is expected to benefit the customer
and enhance the profitability of HMCA-IMPERIAL.
HMCA-IMPERIAL
HMCA MARKETING
HMCA-IMPERIAL's
HMCA's marketing strategy is to expand the business and improve the facilities which it manages. HMCA-IMPERIALHMCA 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-IMPERIALHMCA 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 employed by the diagnostic imaging facilities. Following diagnostic procedures, the images are reviewed by the interpreting physicians who prepare a report of these tests and their findings. These reportsReports for the New York facilities are transcribed by HMCA-IMPERIALHMCA personnel and then
deliveredreports for the Florida facilities are outsourced to the referring physician.
HMCA-IMPERIALindependent contractors.
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-IMPERIALHMCA also directs its marketing efforts at managed care providers.
Managed care providers have become an important factor in the diagnostic imaging industry. To further its position, HMCA-IMPERIALHMCA is seeking to expand the imaging modalities offered at its managed diagnostic imaging facilities. Two of the facilities HMCA manages have two MRI scanners and one of those facilities also performs x-rays.
REIMBURSEMENT
HMCA-IMPERIAL's
HMCA’s clients receive reimbursements for their MRI scansservices through Medicare, Medicaid, managed care and private insurance.
Medicare
The Medicare program provides reimbursement for hospitalization, physician, diagnostic and certain other services to eligible persons 65 years of age and over and certain other individuals. Providers are paid by the federal government in accordance with regulations promulgated by the Department of Health and Human Services, HSS, and generally accept the payment with nominal deductible and co-insurance amounts required to be paid by the service recipient, as payment in full. Hospital inpatient services are reimbursed under a prospective payment system. Hospitals receive a specific prospective payment for inpatient treatment services based upon the diagnosis of the patient.
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Under Medicare'sMedicare’s prospective payment system for hospital outpatient services, or OPPS, a hospital is paid for outpatient services on a rate per service basis that varies according to the ambulatory payment classification group, or APC, to which the service is assigned rather than on a hospital'shospital’s costs. Each year the Centers for Medicare and Medicaid Services, or CMS, publishes new APC rates that are determined in accordance with the promulgated methodology.
Services provided in non-hospital based freestanding facilities, such as
independent diagnostic treatment facilities are paid under the Medicare Physician Fee Schedule, or MPFS. All of HMCA-IMPERIAL'sHMCA’s clients are presently in this category of independent diagnostic treatment facilities.category. The MPFS is updated on an annual basis.
Healthcare Reform Legislation
Healthcare reform legislation enacted in the first quarter of 2010 by the Patient Protection and Affordable Care Act or PPACA, specifically requires the U.S. Department of Health and Human Services, in computing physician practice expense relative value units, to increase the equipment utilization factor for advanced diagnostic imaging services (such as MRI, CT and PET) from a presumed utilization rate of 50% to 65% for 2010 through 2012, 70% in 2013, and 75% thereafter. Excluded from the adjustment are low-technology imaging modalities such as ultrasound, X-ray and fluoroscopy. The Health Care and Education Reconciliation Act of 2010 (H.R. 4872) or Reconciliation Act, which was passed by the Senate and approved by the President on March 30, 2010, amends the provision for higher presumed utilization of advanced diagnostic imaging services to a presumed rate of 75%. These changes may result in decreased revenue for the scans we performservices performed by our clients for Medicare beneficiaries. Other changes in reimbursement for services rendered by Medicare Advantage plans may also reduce the revenues we receive for services rendered to Medicare Advantage enrollees.
We have experienced reimbursement reductions for radiology services provided to Medicare beneficiaries, including reductions pursuant to the Deficit Reduction Act, or DRA.
The DRA, which became effective in 2007, set reimbursement for the technical component for imaging services (excluding diagnostic and screening mammography) in non-hospital based freestanding facilities at the lesser of OPPS or the MPFS.
In addition to the foregoing changes to the usage assumptions, CMS'CMS’ 2010 regulatory changes to the MPFS also included a downward adjustment to services primarily involving the technical component rather than the physician work component, by adjusting downward malpractice payments for these services. The
reductions will affect the services we provide, primarily impacting radiology
and other diagnostic tests. As noted above, the changes to the MPFS will be
transitionedThese adjustments have been phased in over a four-year period such that beginning in 2013, CMS will fully
implement the revised payment rates. This change to the MPFS, could have an
adverse effect on our financial condition and results of operations.four year period. For our fiscal year ended June 30, 2011,2013, Medicare revenues represented approximately 17.4%7.6% of the revenues for HMCA-IMPERIAL's clients. The impact ofHMCA’s clients as compared to 8.3% for the new MPFS
will increase over the four-year transition period unless mitigated by future
legislation (either currently proposed or pledged by Congress and the federal
government administration).
fiscal year ended June 30, 2012.
Many of PPACA'sPPACA’s provisions will not take effect for months or several years, while others are effective immediately. Many provisions also will require the federal government and individual state governments to interpret and implement the new requirements. In addition, PPACA remains the subject of significant debate, and proposals to repeal, block or amend the law have been introduced in Congress and many state legislatures. Finally, a number of state attorneys general have filed legal challenges to PPACA seeking to block its implementation on constitutional grounds. Because of the many variables involved, we are unable to predict how many of the legislative mandates contained in PPACA will be implemented or in what form, whether any additional or similar changes to statutes or regulations (including interpretations), will occur in the future, or what effect any future legislation or regulation would have on our business.
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Medicaid
The Medicaid program is a jointly-funded federal and state program providing coverage for low-income persons. In addition to federally- mandatedfederally-mandated basic services, the services offered and reimbursement methods vary from state to state. In many states, Medicaid reimbursement is patterned after the Medicare program; however, an increasing number of states have established or are establishing payment methodologies intended to provide healthcare services to Medicaid patients through managed care arrangements. In fiscal 2011,2013, approximately 2.7%0.5% of the revenues of HMCA- IMPERIAL'sHMCA’s clients were attributable to Medicaid.
Medicaid, as compared to 1.1% in fiscal 2012.
Managed Care and Private Insurance.
Health Maintenance Organizations, or HMO's,HMO’s, Preferred Provider Organizations, or PPOs, and other managed care organizations attempt to control the cost of healthcare services by a variety of measures, including imposing lower payment rates, preauthorization requirements, limiting services and mandating less costly treatment alternatives. Managed care contracting is competitive and reimbursement schedules are at or below Medicare reimbursement levels. Some managed care organizations have reduced or otherwise limited, and other managed care organizations may reduce or otherwise limit, reimbursement in response to reductions in government reimbursement. These reductions could have an adverse impact on our financial condition and results of operations. These reductions have been, and any future reductions may be, similar to the reimbursement reductions proposed by CMS, Congress and the current federal government administration. The development and expansion of HMOs, PPOs and other managed care organizations within our core markets could have a negative impact on utilization of our services in certain markets and/or affect the revenues per procedure we can collect, since such organizations will exert greater control over patients'patients’ access to diagnostic imaging services, the selection of the provider of such services and the reimbursement thereof.
HMCA-IMPERIAL
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-IMPERIALHMCA expects that more competition will develop. Many competitors have greater financial and other resources than HMCA-IMPERIAL.
HMCA.
With respect to the diagnostic imaging facilities managed by HMCA-IMPERIAL,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-IMPERIALorganizations, as well as emphasizing to potential referral sources the advantages of Upright® MRI scanning. 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-
IMPERIALHMCA believes that it will be able to effectively meet the competition in the outpatient diagnostic imaging industry with the new Fonar Upright(R)Upright® MRI scanners at its facilities.
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GOVERNMENT REGULATION APPLICABLE TO HMCA-IMPERIAL
HMCA
FEDERAL REGULATION
The healthcare industry is highly regulated and changes in laws and regulations can be significant. Changes in the law or new interpretation of existing laws can have a material effect on our permissible activities, the relative costs associated with doing business and the amount of reimbursement by government and other third-party payors.
Federal False Claims Act
The federal False Claims Act and, in particular, the False Claims Act's "qui
tam"Act’s “qui tam” or "whistleblower"“whistleblower” provisions allow a private individual to bring actions in the name of the government alleging that a defendant has made false claims for payment from federal funds. After the individual has initiated the lawsuit the government must decide whether to intervene in the lawsuit and to become the primary prosecutor. If the government declines to join the lawsuit, the individual may choose to pursue the case alone, although the government must be kept apprised of the progress of the lawsuit, and may intervene later. Whether or not the federal government intervenes in the case, it will receive the majority of any recovery. If the litigation is successful, the individual is
entitled to no less than 15%, but no more than 30%, of whatever amount the
government recovers that is related to the whistleblower's allegations.
When an entity is determined to have violated the federal False Claims Act, it must pay three times the actual damages sustained by the government, plus mandatory civil penalties of between $5,500 to $11,000 for each separate false claim as well asand the government's attorneys'government’s attorneys’ fees. Liability arises when an entity knowingly submits, or causes someone else to submit, a false claim for reimbursement to the federal government. The False Claims Act defines the term "knowingly"“knowingly” broadly, though simple negligence will not give rise to liability under the False Claims Act. Examples of the other actions which may lead to liability under the False Claims Act:
Failure to comply with the many technical billing requirements applicable to our Medicare and Medicaid business.
Failure to comply with the prohibition against billing for services ordered or supervised by a physician who is excluded from any federal healthcare program, or the prohibition against employing or contracting with any person or entity excluded from any federal healthcare program.
Failure to comply with the Medicare physician supervision requirements for the services we provide, or the Medicare documentation requirements concerning physician supervision.
The Fraud Enforcement and Recovery Act of 2009 expanded the scope of the False Claims Act by, among other things, broadening protections for whistleblowers and creating liability for knowingly retaining a government overpayment, acting in deliberate ignorance of a government overpayment or acting in reckless disregard of a government overpayment. The recently enacted healthcare reform bills in the form of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, "PPACA"“PPACA”) expanded on changes made by the 2009 Fraud Enforcement and Recovery Act with regard to such "reverse“reverse false claims."” Under PPACA, the knowing failure to report and return an overpayment within 60 days of identifying the overpayment or by the date a corresponding cost report is due, whichever is later, constitutes a violation of the False Claims Act. HMCA-IMPERIALHMCA and its clients have never been sued under the False Claims Act and believe they are in compliance with the law.
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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. The federal government has taken the position that a violation of the federal Stark Law is also a violation of the Federal False Claims Act. 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- IMPERIALHMCA believes that it and its clients are in compliance with these laws.
Anti-kickback Regulation
We are subject to federal and state laws which govern financial and other arrangements between healthcare providers. These include the federal anti-
kickbackanti-kickback statute which, among other things, prohibits the knowing and willful solicitation, offer, payment or receipt of any remuneration, direct or indirect, in cash or in kind, in return for or to induce the referral of patients for items or services covered by Medicare, Medicaid and certain other governmental health programs. Under PPACA, knowledge of the anti-kickback statute or the specific intent to violate the law is not required. Violation of the anti-kickback statute may result in civil or criminal penalties and exclusion from the Medicare, Medicaid and other federal healthcare programs, and according to PPACA, now provides a basis for liability under the False Claims Act. In addition, it is possible that private parties may file "qui tam"“qui tam” actions based on claims resulting from relationships that violate the anti-kickback statute, seeking significant financial rewards. Many states have enacted similar statutes, which are not limited to items and services paid for under Medicare or a federally funded healthcare program.
Neither HMCA-IMPERIALHMCA nor its clients engage in this practice.
In fiscal 2011,2013, approximately 17.4%7.6% of the revenues of HMCA-IMPERIAL'sHMCA’s clients were attributable to Medicare and 2.7%0.5% were attributable to Medicaid. In fiscal 2010,2012, approximately 17.3%8.3% of the revenues of HMCA-IMPERIAL'sHMCA’s clients were attributable to Medicare and 2.8%1.1% were attributable to Medicaid.
Deficit Reduction Act (DRA)
On February 8, 2006, the President signed into law the DRA. Effective January 1, 2007, the DRA provides that Medicare reimbursement for the technical component for imaging services (excluding diagnostic and screening mammography) performed in freestanding facilities will be capped. Payment will be the lesser of the Medicare Physician Fee Schedule or the Hospital Outpatient Prospective Payment System (HOPS) rates. Implementation of these reimbursement reductions contained in the DRA has had an adverse effect on our business. In fiscal 2011,2012, however, we were able to counter this effect by increasing our clients'clients’ scan volumes through our vigorous marketing efforts.
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The DRA also codified the reduction in reimbursement for multiple images on contiguous body parts previously announced by CMS, the agency responsible for administering the Medicare program. In November 2005, CMS announced that it would pay 100% of the technical component of the higher priced imaging procedure and 50% of the technical component of each additional imaging procedure for imaging procedures involving contiguous body parts within a family of codes when performed in the same session. CMS had indicated that it would phase in this 50% rate reduction over two years, so that the reduction was 25% for each additional imaging procedure in 2006 and another 25% reduction scheduled for 2007. However, for services furnished on or after July 1, 2010, the PPACA which, as stated
above, was signed into law on March 23, 2010, requires the full 50% reduction to be implemented. We have determinedbelieve that the impact of this final 25% reduction is, and will likely be in the future, immaterial tonot materially affect our operating results.
operations.
Health Insurance Portability and Accountability Act
Congress enacted the Health Insurance Portability and Accountability Act of 1996, or HIPAA, in part, to combat healthcare fraud and to protect the privacy and security of patients'patients’ individually identifiable healthcare information. HIPAA, among other things, amends existing crimes and criminal penalties for Medicare fraud and enacts new federal healthcare fraud crimes, including actions affecting non-government healthcare benefit program by means of false or fraudulent representations in connection with the delivery of healthcare services is subject to a fine or imprisonment, or potentially both. In addition, HIPAA authorizes the imposition of civil money penalties against entities that employ or enter into contracts with excluded Medicare or Medicaid program participants if such entities provide services to federal health program beneficiaries. A finding of liability under HIPAA could have a material adverse effect on our business, financial condition and results of operations.
Further, HIPAA requires healthcare providers and their business associates to maintain the privacy and security of individually identifiable protected health information ("PHI"(“PHI”). HIPAA imposes federal standards for electronic transactions, for the security of electronic health information and for protecting the privacy of PHI. The Health Information Technology for Economic and Clinical Health Act of 2009 ("HITECH"(“HITECH”), signed into law on February 17, 2009, dramatically expanded, among other things, (1) the scope of HIPAA to now apply directly to "business“business associates,"” or independent contractors who receive or obtain PHI in connection with providing a service to a covered entity, (2) substantive security and privacy obligations, including new federal security breach notification requirements to affected individuals, DHHS and prominent media outlets, of certain breaches of unsecured PHI, (3) restrictions on marketing communications and a prohibition on covered entities or business associates from receiving remuneration in exchange for PHI, and (4) the civil and criminal penalties that may be imposed for HIPAA violations, increasing the annual cap in penalties from $25,000 to $1.5 million per year.
In addition, many states have enacted comparable privacy and security statues or regulations that, in some cases, are most stringent than HIPAA requirements. In those cases it may be necessary to modify our operations and procedures to comply with the more stringent state laws, which may entail significant and costly changes for us. We believe that we are in compliance with such state laws and regulations. However, if we fail to comply with applicable state laws and regulations, we could be subject to additional sanctions.
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We believe that we are in compliance with the current HIPAA requirements, as amended by HITECH, and comparable state laws, but we anticipate that we may encounter certain costs associated with future compliance. Moreover, we cannot guarantee that enforcement agencies or courts will not make interpretations of the HIPAA standards that are inconsistent with ours, or the interpretations of our contracted radiology practices or their affiliated physicians. A finding of liability under the HIPAA standards may result in significant criminal and civil penalties. Noncompliance also may result in exclusion from participation in government programs, including Medicare and Medicaid. These actions could have a material adverse effect on our business, financial condition, and results of operations.
Civil Money Penalty Law and Other Federal Statutes
The Civil Money Penalty, or CMP, law covers a variety of practices. It provides a means of administrative enforcement of the anti-kickback statute, and prohibits false claims, claims for medically unnecessary services, violations of Medicare participating provider or assignment agreements and other practices. The statute gives the Office of Inspector General of the HHS the power to seek substantial civil fines, exclusion and other sanctions against providers or others who violate the CMP prohibitions.
In addition, in 1996, Congress created a new federal crime: healthcare fraud and false statements relating to healthcare matters. The healthcare fraud statute prohibits knowingly and willfully executing a scheme to defraud any healthcare benefit program, including private payors. A violation of this statute is a felony and may result in fines, imprisonment or exclusion from government sponsored programs such as the Medicare and Medicaid programs.
Certificates of Need
Some states require hospitals and certain other healthcare facilities and providers to obtain a certificate of need, or CON, or similar regulatory approval prior to establishing certain healthcare operations or services, incurring certain capital projects and/or the acquisition of major medical equipment including MRI and PET/CT systems. We are not operating in any such states.
Patient Protection and Affordable Care Act
On March 23, 2010, President Obama signed into law healthcare reform legislation in the form of PPACA. The implementation of this law will likely have a profound impact on the healthcare industry. Most of the provisions of PPACA will be phased in over the next four years and can be conceptualized as a broad framework not only to provide health insurance coverage to millions of Americans, but to fundamentally change the delivery of care by bringing together elements of health information technology, evidence-based medicine, chronic disease management, medical "homes,"“homes,” care collaboration and shared financial risk in a way that will accelerate industry adoption and change. There are also many provisions addressing cost containment, reductions of Medicare and other payments and heightened compliance requirements and additional penalties, which will create further challenges for providers. We are unable to predict the full impact of PPACA at this time due to the law'slaw’s complexity and current lack of implementing regulations or interpretive guidance. Moving forward, we believe that the federal government will likely have greater involvement in the healthcare industry than in prior years.
State Regulation
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| FONAR CORPORATION AND SUBSIDIARIES |
In addition to the federal self-referral law and federal Anti-kickback statute, many States, including those in which HMCA-IMPERIALHMCA 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-IMPERIALHMCA believes that it and its clients are in compliance with these laws.
Various States prohibit business corporations from practicing medicine. Various States, including New York, also prohibit the sharing of professional fees or fee splitting. Consequently, HMCA-IMPERIALin New York 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-IMPERIAL does not engageUnder Florida law a business entity can bill patients and third party payors directly, and at three of the six facilities in the practice of medicine or
establish standards of medical practice or policies for its clients in any State
even where permitted.
HMCA-IMPERIAL'sFlorida, HMCA’s subsidiaries do so.
HMCA’s clients generate revenue from patients covered by no-fault insurance and workers' compensation programs. For the fiscal year ended June 30, 20112013 approximately 30.7%37.0% of our clients'clients’ receipts were from patients covered by no-fault insurance and approximately 3.5%3.8% of our client'sclient’s receipts were from patients covered by workers'workers’ compensation programs. For the fiscal year ended June 30, 2010,2012, approximately 35.7%33.8% of HMCA-IMPERIAL's clients'HMCA’s clients’ receipts were from patients covered by no-fault insurance and approximately 5.9%3.7% of HMCA-IMPERIAL's clients'HMCA’s clients’ receipts were from patients covered by workers'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-IMPERIALHMCA could be required to modify its business practices and services in ways that could be more costly to HMCA-IMPERIALHMCA or in ways that decrease the revenues which HMCA-IMPERIALHMCA receives from its clients.
Compliance Program
We maintain a program to monitor compliance with federal and state laws and regulations applicable to the healthcare entities. We have a compliance officer who is charged with implementing and supervising our compliance program, which includes the adoption of (i) Standards of Conduct for our employees and affiliates and (ii) a process that specifies how employees, affiliates and others may report regulatory or ethical concerns to our compliance officer. We believe that our compliance program meets the relevant standards provided by the Office of Inspector General of the Department of Health and Human Services.
An important part of our compliance program consists of conducting periodic audits of various aspects of our operations and that of the contracted radiology practices. We also conduct mandatory educational programs designed to familiarize our employees with the regulatory requirements and specific elements of our compliance program.
HMCA-IMPERIAL
HMCA believes that it and its clients are in compliance with applicable Federal, State and local laws. HMCA-IMPERIALHMCA does not believe that such laws will have any adverse material effect on its business.
EMPLOYEES
As of July 1, 2011,2013, we employed 214approximately 411 persons on a full-time andor part-time basis. Of suchSuch employees 7 were engagedincluded 53 persons in marketing and sales, 129 in research and development, 2115 in production, 2829 in customer support services, 215 in administration, 90 on site at facilities and offices, 19 performinginformation technology, 32 in billing and collection functions managed by HMCA-IMPERIAL and 1624 performing transcription services for those facilities.
the facilities managed or directly operated by HMCA. Of our 411 employees, 222 were stationed at the facilities managed or operated by HMCA.
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| FONAR CORPORATION AND SUBSIDIARIES |
Fonar leases approximately 117,000 square feet of office and plant space at its principal offices in Melville, New York and at one other location in Melville, New York at a current aggregate annual rental rate of $1,287,105,$1,292,757, excluding utilities, taxes and other related expenses. The term of one of the leases includes options to renew up through 2016 and the terms of the other leases extend to December 2013. Fonar plans to vacate 29,000 square feet of space in a building
adjacent to its principal offices as part of its continuing efforts to cut
costs, thereby saving an additional $254,688 annually (excluding savings on
utilities, taxes and other related expenses). Management believes that the premises will be adequate for its current needs. HMCA-IMPERIALHMCA already has consolidated its headquarters with those of Fonar as part of Fonar'sFonar’s cost cutting program. HMCA-IMPERIALHMCA maintains leased office premises for its clients at the clients'clients’ sites having an aggregate annual rental rate of approximately $1,023,000$2,742,217 under leases having various terms.
On or about June 30, 2010, one of Fonar'sFonar’s customers, Golden Triangle Company, commenced an action against Fonar and certain individual defendants employed or formerly employed by Fonar, in the United States District Court for the Eastern District of New York based on the alleged wrongful failure of Fonar to deliver a scanner in Kuwait. The claim allegesalleged various causes of action including breach of contract, fraud, conspiracy to defraud and conversion.Golden Triangle Company v. Fonar Corporation et al, CV10-2933. Plaintiff contracted with Fonar to purchase an MRI scanner, and paid $1,455,500 in advance. The plaintiff seeks relief in the
amount ofscanner was never delivered, but Plaintiff never designated a site for delivery either. Alleging other damages, fraud and deceptive trade practices, Plaintiff sought up to $5,000,000. Fonar believes that the plaintiff's claims are without
merit and made a motion to dismiss the complaint, as tothe outcome of which left plaintiff withonly a cause of action for breach of contract. The claims against the individual defendantsofficers and mostemployees of Fonar were dismissed. Fonar filed its answer, together with a counterclaim alleging that the plaintiff, by attempting to overcharge the end-customer, had damaged Fonar’s reputation and ability to sell in Kuwait. The case was settled in June, 2013 for $480,000 in cash and 30,000 shares of Fonar’s common stock payable in installments.
Jack Shapiro v. Fonar Corporation, Supreme Court of the causesState of action.New York, Nassau County, was commenced by plaintiff in July, 2009 to recover $500,000 based on Fonar’s failure to refund a deposit on an MRI scanner and termination of plaintiff’s sales representative agreement. Plaintiff alleged that the deposit on the machine was in part consideration for the sales representative agreement. Fonar’s view was that the sales agreement and sales representative agreement were separate and (1) Fonar was entitled to keep the deposit on the sale when plaintiff failed to proceed with the transaction and (2) properly terminated the sales representative agreement in accordance with its terms. The motioncase has been grantedsettled for $323,000 payable in installments, subject to Fonar obtaining a sale and Fonar served
its answer and counterclaims.
In addition, we are party to three additional less significant actions in which
the customers are seeking to obtain a returncustomer paying the installments of their deposits for MRI scanners
on the grounds that various contingencies failed to materialize. Upright MRI of
Chicago, LLC v. Fonar, Circuit Court of Cook County, Illinois ($310,000), purchase price.
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| FONAR CORPORATION AND SUBSIDIARIES |
Matt Malek Madison v. Fonar U.S.Corporation, United States District Court, Northern District of California, ($300,000)was commenced by plaintiff on August 27, 2007 to recover a down payment for a scanner in the amount of $300,000, with interest. The plaintiff sought costs of suit and attorney’s fees as well. Fonar answered the complaint and sued the plaintiff for breach of contract in the amount of $450,000. Although down payments are usually expressly non-refundable in Fonar’s quotations and agreements, in this case, the quotation contemplated the sale of four scanners, and provided that the deposit would be refundable with interest, if the customer were unable to find suitable locations in the San Francisco Bay area. The issue was whether the customer made a good faith effort to find locations; Fonar’s position was that the customer did not. The case went to trial before a judge; the parties submitted post-trial briefs, and judgment was awarded to the plaintiff. Fonar appealed the trial court’s decision, but on January 31, 2012, the U.S. Court of Appeals for the 9th Circuit affirmed the lower court’s decision awarding the plaintiff the $300,000 deposit with prejudgment interest from July 1, 2006. Fonar sought to have the Court of Appeals reconsider the decisionen banc, and Jack Shapiro(by all or a larger number of the judges on the Circuit Court of Appeals), but this was not granted. Although the case has been concluded, the plaintiff has not taken any steps to collect the judgment.
Bonutti Research v. Fonar Corporation, SupremeHealth Management Corporation of America, Health Diagnostics, LLC et al, was commenced on December 2, 2011. Bonutti Research filed a patent infringement action in the U.S. District Court Nassau County,for the Eastern District Court of New York, ($500,000 althoughalleging that Fonar’s Upright® MRI scanners infringe plaintiff’s patent which relates to the actual deposit was $323,000). A fourth case,
Anchorage Neurological Associates, Inc., Superior Courtmoving of Alaska, Third
Judicial Districta patient into the scanner. Fonar believes plaintiff’s claims are without merit and further, that the patent is invalid. The parties are engaged in jurisdictional discovery to determine whether the plaintiff owned the patent claimed to have been infringed at Anchorage ($155,000),the time of the commencement of the lawsuit. Discovery on the merits has been settled for $155,000 payable
over time. Fonar's down paymentsstayed pending the outcome of the jurisdictional discovery. The parties, are generally non-refundable, butengaged in some
instances, whereserious settlement negotiations. No specified conditionsamount of damages was specified in the complaint. The patent has expired and as a result, only past damages are met,at issue.
Bolt MRI Technologies v. Fonar will refund a down payment.
InCorporation, Health Management Corporation of America & Health Diagnostics, LLC, was commenced on July 22, 2013, when Bolt MRI Technologies filed an action against Fonar Corporation, Health Management Corporation of America and Health Diagnostics, LLC alleging infringement of the Upright MRIsame patent which is the subject of Chicago case, the down paymentBonutti case. Bolt alleges that the patent was specifically statedassigned to be non-refundable andBolt on or about June 8, 2012. The parties have been negotiating to settle the case although still pending, is close to being
settled. In the Madison case, the Court recently granted summary judgment to
Madison for the deposit and prejudgment interest. We strongly disagreein conjunction with the decision and have appealedsettlement of the judgment. In the Shapiro case, Shapiro, who was
also a sales representative for Fonar, and Fonar are continuing to negotiate a
settlement.
PartBonutti case.
ITEM 4. MINE SAFETY DISCLOSURES. Not Applicable
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 2009 1.38 0.62
April - June 2009 3.92 0.82
July - September 2009 2.47 1.60
October - December 2009 4.60 1.55
January - March 2010 3.81 1.19
April - June 2010 2.24 1.40
July - September 2010 1.94 1.31
October - December 2010 2.29 1.00
January - March 2011 2.57 1.25
April - June 2011 3.20 1.65
July - September 8, 2011 2.70 1.63
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| FONAR CORPORATION AND SUBSIDIARIES |
| Fiscal Quarter | High | Low | |||||||||||||||||||
| January | — | March | 2011 | $ | 2.57 | $ | 1.25 | ||||||||||||||
| April | — | June | 2011 | $ | 3.20 | $ | 1.65 | ||||||||||||||
| July | — | September | 2011 | $ | 2.70 | $ | 1.63 | ||||||||||||||
| October | — | December | 2011 | $ | 2.16 | $ | 1.36 | ||||||||||||||
| January | — | March | 2012 | $ | 2.89 | $ | 1.68 | ||||||||||||||
| April | — | June | 2012 | $ | 6.80 | $ | 2.68 | ||||||||||||||
| July | — | September | 2012 | $ | 4.12 | $ | 3.02 | ||||||||||||||
| January | — | March | 2013 | $ | 7.44 | $ | 4.42 | ||||||||||||||
| April | — | June | 2013 | $ | 7.94 | $ | 5.67 | ||||||||||||||
| July | — | September 5 | 2013 | $ | 6.70 | $ | 5.12 | ||||||||||||||
On September 8, 2011,5, 2013, we had approximately 2,7382,099 stockholders of record of our Common Stock, 1211 stockholders of record of our Class B Common Stock, 3 stockholders of record of our Class C Common Stock and 2,5391,473 stockholders of record of our Class A Non-voting Preferred Stock.
At the present time, the only class of our securities for which there is a market is the Common Stock.
We paid cash dividends in fiscal 1998 and the first three quarters of fiscal 1999 on monies we received from the enforcement of our patents. Except for these dividends, we have not paid any cash dividends. Except for these dividends, we expect that we will retain earnings to finance the development and expansion of our business.
business for the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA. Not Required.
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-IMPERIAL",HMCA and formerly known as U.S. Health Management Corporation, in order to expand into the physician and diagnostic management services business. HMCA currently provides its services exclusively to diagnostic imaging facilities.
Fonar's principal MRI products are its Stand-Up(R)Stand-Up®/Upright(R)Upright® MRI and Fonar 360(TM)360™ MRI scanners. The Stand-Up(R)Stand-Up® MRI allows patients to be scanned for the first time under weight-bearing conditions. The Stand-Up(R)Stand-Up® MRI is the only MRI capable of producing images in the weight-bearing state.
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| FONAR CORPORATION AND SUBSIDIARIES |
At 0.6 Tesla field strength, the Upright(R)Upright® MRI and Fonar 360(TM)360™ magnets are among the highest field open MRI scanners in the industry, offering non- claustrophobicnon-claustrophobic MRI together with high-field image quality. Fonar'sFonar’s open MRI scanners were the first high field strength open MRI scanners in the industry.
HMCA-IMPERIAL
HMCA commenced operations in July, 1997 and generates revenues from providing comprehensive management services, including development, administration, accounting, billing and collection services, together with office space, medical equipment, supplies and non-medical personnel to its clients. Revenues are in the form of fees which are earned under contracts with HMCA-IMPERIAL's clients. Since July 2005, HMCA-IMPERIAL has engaged only in the
management of MRI facilities.
HMCA’s clients except for three Florida subsidiaries which bill and collect fees from patients, insurers and other third party payors directly.
For the fiscal years ended June 30, 20112013 and June 30, 2010, 33.6%2012, 23.0% and 34.1%32.2%, respectively, of HMCA-IMPERIAL'sHMCA’s revenues were derived from contracts with facilities owned by Dr. Raymond V. Damadian, the President of Fonar and HMCA-
IMPERIALHMCA, and principal stockholder of Fonar. The agreements with these MRI facilities are for one-year terms which renew automatically on an annual basis, unless terminated. The fees for thethese sites, owned by Dr. Damadianwhich are located in Florida, are flat monthly fees ranging from $137,444 to $206,686. The balance of HMCA-
IMPERIAL's revenues are derived from contracts with MRI facilities purchased by
Dr. Robert Diamond from Dr. Damadian. The MRI facilities owned by Dr. Diamond
are charged a flat fee, pursuant to new contracts executed in connection with
the sale of the MRI facilities at the end of fiscal 2007. The fees are reviewed
and if appropriate, adjusted on an annual basis by mutual agreement. During
fiscal 2011, these fees ranged from $100,000 per month to $212,311 per month.
fees.
Industry Trends
Prior to 2007, forUpdates
For services for which we bill Medicare is billed directly, payment was
madethe sites are paid under the Medicare Physician Fee Schedule, which is updated on an annual basis. Under the Medicare statutory formula, payments under the Physician Fee Schedule would have decreased for the past several years if Congress failed to intervene. For example, for 2008, the fee schedule rates were to be reduced by
approximately 10.1%. The Medicare, Medicaid and SCHIP Extension Act of 2007
eliminated the 10.1% reduction for 2008 and increased the annual payment rate
update by 0.5%. This increase to the annual Medicare Physician Fee Schedule
payment update was effective only for Medicare claims with dates of service
between January 1, 2008 and June 30, 2008.
Beginning July 1, 2008, under MIPPA, the 0.5% increase was continued for the
rest of 2008. In addition, MIPPA established a 1.1% increase to
Many private payors use the Medicare Physician Fee Schedule payment update for 2009.
For 2010, CMS projected a rate reduction of 21.2% in the absence of
Congressional intervention. However, over the course of the first six months of
2010, various temporary solutions were enacted by Congress which resulted in
delaying any such change to the physician fee schedule. Ultimately, a 2.2%
increase in the conversion factor was passed by Congress effective June 1, 2010,
further delaying the pending 21.2% conversion factor reduction to November 30,
2010. On November 29, 2010, the calendar year 2011 physician fee schedule final
rule with comment period was published in the Federal Register. The rule updates
payment policies and Medicare payment rates under the Medicare physician fee
schedule for physicians' services and would have significantly reduced physician
fee schedule payments in 2011 had Congress not acted by passing the Physician
Payment and Therapy Relief Act of 2010 and the Medicare and Medicaid Extenders
Act of 2010, which together continue the 2.2% update from June 2010 through
December 31, 2011. determine their own reimbursement rates.
While Congress has historically provided temporary relief
fromrepeatedly intervened to mitigate the formula-driven reductions innegative reimbursement impact associated with the conversion factor, it cannot be
guaranteedformula, there is no guarantee that Congress will actcontinue to provide reliefdo so in the future. The failure
of Congress to act could adversely impact our revenues and results of operation.
MIPPA also modifiedMoreover, the existing methodology by whichmay result in significant yearly fluctuations in the budget neutrality formula was
applied to the 2009 physician fee schedule payment rates, resulting in an
overall reduction in payment rates for services performed by many specialties,
including an estimated 1% reduction for nuclear medicine. The impact of the
payment rates on specific companies depends on their service mix. Also with
respect to MIPPA, the legislation requires all suppliers that provide the
technical component of diagnostic MRI, PET/CT, CT, and nuclear medicine to be
accredited by an accreditation organization designated by CMS (which currently
include the ACR, the IAC and The Joint Commission) by January 1, 2012. Our
facilities are currently accredited by the ACR.
A number of other legislative changes impact our physician management and
diagnostic services business. For example, beginning on January 1, 2007, the DRA
imposed caps on Medicare payment rates for certain imaging services furnished in
physician's offices and other non-hospital based settings. Under the cap,
payments for specified imaging services cannot exceed the hospital outpatient
payment rates for those services. The limitation is applicable only to the
technical components of the diagnostic imaging services. CMS issues on an annual
basis the hospital outpatient prospective payment rates, which are used to
develop the caps. If the technical component of the service established under
the Physician Fee Schedule (without including geographic adjustments) exceedsamounts, which may be unrelated to changes in the hospital outpatient payment amount for the service (also without including
geographic adjustments), then the payment is to be reduced. In other words, in
those instances where the technical component for the particular service is
greater for the non-hospital site, the DRA directs that the hospital outpatient
payment rate be substituted for the otherwise applicableactual costs of providing physician services.
The 2013 Medicare Physician Fee Schedule payment rate.
The DRA also codified theexpanded a reduction in reimbursement for multiple images on contiguous body parts which was previously announcedto new services, namely diagnostic cardiovascular services and ophthalmology services. Medicare has a longstanding policy to reduce payment by CMS. The DRA mandated
payment at 100% of the technical component of the higher priced imaging
procedure and 50% for the technical component of each additional imaging
procedure for multiple images of contiguous body parts withinsecond and subsequent procedures furnished to the same beneficiary by a family of codes
performedsingle physician or physicians in the same session. Initially, CMS announced that it would phase in
this reimbursement reduction over a two-year period, to include a 25% reduction
for each additional imaging proceduregroup practice on contiguous body parts in 2006 and an
additional 25% reduction in 2007. CMS did not implement the additional 25%
reduction scheduled for 2007, but for services furnished on or after July 1,
2010, PPACA requires the full 50% reduction to be implemented.
Regulatory updates to payment rates for which we bill the Medicare program
directly are published annually by CMS. For payments under the Physician Fee
Schedule for calendar year 2010, CMS changed the way it calculates components of
the Medicare Physician Fee Schedule. First, CMS reduced payment rates for
certain diagnostic services using equipment costing more than $1 million through
revisions to usage assumptions from the current 50% usage rate to a 90% usage
rate. This change applied to MRI and CT scans. However, for certain diagnostic
services performed on or after January 1, 2011, the Reconciliation Act reduces
the assumed usage rate for such equipment from CMS's current rate of 90% to a
rate of 75%, resulting in an increase in payment rates for such services.
Recent global market and economic conditions have been unprecedented. Concerns
about the potential long-term and widespread recession, inflation, energy costs,
geopolitical issues, the availability and cost of credit, the United States
mortgage market and a declining real estate market in the United States have
contributed to increased market volatility and diminished expectations for the
United States economy. These conditions, combined with declining business and
consumer confidence and increased unemployment, have contributed to unusual
volatility. At this time, it is unclear what impact this might have on our
future revenues or business.
As a result of these market conditions, the cost and availability of credit has
been and may continue to be adversely affected by illiquid credit markets and
wider credit spreads. Concern about the stability of the markets generally and
the strength of counterparties specifically has led many lenders and
institutional investors to reduce, and in some cases, cease to provide funding
to borrowers. If market conditions continue, they may limit our ability to
timely access the capital markets to meet liquidity needs, resulting in adverse
effects on our financial condition and results of operations.
same day.
Critical Accounting Policies
----------------------------
Our discussion and analysis of our financial condition and results of operations are based uponon our consolidated financial statements which have beenthat were prepared in accordance with U.S. generally accepted accounting principles, generally acceptedor GAAP. Management makes estimates and assumptions when preparing financial statements. These estimates and assumptions affect various matters, including:
| · | our reported amounts of assets and liabilities in our consolidated balance sheets at the dates of the financial statements |
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| FONAR CORPORATION AND SUBSIDIARIES |
| · | our disclosure of contingent assets and liabilities at the dates of the financial statements; and |
| · | our reported amounts of net revenue and expenses in our consolidated statements of operations during the reporting periods |
These estimates involve judgments with respect to numerous factors that are difficult to predict and are beyond management’s control. As a result, actual amounts could differ materially from these estimates.
The Securities and Exchange Commission defines critical accounting estimates as those that are both most important to the portrayal of a company’s financial condition and results of operations and require management’s most difficult, subjective or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. In the United States
of America. The preparation of thesenotes to our 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 evaluatediscuss 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.
significant accounting policies.
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 ourevaluate the realizability of the net deferred tax assets and assess the valuation allowance periodically. If future taxable income or other factors are not consistent with our expectations, an adjustment to the amount
that isour allowance for net deferred tax assets may be required. For net deferred tax assets we consider estimates of future taxable income, including tax planning strategies, in determining whether our net deferred tax assets are more likely than not to be realized.
In 2013 we recorded a valuation allowance resulting in a deferred tax asset of $2,473,892. As of June 30, 2011,2012, we had recorded a valuation allowance which reduced our deferred tax assets to equal our deferred tax liability.
We depreciate our long-lived assets over their estimated economic useful lives with the exception of leasehold improvements where we use the shorter of the assets useful lives or the lease term of the facility for which these assets are associated.
The Company provides for medical receivables that could become uncollectible by establishing an allowance for doubtful accounts in order to adjust medical receivables to estimated net realizable value. In evaluating the collectability of medical receivables, the Company considers a number of factors, including the age of the account, historical collection experiences, payor type, current economic conditions and other relevant factors. There are various factors that impact collection trends, such as payor mix, changes in the economy, increase burden on copayments to be made by patients with insurance and business practices related to collection efforts. These factors continuously change and can have an impact on collection trends and the estimation process.
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| FONAR CORPORATION AND SUBSIDIARIES |
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. Our amortization of the non-competition agreements entered into with certain individuals in connection with the HDM transaction are depreciated over seven years, and customer relationships are amortized over 20 years.
Goodwill is recorded as a result of business combinations. Management evaluates goodwill, at a minimum, on an annual basis and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable. Impairment of goodwill is tested by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. The fair value of a reporting unit is estimated using a combination of the income or discounted cash flows approach and the market approach, which uses comparable market data. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired and a second step is performed to measure the amount of impairment loss, if any. Based on our test for goodwill impairment, we noted no impairment related to goodwill. However, if estimates or the related assumptions change in the future, we may be required to record impairment charges to reduce the carrying amount of goodwill.
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 20112013 COMPARED TO FISCAL 2010
2012
In fiscal 2011,2013, we experienced arecognized net income of $3.2$10.3 million on revenues of $33.1$49.1 million, as compared to a net lossincome of $3.0$6.9 million on revenues of $31.8$39.4 million for fiscal 2010.2012. This represents an increase in revenues of 4.2%24.6%. Increased management fees of 38.2% waswere the principal factor accounting for the increased revenues of the Company. RelatedUnrelated party management fees increased by 36.1%41.6%. In
addition, totalTotal costs and expenses decreasedincreased by 14.7%29.1%. Our consolidated operating results improved by $6.4 million$300,000 to an operating income of $3.8$7.5 million for fiscal 20112013 as compared to an operating lossincome of $2.6$7.2 million for fiscal 2010.
2012.
Discussion of Operating Results of Medical Equipment Segment
Fiscal 20112013 Compared to Fiscal 2010
------------------------------------------------------------
2012
Revenues attributable to our medical equipment segment decreased by 14.1%20.4% to $17.8$14.9 million in fiscal 20112013 from $20.7$18.7 million in fiscal 2010,2012, with product sales revenues decreasing 26.2%by 43.1% from $9.1$6.9 million in fiscal 20102012 to $6.7$3.9 million in fiscal 2011.2013. Service revenue remained the same at $11.1decreased from $11.8 million in fiscal 2010 and $11.12012 to $11.0 million in fiscal 2011. 2013.
The decrease in revenues was attributable
to a decrease in sales of our Upright(R) MRI, which FONAR attributes to the
current state of the economy, notwithstanding stability in service and repair
fees.
The Upright(R)Upright® MRI is unique in that it permits MRI scans to be performed on patients upright in the weight-bearing state and in multiple positions that correlate with symptoms. An important event in our ongoing effort to educate
both the medical community and payors about the benefits, if not necessity, of
utilizing Upright(R) MRI scanning, occurred in fiscal 2007 when we sold an
Upright(R) MRI scanner to the largest orthopedic hospital in the Netherlands,
St. Maartenskliniek. Upon placing the order, the Chairman of Spine Surgery at
St. Maartenskliniek expressed the view that for their hospital to continue to
engage in spine surgery without Fonar's Upright(R) MRI technology, now that it
was available was "unacceptable" and that owning the scanner "was not optional,
but mandatory". He further stated that "once our active research program has
discovered the benefits of this new Fonar technology for patients, we intend to
publish the results in a lot of peer reviewed scientific journals".
In addition, significant progress is being made in developing the Fonar 360(TM)
MRI scanner so that it can be used in interventional procedures. At the
Oxford-Nuffield site in the United Kingdom, where we installed the first Fonar
360(TM) MRI, Fonar software engineers have completed and installed our 2nd
generation tracking software, which is designed to enable the surgeons to insert
needles into the patient and accurately advance them under direct visual image
guidance to the target tissue, such as a tumor, in order to inject therapeutic
agents directly into the tissue.
Product sales to unrelated parties decreased by 26.2%43.1% in fiscal 20112013 from $9.1$6.9 million in fiscal 20102012 to $6.7$3.9 million in fiscal 2011.2013. There were no product sales to related parties in fiscal 20112013 or 2010.
2012.
| 40 |
| FONAR CORPORATION AND SUBSIDIARIES |
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 multi-position MRI scanner as the FONAR Upright(R)Upright® MRI.
The operating results for the medical equipment segment increased by $2.5
milliondecreased from a loss of $1.1 million in 2010 to an income of $1.4$2.7 million in fiscal 2011.2012 to income of $140,000 in fiscal 2013. This increasedecrease is attributable most significantly to a decrease in our operating expenses.
product sales.
We recognized revenues of $5.3$3.2 million from the sale of our Upright(R)Upright® MRI scanners in fiscal 2011,2013, while in fiscal 2010,2012, we recognized revenues of $7.9$6.3 million from the sale of Upright(R)Upright® MRI scanners.
None of our revenues for fiscal 2011 or fiscal 2010 were attributable to sales
to related parties.
License and royalty revenue in fiscal 2011 decreased to $0 as compared to
$585,000 in fiscal 2010. The license expired and as a result, we had no license
and royalty revenue in fiscal 2011.
Research and development expenses, net of capitalized costs, decreasedincreased by 41.4%15.8% to $1.4 million in fiscal 20112013 as compared to $2.5$1.2 million in fiscal 2010.2012. Our expenses for fiscal 20112013 represented continued research and development of Fonar'sFonar’s scanners, Fonar'sFonar’s new hardware and software product, Sympulse(R)Sympulse® and new surface coils to be used with the Upright(R)Upright® MRI scanner.
Discussion of Operating Results of Physician and Diagnostic Services Management Segment.
Fiscal 20112013 Compared to Fiscal 2010
-------------------------------------------------------------------------------
2012
Revenues attributable to the Company's physician and diagnostic services management segment, HMCA-IMPERIAL,HMCA, increased by 38%65.2% to $15.3$34.3 million in fiscal 20112013 from $11.1$20.7 million in fiscal 2010.2012. The increase in revenues was primarily due to the renegotiation14 additional scanning facilities acquired in the HDM transaction, which resulted in the recognition of some$12.2 million in revenues from HDM, including $4.9 million of fees (net of contractual allowances and discounts less provision for bad debts) from patient and third party payors recognized by four of the management contracts between HMCA-
IMPERIAL and its clients and the opening of a new sitefacilities in Manhattan, New York.
All of the MRI facilities managed by HMCA-IMPERIAL have Upright(R) MRI scanners.
Florida.
Cost of revenues as a percentage of the related revenues for our physician and diagnostic services management segment decreasedincreased from $8.3$12.3 million or 75.0%59.4% of related revenues for the year ended June 30, 20102012 to $9.7$19.2 million, or 63%56.1% of related revenue for the year ended June 30, 2011. This was the result of
increased revenues produced by our increased marketing efforts, coupled with our
cost containment policies.
2013.
Operating results of this segment increased from an operating lossincome of $1.5$4.5 million in fiscal 20102012 to operating income of $2.4$7.4 million in fiscal 2011.2013. We believe that the 14 additional facilities managed by HDM and our efforts to expand and improve the operation of our physician and diagnostic services management segment are directly responsible for the profitability of this segment and our company as a whole.
Discussion of Certain Consolidated Results of Operations
Fiscal 20112013 Compared to Fiscal 2010
--------------------------------------------------------
2012
Interest and investment income decreased in 20112013 compared to 2010.2012. We recognized interest income of $228,174$217,598 in 20112013 as compared to $260,216$243,254 in fiscal 2010,2012, representing a decrease of 12.3%10.5%.
| 41 |
| FONAR CORPORATION AND SUBSIDIARIES |
Interest expense of $518,532$500,362 was recognized in fiscal 2011,2013, as compared to $387,902$478,663 in fiscal 2010,2012, representing a increase of 33.7%4.5%.
While revenue increased by 4.2%24.6%, selling, general and administrative expenses decreasedincreased by 29.1%42.9% to $8.5$12.5 million in fiscal 20112013 from $11.9$8.7 million in fiscal 2010.
Compensatory2012.
The compensatory element of stock issuances also increased from approximately $99,000$180,000 in fiscal 20102012 to $204,000$415,021 in fiscal 2011,2013, reflecting an increase in Fonar'sFonar’s use of its stock bonus plans to pay employees and others.
The lowerhigher provision for bad debts of $963,000$1.5 million in fiscal 20112013 as compared to $1.4$1.1 million in fiscal 2010,2012, reflected a decreasean increase in reserves offor certain indebtedness in fiscal 20112013 by our physician and diagnostic services management segment. In addition, in fiscal 2011,2013, the Company recorded a provision for bad debts for patient fee revenue of $2.6 million for the four MRI facilities in Florida which bill patients and third party payors directly. The three Florida sites managed by HMCA-IMPERIALHMCA jointly and severally guaranteed the payment of their management fees to HMCA- IMPERIAL,HMCA, further securing HMCA-IMPERIAL'sHMCA’s management fee receivables.
Revenue from service and repair fees remained constant at $11.1decreased from $11.8 million in fiscal 2010 and $11.12012 to $11.0 million in fiscal 2011 as scanners previously under
warranty entered into service agreements with FONAR.
2013.
Continuing our tradition as the originator of MRI, we remain committed to maintaining our position as the leading innovator of the industry through investing in research and development. In fiscal 20112013 we continued our investment in the development of our new MRI scanners, together with software and upgrades, with an investment of $1,507,290$1,438,560 in research and development, $67,258none of which was capitalized, as compared to $2,773,704, $315,362$1,242,656, none of which was capitalized, in fiscal 2010.2012. The research and development expenditures were approximately 8.1%9.7% of revenues attributable to our medical equipment segment and 4.3%2.9% of total revenues in 20112013, and 11.9%6.6% of medical equipment segment revenues and 7.7%3.2% of total revenues in fiscal 2010.2012. This represented a 41.4%
decrease15.7% increase in research and development expenditures in fiscal 20112013 as compared to fiscal 2010, necessitated by budgetary restraints. Notwithstanding the decrease
in research and development expenditures in connection with our overall cost
cutting programs, we remain fully committed to developing new features, software
and upgrades to improve its products.
2012.
The physician and diagnostic services management segment, HMCA-IMPERIAL,HMCA, revenues increased, from $11.1$20.7 in fiscal 20102012 to $15.3$34.3 million in fiscal 2011.2013. This is primarily attributable to increased revenue resulting from the renegotiating of several management
contracts between HMCA-IMPERIAL and its clients and the opening of a new site in
Manhattan, New York, even though we sold the site in Dublin, Georgia.
HDM acquisition.
We have been taking steps to improve HMCA-IMPERIALHMCA revenues by our marketing efforts, which focus on the unique capability of our Upright(R)Upright® MRI scanners to scan patients in different positions. We have also been increasing the number of health insurance plans in which our clients participate.
Marketing expenditures may increase, as the Company continues its efforts to promote sales.
In the beginning of fiscal 2006, in July of 2005, HMCA-IMPERIAL 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. During fiscal 2010, this note was prepaid in full at a discount of
$350,000.
Our management fees are dependent on collection by itsour clients of fees from reimbursements from Medicare, Medicaid, private insurance, no fault and workers'workers’ compensation carriers, self-payself–pay and other third-party payors. The health care industry is experiencing the effects of the federal and state governments'governments’ trend toward cost containment, as governments and other third- partythird-party payors seek to impose lower reimbursement and utilization rates and negotiate reduced payment schedules with providers. The cost-containment measures, consolidated with the increasing influence of managed-care payors and competition for patients, have resulted in reduced rates of reimbursement for services provided by our clients from time to time. Our future revenues and results of operations may be adversely impacted by future reductions in reimbursement rates.
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| FONAR CORPORATION AND SUBSIDIARIES |
Certain third-party payors have proposed and implemented changes in the methods and rates of reimbursement that have had the effect of substantially decreasing reimbursement for diagnostic imaging services that HMCA-IMPERIAL'sHMCA’s clients provide. To the extent reimbursement from third-party payors is reduced, it will likely have an adverse impact on the rates they pay us, as they would need to reduce the management fees they pay HMCA-IMPERIALHMCA to offset such decreased reimbursement rates. Furthermore, many commercial health care insurance arrangements are changing, so that individuals bear greater financial responsibility through high deductible plans, co-insurance and higher co-payments, which may result in patients delaying or foregoing medical procedures. We expect that any further changes to the rates or methods of reimbursement for services, which reduce the reimbursement per scan of our clients may partially offset the increases in scan volume we are working to achieve for our clients, and indirectly will result in a decline in our revenues.
In 2009, the Obama administration announced its intentions for healthcare reform
in the United States. Legislation adopting healthcare reform was passed in 2010.
On March 23, 2010, President Obama signed into law healthcare reform legislation in the form of the Patient Protection and Affordable Care Act, or PPACA. The implementation of this law will likely have a profound impact on the healthcare industry. Mostindustry, most of the provisions of PPACAwhich will be phasedgo into effect in over the next four
yearsfiscal 2014 and can be conceptualized as a broad framework not only to provide health
insurance coverage to millions of Americans, but to fundamentally change the
delivery of care by bringing together elements of health information technology,
evidence-based medicine, chronic disease management, medical "homes," care
collaboration and shared financial risk in a way that will accelerate industry
adoption and change. There are also many provisions addressingthereafter. Healthcare cost containment, reductions of Medicare and other payments, and heightened compliance requirements
andincreased regulation will present additional penalties, which will create further challenges for healthcare providers. We are unable to predict the full impact of PPACA at this time, due tobut anticipate the law's
complexitypossibility that it may reduce the profitability of both our medical equipment segment and current lack of implementing regulations or interpretive
guidance. Moving forward, we believe that the federal government will likely
have greater involvementphysician and diagnostic services management segment. In addition there are also political uncertainties which may result in the healthcare industry than in prior years.
repeal or modification of PPACA or the adoption of alternative medical cost containment and insurance requirements.
In addition, the use of radiology benefit managers, or RBM'sRBM’s has increased in recent years. It is common practice for health insurance carriers to contract with RBMs to manage utilization of diagnostic imaging procedures for their insureds. In many cases, this leads to lower utilization of imaging procedures based on a determination of medical necessity. The efficacy of RBMs is still a high controversial topic. We cannot predict whether the healthcare legislation or the use of RBMs will negatively impact our business, but it is possible that our financial position and results of operations could be negatively affected.
At the present time healthcare reform has not directly affected our business, but we believe uncertainty as to the ultimate impact of healthcare reform, taxes, and the state of the economy have hurt our scanner sales.
There can be no assurance that the impact of health care legislation or possible
reimbursement changes will not adversely affect our business.
As a result of our loss for fiscal 2010, Fonar did not meet NASDAQ's criteria
for continued listing. During fiscal 2011 Fonar was able to avoid delisting and
to come into compliance with NASDAQ's requirements.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and marketable securities increaseddecreased by 615%34.6% from $1.3$12.0 million at June 30, 20102012 to $9.3$7.9 million at June 30, 2011.
Marketable securities approximated $33,000 as of June 30, 2011, as compared to
$28,000 as of June 30, 2010.
2013.
Cash provided by operating activities for fiscal 20112013 approximated $3.1$7.5 million. Cash provided by operating activities was attributable to the net income before
non-controlling interests of $3.4$10.3 million, which was offset by the deferred income tax benefit of $2.5 million and the increase in accounts, medical and management fee receivables of $3.7 million.
Cash used in investing activities for fiscal 20112013 approximated $448,000.$41.0 million. The principal sourceuse of cash from investing activities was cash acquired from a
business combinationthe cost of $290,000. The principal usesthe HDM acquisition of cash from investing
activities were$40.0 million, purchases of property and equipment of $533,000, costs of
capitalized software development of $67,000$1.1 million, and costs of patents and copyrights
of $135,000.
$160,000.
| 43 |
| FONAR CORPORATION AND SUBSIDIARIES |
Cash provided by financing activities for fiscal 20112013 approximated $5.3$29.6 million. The principal usesources of cash in financing activities wasconsisted of proceeds from non-controlling interests of $19.8 million and the proceeds from loans of $14.7 million; uses of cash included the repayment of borrowingsloans and capital lease obligations of $1.5 million. The principal source
of cash from financing activities was proceeds from$1.8 million, distributions to non-controlling interests of $6.7$1.8 million and a redemption of non-controlling interests of $1.4 million.
Total liabilities decreasedincreased by 6.2%56.9% during fiscal 2011,2013, from approximately $27.4$22.5 million at June 30, 20102012 to approximately $25.7$35.4 million at June 30, 2011. The
decrease in total liabilities reflected principally a decrease in billings in
excess of costs and estimated earnings on uncompleted contracts of 99.9% from
$2.7 million at June 30, 2010 to $4,045 at June 30, 2011.
2013.
As at June 30, 2011,2013, our obligations included approximately $2.7$5.2 million in various state sales taxes.
taxes, inclusive of penalties and interest. The Company will attempt to obtain a reduction of penalties in negotiating final settlements.
At June 30, 2011,2013, we had a working capital deficit of approximately $576,000$16.7 million as compared to a working capital deficit of $10$4.8 million at June 30, 20102012, and stockholders'stockholders’ equity of $5.9$37.8 million at June 30, 20112013 as compared to a
stockholders' deficiencystockholders’ equity of $5.8$11.1 million at June 30, 2010.2012. For the year ended June 30, 2011,2013, we realized a net income of $3.1$10.3 million.
Our principal sourcesources of liquidity has been derived from investments, revenues and revenues.
the proceeds of loans obtained in connection with the HDM acquisition.
Our business plan includes an program for manufacturing and selling our Upright(R)Upright® MRI scanners. In addition, we are enhancing our revenue by participating in the physician and diagnostic services management business through our subsidiary, HMCA-IMPERIALHMCA and have upgraded the facilities which it manages, most significantly by the replacement of the original MRI scanners with new Upright(R)Upright® MRI scanners. Presently, all23 of the 1025 MRI facilities managed by HMCA-IMPERIALHMCA, are equipped with Upright(R)Upright® MRI scanners. We have also intensified our marketing activities through the hiring of additional marketers for HMCA-IMPERIAL'sHMCA’s clients.
Our business plan also calls for a continuing emphasis on providing our customers with enhanced equipment service and maintenance capabilities and delivering state-of-the-art, innovative and high quality equipment upgrades at competitive prices. Fees for on-going service and maintenance from our installed base of scanners were $11.1$11.8 million for the year ended June 30, 20102012 and $11.1$11.0 million for the year ended June 30, 2011.
2013.
In order to reduce our net losses and demands on our cash and other liquid reserves, we institutedhave an aggressive program of cost cutting during and
following the end of fiscal 2008.cutting. These measures included consolidating HMCA-
IMPERIAL'sHMCA’s office space with Fonar'sFonar’s office space, reductions in the size of our workforce, compensation and benefits, as well as across the board reduction of expenses. The cost reductions were intended to enable us to withstand periods of low volumes of MRI scanner sales, by keeping expenditures at levels which, if necessary, can be supported by service revenues and HMCA-IMPERIALHMCA revenues. We are also seeking equity and debt financing and have been engaged in discussions with several possible sources.
| 44 |
| FONAR CORPORATION AND SUBSIDIARIES |
In order to promote sales, we are continuing to focus on marketing campaigns to strengthen the demand for our products and services. Management anticipates that Fonar'sFonar’s capital resources will continue to improve if Fonar's MRI scannerFonar’s products gain wider market recognition and acceptance resulting in both increased product sales by Fonar and increased scan volumes.volumes at sites managed by HMCA. If we are not successful with our marketing efforts, to
increase sales, we will experience a shortfall in cash, and it will be necessary to further reduce operating expenses in a manner or obtain funds through equity or debt financing in sufficient amounts to avoid the need to curtail our operations subsequent to June 30, 2011.2014. Current economic credit conditions have contributed to a slowing business environment. Given such liquidity and credit constraints in the markets, the business may suffer, should the credit markets not improve in the near future. The direct impact of these conditions is not fully known. However, there can be no assurance that we would be able to secure additional funds if needed and that if such funds were available, whether the terms or conditions would be acceptable to us. In such case, the reduction in operating expenses might need to be substantial in order for us to generate positive cash flow to sustain our operations.
If we are unable to meet expenditures with revenues or financing then it will be necessary to reduce expenses further, or seek other sources of funds through the issuance of debt or equity financing in order to conduct operations as now conducted subsequent to fiscal 2011.
2014.
Capital expenditures for fiscal 20112013 approximated $533,000.$1.3 million. Capitalized software
costs were approximately $67,000, and capitalized patent costs were approximately $135,000.
$160,000. Purchases of property and equipment were approximately $1.1 million.
Fonar has not committed to making capital expenditures in the 20122014 fiscal year.
year except for a new diagnostic center which opened in Nassau County, New York in August 2013.
The accompanying financial statements haveCompany believes that its business plan has been prepared in accordance with
accounting principals generally accepted inresponsible for the United Statespast two consecutive fiscal years of Americaprofitability (fiscal 2013 and assumefiscal 2012) and that its capital resources will be adequate to support operations at current levels through June 30, 2014. In fiscal 2010 and prior years, however, the Company will continue as a going concern. The Company had aalso experienced losses and periods of working capital deficitdeficits. The future effects on our business of approximately $576,000 plushealthcare reform legislation, the company backlog has
decreasedDeficit Reduction Act, the tax on sales of medical equipment and the general economic and business climate are not known at the present time. Nevertheless, there is a possibility of adverse consequences to our business operations from $14.9 million at September 8, 2010 to $9.4 million at September
20, 2011. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. The accompanying financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
these causes.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET
RISK
Fonar's
The Company does not have any investments in marketable securities, foreign currencies, mutual funds, certificates of deposit or other fixed rate instruments. NoneAll of the fixed rate
instrumentsour funds are in cash accounts or money market accounts which we invest extend beyond June 30, 2012.
are liquid.
All of our revenue, expense and capital purchasing activities are transacted in United States dollars.
See Note 1410 to the consolidated Financial Statements for information on long-
termlong-term debt.
Item
| 45 |
| FONAR CORPORATION AND SUBSIDIARIES |
FINANCIAL STATEMENTS
FONAR CORPORATION AND SUBSIDIARIES
STATEMENT
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page No. | ||||
| REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | 47 | |||
CONSOLIDATED BALANCE SHEETS At June 30, 2013 and 2012 | 48 | |||
CONSOLIDATED STATEMENTS OF INCOME For the Years Ended June 30, 2013 and 2012 | 51 | |||
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Years Ended June 30, 2013 and 2012 | 53 | |||
CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended June 30, 2013 and 2012 | 56 | |||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | 58 | |||
| 46 |
.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED BALANCE SHEETS
At June 30, 2011 and 2010
CONSOLIDATED STATEMENTS OF OPERATIONS/INCOME
For the Years Ended June 30, 2011 and 2010
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
AND COMPREHENSIVE INCOME (LOSS)
For the Years Ended June 30, 2011 and 2010
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30, 2011 and 2010
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Audit Committee of the
Board of Directors and StockholdersShareholders
of FONAR Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets ofFONAR Corporation and Subsidiaries (the "Company"“Company”) as of June 30, 20112013 and 2010,2012, and the related consolidated statements of operations/income, stockholders'stockholders’ equity
(deficiency) and comprehensive income (loss) and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its 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'sCompany’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 ofFONAR Corporation and Subsidiaries, as of June 30, 20112013 and 2010,2012, and the consolidated results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that FONAR Corporation and Subsidiaries will continue as a going concern. As
more fully described in Note 1, the Company has negative working capital at June
30, 2011 and is dependent on asset sales to fund its operations. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/
/s/ Marcum LLP
Marcum LLP
New York, New York
September 30, 2011
FONAR CORPORATION AND SUBSIDIARIES
October 15, 2013
| 47 |
| FONAR CORPORATION AND SUBSIDIARIES |
ASSETS
------
June 30,
--------------------------
2011 2010
------------ ------------
Current Assets:
Cash and cash equivalents $ 9,251,244 $ 1,299,493
Marketable securities 32,531 27,613
Accounts receivable - net of allowances for
doubtful accounts of $1,777,794 and $2,289,049
at June 30, 2011 and 2010, respectively 5,263,903 4,820,541
Medical receivables - net of allowances for
doubtful accounts of $1,622,000
at June 30, 2011 and at June 30, 2010 - 25,225
Management and other fees receivable - net of
allowances for doubtful accounts of $6,508,345
and $5,808,345 at June 30, 2011 and 2010,
respectively 3,308,456 2,568,526
Management and other fees receivable - related
medical practices - net of allowances for
doubtful accounts of $403,047 and $1,129,818 at
June 30, 2011 and 2010, respectively 1,668,880 1,921,983
Costs and estimated earnings in excess of
billings on uncompleted contracts 169,443 277,384
Inventories 2,400,240 2,826,211
Current portion of advances and notes to related
medical practices - net of allowance for
doubtful accounts of $264,791 at June 30, 2011
and at June 30, 2010 - 83,423
Current portion of note receivable - net of
allowances for doubtful accounts of
$65,000 and $115,000 at June 30, 2011 and at
June 30, 2010, respectively 114,058 271,796
Prepaid expenses and other current assets 351,906 552,800
------------ ------------
Total Current Assets 22,560,661 14,674,995
Property and Equipment - Net 3,769,424 2,108,556
Notes Receivable 358,769 -
Other Intangible Assets - Net 4,318,311 4,291,419
Other Assets 573,509 553,875
------------ ------------
Total Assets $31,580,674 $21,628,845
============ ============
| June 30, | ||||||||
| 2013 | 2012 | |||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 7,870,727 | $ | 12,032,015 | ||||
| Accounts receivable – net of allowances for doubtful accounts of $257,362 and $1,852,987 at June 30, 2013 and 2012, respectively | 4,443,595 | 5,094,687 | ||||||
| Medical receivable –net of allowances for doubtful accounts of $2,584,669 and $0 at June 30, 2013 and 2012, respectively | 8,126,476 | — | ||||||
| Management and other fees receivable – net of allowances for doubtful accounts of $9,095,320 and $7,458,345 at June 30, 2013 and 2012, respectively | 11,465,913 | 3,781,635 | ||||||
| Management and other fees receivable – related medical practices – net of allowances for doubtful accounts of $403,047 at June 30, 2013 and 2012 | 2,381,664 | 1,311,195 | ||||||
| Costs and estimated earnings in excess of billings on uncompleted contracts | 445,742 | 1,128,596 | ||||||
| Inventories | 2,077,088 | 2,194,949 | ||||||
| Prepaid expenses and other current assets | 1,054,551 | 341,878 | ||||||
| Total Current Assets | 37,865,756 | 25,884,955 | ||||||
| Deferred income tax asset | 2,935,750 | — | ||||||
| Property and Equipment – net | 17,524,494 | 3,173,447 | ||||||
| Goodwill | 1,767,098 | — | ||||||
| Other Intangible Assets – net | 11,904,248 | 3,835,179 | ||||||
| Other Assets | 1,153,304 | 741,421 | ||||||
| Total Assets | $ | 73,150,650 | $ | 33,635,002 | ||||
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
| 48 |
| FONAR CORPORATION AND SUBSIDIARIES |
CONSOLIDATED BALANCE SHEETS
LIABILITIES
-----------
June 30,
--------------------------
2011 2010
------------ ------------
Current Liabilities:
Current portion of long-term debt and
capital leases $ 2,025,836 $ 579,436
Current portion of long-term debt - related
party - 87,835
Accounts payable 2,187,115 3,191,960
Other current liabilities 8,236,105 8,065,069
Unearned revenue on service contracts 5,762,394 5,219,547
Customer advances 4,845,794 4,813,327
Billings in excess of costs and estimated
earnings on uncompleted contracts 4,045 2,743,398
Income tax payable 75,000 -
------------ ------------
Total Current Liabilities 23,136,289 24,700,572
------------ ------------
Long-Term Liabilities:
Accounts payable 102,000 62,622
Due to related medical practices 228,267 527,891
Long-term debt and capital leases, less
current portion 1,746,286 1,566,622
Long-term debt, less current
portion - related party - 72,341
Other liabilities 502,018 474,763
------------ ------------
Total Long-Term Liabilities 2,578,571 2,704,239
------------ ------------
Total Liabilities 25,714,860 27,404,811
------------ ------------
| June 30, | ||||||||
| 2013 | 2012 | |||||||
| Current Liabilities: | ||||||||
| Current portion of long-term debt and capital leases | $ | 2,885,769 | $ | 1,853,623 | ||||
| Accounts payable | 2,752,479 | 2,076,846 | ||||||
| Other current liabilities | 8,494,361 | 7,693,241 | ||||||
| Unearned revenue on service contracts | 4,965,415 | 5,474,614 | ||||||
| Customer advances | 1,857,870 | 3,881,284 | ||||||
| Billings in excess of costs and estimated earnings on uncompleted contracts | 142,217 | — | ||||||
| Income tax payable | 19,501 | 100,000 | ||||||
| Total Current Liabilities | 21,117,612 | 21,079,608 | ||||||
| Long-Term Liabilities: | ||||||||
| Deferred income tax liability | 461,858 | — | ||||||
| Due to related medical practices | 230,626 | 228,741 | ||||||
| Long-term debt and capital leases, less current portion | 12,887,005 | 777,274 | ||||||
| Other liabilities | 654,273 | 448,314 | ||||||
| Total Long-Term Liabilities | 14,233,762 | 1,454,329 | ||||||
| Total Liabilities | 35,351,374 | 22,533,937 | ||||||
Commitments, Contingencies and Other Matters
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
| 49 |
| FONAR CORPORATION AND SUBSIDIARIES |
CONSOLIDATED BALANCE SHEETS
STOCKHOLDERS' EQUITY (DEFICIENCY)
--------------------------------
June 30,
--------------------------
2011 2010
------------ ------------
Stockholders' Equity (Deficiency):
Class A non-voting preferred stock - $.0001
par value; authorized - 453,000 and 1,600,000
shares at June 30, 2011 and 2010, respectively;
issued and outstanding - 313,451 shares
at June 30, 2011 and 2010 $ 31 $ 31
Preferred stock - $.001 par value;
authorized - 567,000 and 2,000,000 shares
at June 30, 2011 and 2010, respectively;
issued and outstanding - none - -
Common stock - $.0001 par value; authorized -
8,500,000 and 30,000,000 shares at
June 30, 2011 and 2010, respectively;
issued - 5,636,571 and 4,985,850 shares
at June 30, 2011 and 2010, respectively;
outstanding - 5,624,928 and 4,974,207
shares at June 30, 2011 and 2010, respectively 562 497
Class B common stock (10 votes per share) -
$.0001 par value; authorized - 227,000 and
800,000 shares at June 30, 2011 and 2010,
respectively; issued and outstanding - 158
shares at June 30, 2011 and 2010 - -
Class C common stock (25 votes per share) -
$.0001 par value; authorized - 567,000 and
2,000,000 shares at June 30, 2011 and 2010,
respectively; issued and outstanding -
382,513 shares at June 30, 2011 and 2010 38 38
Paid-in capital in excess of par value 173,476,059 172,379,863
Accumulated other comprehensive loss (16,179) (18,489)
Accumulated deficit (174,110,439) (177,271,349)
Notes receivable from employee stockholders (115,305) (191,167)
Treasury stock, at cost - 11,643 shares
of common stock at June 30, 2011 and 2010 (675,390) (675,390)
Non controlling interests 7,306,437 -
------------ ------------
Total Stockholders' Equity (Deficiency) 5,865,814 (5,775,966)
------------ ------------
Total Liabilities and Stockholders'
Equity (Deficiency) $31,580,674 $21,628,845
============ ============
| June 30, | ||||||||
| 2013 | 2012 | |||||||
| Stockholders' Equity: | ||||||||
| Class A non-voting preferred stock $.0001 par value; 453,000 shares authorized at June 30, 2013 and 2012, 313,438 issued and outstanding at June 30, 2013 and 2012 | $ | 31 | $ | 31 | ||||
| Preferred stock $.001 par value; 567,000 shares authorized at June 30, 2013 and 2012, issued and outstanding – none | — | — | ||||||
| Common stock $.0001 par value; 8,500,000 shares authorized at June 30, 2013 and 2012, 5,980,775 and 5,912,905 issued at June 30, 2013 and 2012, respectively; 5,969,132 and 5,901,262 outstanding at June 30, 2013 and 2012, respectively | 597 | 590 | ||||||
| Class B common stock (10 votes per share) $.0001 par value; 227,000 shares authorized at June 30, 2013 and 2012, 146 and 158 issued and outstanding at June 30, 2013 and 2012 | — | — | ||||||
| Class C common stock (25 votes per share) $.0001 par value; 567,000 shares authorized at June 30, 2013 and 2012, 382,513 issued and outstanding at June 30, 2013 and 2012 | 38 | 38 | ||||||
| Paid-in capital in excess of par value | 174,499,021 | 174,084,007 | ||||||
| Accumulated deficit | (159,655,416 | ) | (168,333,958 | ) | ||||
| Notes receivable from employee stockholders | (54,820 | ) | (70,813 | ) | ||||
| Treasury stock, at cost – 11,643 shares of common stock at June 30, 2013 and 2012 | (675,390 | ) | (675,390 | ) | ||||
| Total Fonar Corporation’s Stockholders’ Equity | 14,114,061 | 5,004,505 | ||||||
| Noncontrolling interests | 23,685,215 | 6,096,560 | ||||||
| Total Stockholders' Equity | 37,799,276 | 11,101,065 | ||||||
| Total Liabilities and Stockholders' Equity | $ | 73,150,650 | $ | 33,635,002 | ||||
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
| 50 |
| FONAR CORPORATION AND SUBSIDIARIES |
CONSOLIDATED STATEMENTS OF OPERATIONS/INCOME
June 30,
--------------------------
2011 2010
------------ ------------
Revenues
Product sales - net $ 6,682,297 $ 9,056,307
Service and repair fees - net 10,936,839 10,864,927
Service and repair fees - related
parties - net 192,500 220,000
Management and other fees 10,170,086 7,302,216
Management and other fees - related
medical practices - net 5,154,673 3,786,612
License fees and royalties - 585,493
------------ ------------
Total Revenues - Net 33,136,395 31,815,555
------------ -----------
Costs and Expenses
Costs related to product sales 5,768,601 7,248,756
Costs related to service and repair fees 2,936,435 3,026,598
Costs related to service and repair fees
- related parties 51,684 61,284
Costs related to management and other fees 6,781,638 5,320,756
Costs related to management and other fees
- related medical practices 2,941,192 2,962,826
Research and development 1,440,032 2,458,342
Selling, general and administrative, inclusive of
compensatory element of stock issuances of
$204,486 and $99,269 for the years ended
June 30, 2011 and 2010, respectively 8,462,335 11,939,223
Provision for bad debts 963,009 1,378,500
------------ ------------
Total Costs and Expenses 29,344,926 34,396,285
------------ ------------
Income (Loss) from Operations 3,791,469 (2,580,730)
Other Income and (Expenses):
Interest expense (514,703) (313,416)
Interest expense - related parties ( 3,829) (74,486)
Investment income 226,610 249,290
Interest income - related parties 1,564 10,926
Other (expense) income - net (116,617) 45,674
Loss on note receivable - (350,000)
------------ ------------
Income (Loss) Before Provision For
Income Taxes and Non Controlling Interests 3,384,494 (3,012,742)
Provision for Income Taxes 75,475 -
------------ ------------
Net Income (Loss) $ 3,309,019 $(3,012,742)
Net Income - Non Controlling Interests (148,109) -
------------ ------------
Net Income (Loss) - Controlling Interests $ 3,160,910 $(3,012,742)
============ ============
| For the Years Ended June 30, | ||||||||
| 2013 | 2012 | |||||||
| Revenues | ||||||||
| Product sales – net | $ | 3,939,140 | $ | 6,922,465 | ||||
| Service and repair fees – net | 10,841,935 | 11,674,541 | ||||||
| Service and repair fees – related parties – net | 110,000 | 110,000 | ||||||
| Patient fee revenue, net of contractual allowances and discounts | 7,481,865 | — | ||||||
| Provision for bad debts for patient fee | (2,584,669 | ) | — | |||||
| Management and other fees - net | 21,493,599 | 14,060,275 | ||||||
| Management and other fees – related medical practices – net | 7,859,944 | 6,677,138 | ||||||
| Total Revenues – net | 49,141,814 | 39,444,419 | ||||||
| Costs and Expenses | ||||||||
| Costs related to product sales | 3,656,635 | 5,387,923 | ||||||
| Costs related to service and repair fees | 3,213,420 | 3,453,116 | ||||||
| Costs related to service and repair fees – related parties | 32,603 | 32,536 | ||||||
| Costs related to patient fee revenue | 2,704,758 | — | ||||||
| Costs related to management and other fees | 12,998,243 | 8,733,823 | ||||||
| Costs related to management and other fees – related medical practices | 3,515,706 | 3,588,282 | ||||||
| Research and development | 1,438,560 | 1,242,656 | ||||||
| Selling, general and administrative, inclusive of compensatory element of stock issuances of $415,021 and $180,418 for the years ended June 30, 2013 and 2012, respectively | 12,501,621 | 8,749,090 | ||||||
| Provision for bad debts | 1,544,521 | 1,050,442 | ||||||
| Total Costs and Expenses | 41,606,067 | 32,237,868 | ||||||
| Income from Operations | 7,535,747 | 7,206,551 | ||||||
| Other Income and (Expenses): | ||||||||
| Interest expense | (500,362 | ) | (478,663 | ) | ||||
| Investment income | 217,598 | 243,254 | ||||||
| Other income – net | 725,488 | 45,056 | ||||||
| Income before benefit (provision) for income taxes and noncontrolling interests | 7,978,471 | 7,016,198 | ||||||
| Benefit (Provision) for Income Taxes | 2,277,891 | (141,125 | ) | |||||
| Net Income | 10,256,362 | 6,875,073 | ||||||
| Net Income – Noncontrolling Interests | (1,577,820 | ) | (1,098,592 | ) | ||||
| Net Income – Controlling Interests | $ | 8,678,542 | $ | 5,776,481 | ||||
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
| 51 |
| FONAR CORPORATION AND SUBSIDIARIES |
CONSOLIDATED STATEMENTS OF OPERATIONS/INCOME June 30,
--------------------------
2011 2010
------------ ------------
Net Income (Loss) Available to Common Stockholders $ 2,941,026 $(3,012,742)
============ ============
Net Income Available to Class A Non-Voting
Preferred Stockholders $ 163,886 N/A
============ ============
Net Income Available to Class C Common Stockholders $ 55,998 N/A
============ ============
Basic Net Income (Loss) Per Common Share
Available to Common Stockholders $ 0.56 $ (0.61)
============ ============
Diluted Net Income (Loss) Per Common Share
Available to Common Stockholders $ 0.55 $ (0.61)
============ ============
Basic and Diluted Income Per Share - Common C $ 0.15 N/A
============ ============
Weighted Average Basic Shares Outstanding 5,264,795 4,932,044
============ ============
Weighted Average Diluted Shares Outstanding 5,392,299 4,932,044
============ ============
(Continued)
| For the Years Ended June 30, | ||||||||
| 2013 | 2012 | |||||||
| Net Income Available to Common Stockholders | $ | 8,107,367 | $ | 5,392,212 | ||||
| Net Income Available to Class A Non-Voting Preferred Stockholders | $ | 425,708 | $ | 286,406 | ||||
| Net Income Available to Class C Common Stockholders | $ | 145,467 | $ | 97,863 | ||||
| Basic Net Income Per Common Share Available to Common Stockholders | $ | 1.37 | $ | 0.93 | ||||
| Diluted Net Income Per Common Share Available to Common Stockholders | $ | 1.34 | $ | 0.91 | ||||
| Basic and Diluted Income Per Share – Common C | $ | 0.38 | $ | 0.26 | ||||
| Weighted Average Basic Shares Outstanding – Common Stockholder | 5,933,318 | 5,778,695 | ||||||
| Weighted Average Diluted Shares Outstanding – Common Stockholder | 6,060,822 | 5,906,199 | ||||||
| Weighted Average Basic Shares Outstanding – Class C Common | 382,513 | 382,513 | ||||||
| Weighted Average Diluted Shares Outstanding – Class C Common | 382,513 | 382,513 | ||||||
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
| 52 |
| FONAR CORPORATION AND SUBSIDIARIES |
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE YEAR ENDED JUNE 30, 2011
Class A
Non-Voting Common Stock
Preferred --------------------------
Stock Shares Amount
------------ ------------ ------------
Balance - June 30, 2010 $ 31 4,974,207 $ 497
Net income - - -
Other comprehensive loss, net of tax:
Unrealized gains on securities arising
during the year, net of tax - - -
Stock issued to employees under stock
bonus plans - 128,803 13
Issuance of stock for goods and services - 521,918 52
Capital contribution in Fair Haven
acquisition - - -
Payments on notes receivable
from employee stockholders - - -
Proceeds from non controlling interests - -
Distributions to non controlling interests - - -
Purchase of non controlling interest - - -
Effect of change from equity method to
consolidation of investment (Note 13) - - -
------------ ------------ ------------
Balance - June 30, 2011 $ 31 5,624,928 $ 562
============ ============ ============2013 AND 2012
| Common | Stock | Paid-in Capital in Excess of | ||||||||||
| Shares | Amount | Par Value | ||||||||||
| Balance - June 30, 2011 | 5,624,928 | $ | 562 | $ | 173,476,059 | |||||||
| Net income | — | — | — | |||||||||
| Stock issued to employees under stock bonus plans | 58,334 | 6 | 180,412 | |||||||||
| Issuance of stock for goods and services | 218,000 | 22 | 427,536 | |||||||||
| Payments on notes receivable from employee stockholders | — | — | — | |||||||||
| Redemption of noncontrolling interests | — | — | — | |||||||||
| Distributions to noncontrolling interests | — | — | — | |||||||||
| Sale to noncontrolling interest | — | — | — | |||||||||
| Proceeds from noncontrolling interest | — | — | — | |||||||||
| Balance - June 30, 2012 | 5,901,262 | $ | 590 | $ | 174,084,007 | |||||||
| Net income | — | — | — | |||||||||
| Stock issued to employees under stock bonus plans | 67,870 | 7 | 415,014 | |||||||||
| Payments on notes receivable from employee stockholders | — | — | — | |||||||||
| Buyout of noncontrolling interests | — | — | — | |||||||||
| Redemption of noncontrolling interests | — | — | — | |||||||||
| Distributions to noncontrolling interests | — | — | — | |||||||||
| Proceeds from noncontrolling interest | — | — | — | |||||||||
| Balance - June 30, 2013 | 5,969,132 | $ | 597 | $ | 174,499,021 | |||||||
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
| 53 |
| FONAR CORPORATION AND SUBSIDIARIES |
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE YEAR ENDED JUNE 30, 2011
Paid-in
Class B Class C Capital in
Common Common Excess of
Stock Stock Par Value
------------ ------------ ------------
Shares
------------
Balance - June 30, 2010 158 $ 38 $172,379,863
Net income - - -
Other comprehensive loss, net of tax:
Unrealized gains on securities arising
during the year, net of tax - - -
Stock issued to employees under stock
bonus plans - - 204,473
Issuance of stock for goods and services - - 862,759
Capital contribution in Fair Haven
acquisition - - 28,964
Payments on notes receivable
from employee stockholders - - -
Proceeds from non controlling interests - - -
Distributions to non controlling interests - - -
Purchase of non controlling interest - - -
Effect of change from equity method to
consolidation of investment (Note 13) - - -
------------ ------------ ------------
Balance - June 30, 2011 158 $ 38 $173,476,059
============ ============ ============
2013 AND 2012
| Treasury Stock | Notes Receivable From Employee Stockholders | Accumulated Deficit | ||||||||||
| Balance - June 30, 2011 | $ | (675,390 | ) | $ | (115,305 | ) | $ | (174,110,439 | ) | |||
| Net income | — | — | 5,776,481 | |||||||||
| Stock issued to employees under stock bonus plans | — | — | — | |||||||||
| Issuance of stock for goods and services | — | — | — | |||||||||
| Payments on notes receivable from employee stockholders | — | 44,492 | — | |||||||||
| Redemption of noncontrolling interests | — | — | — | |||||||||
| Distributions to noncontrolling interests | — | — | — | |||||||||
| Sale to noncontrolling interest | — | — | — | |||||||||
| Proceeds from noncontrolling interests | — | — | — | |||||||||
| Balance - June 30, 2012 | $ | (675,390 | ) | $ | (70,813 | ) | $ | (168,333,958 | ) | |||
| Net income | — | — | 8,678,542 | |||||||||
| Stock issued to employees under stock bonus plans | — | — | — | |||||||||
| Payments on notes receivable from employee stockholders | — | 15,993 | — | |||||||||
| Buyout of noncontrolling interests | — | — | — | |||||||||
| Redemption of noncontrolling interests | — | — | — | |||||||||
| Distributions to noncontrolling interests | — | — | — | |||||||||
| Proceeds from noncontrolling interests | — | — | — | |||||||||
| Balance – June 30, 2013 | $ | (675,390 | ) | $ | (54,820 | ) | $ | (159,655,416 | ) | |||
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
| 54 |
| FONAR CORPORATION AND SUBSIDIARIES |
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE YEARYEARS ENDED JUNE 30, 2011
Notes
Receivable Accumulated
From Other
Treasury Employee Comprehensive
Stock Stockholders Loss
------------ ------------ ------------
Balance - June 30, 2010 $ (675,390) $ (191,167) $ (18,489)
Net income - - -
Other comprehensive loss, net of tax:
Unrealized gains on securities arising
during the year, net of tax - - 2,310
Stock issued to employees under stock
bonus plans - - -
Issuance of stock for goods and services - - -
Capital contribution in Fair Haven
acquisition - - -
Payments on notes receivable
from employee stockholders - 75,862 -
Proceeds from non controlling interests - - -
Distributions to non controlling interests - - -
Purchase of non controlling interest - - -
Effect of change from equity method to
consolidation of investment (Note 13) - - -
------------ ------------ ------------
Balance - June 30, 2011 $ (675,390) $ (115,305) $ (16,179)
============ ============ ============
2013 AND 2012
| Noncontrolling Interests | Total | |||||||
| Balance - June 30, 2011 | $ | 7,306,437 | $ | 5,881,993 | ||||
| Net income | 1,098,592 | 6,875,073 | ||||||
| Stock issued to employees under stock bonus plans | — | 180,418 | ||||||
| Issuance of stock for goods and services | — | 427,558 | ||||||
| Payments on notes receivable from employee stockholders | — | 44,492 | ||||||
| Redemption of noncontrolling interests | (1,200,000 | ) | (1,200,000 | ) | ||||
| Distributions to noncontrolling interests | (1,135,000 | ) | (1,135,000 | ) | ||||
| Sale to noncontrolling interest | 10,500 | 10,500 | ||||||
| Proceeds from noncontrolling interest | 16,031 | 16,031 | ||||||
| Balance - June 30, 2012 | $ | 6,096,560 | $ | 11,101,065 | ||||
| Net income | 1,577,820 | 10,256,362 | ||||||
| Stock issued to employees under stock bonus plans | — | 415,021 | ||||||
| Payments on notes receivable from employee stockholders | — | 15,993 | ||||||
| Buyout of noncontrolling interests | (564,315 | ) | (564,315 | ) | ||||
| Redemption of noncontrolling interests | (1,424,900 | ) | (1,424,900 | ) | ||||
| Distributions to noncontrolling interests | (1,799,950 | ) | (1,799,950 | ) | ||||
| Proceeds from noncontrolling interests | 19,800,000 | 19,800,000 | ||||||
| Balance – June 30, 2013 | $ | 23,685,215 | $ | 37,799,276 | ||||
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
| 55 |
| FONAR CORPORATION AND SUBSIDIARIES |
CONSOLIDATED STATEMENTSTATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE YEAR ENDED JUNE 30, 2011
Non
Accumulated Controlling
Deficit Interests
-------------- ------------
Balance - June 30, 2010 $(177,271,349) $ -
Net income 3,160,910 148,109
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 - -
Issuance of stock for goods and services - -
Capital contribution in Fair Haven
acquisition - -
Payments on notes receivable
from employee stockholders - -
Proceeds from non controlling interests - 6,700,000
Distributions to non controlling interests - (22,500)
Purchase of non controlling interest - (10,500)
Effect of change from equity method to
consolidation of investment (Note 13) 491,328
-------------- ------------
Balance - June 30, 2011 $(174,110,439) $ 7,306,437
============== ============
CASH FLOWS
| For the Years Ended June 30, | ||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | 2013 | 2012 | ||||||
| Net income | $ | 10,256,362 | $ | 6,875,073 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 2,421,177 | 2,230,250 | ||||||
| Abandoned patents written off | 66,619 | 76,231 | ||||||
| Provision for bad debts | 1,544,521 | 1,050,442 | ||||||
| Deferred income tax benefit - net | (2,473,892 | ) | — | |||||
| Gain on sale of equipment | (557,473 | ) | — | |||||
| Gain on litigation settlement | (755,500 | ) | — | |||||
| Impairment on management agreement | 357,500 | — | ||||||
| Compensatory element of stock issuances | 415,021 | 180,418 | ||||||
| Stock issued for costs and expenses | — | 427,558 | ||||||
| (Increase) decrease in operating assets, net: | ||||||||
| Accounts, medical and management fee receivables | (3,717,440 | ) | (996,720 | ) | ||||
| Notes receivable | 120,976 | 80,845 | ||||||
| Costs and estimated earnings in excess of billings on uncompleted contracts | 682,854 | (959,153 | ) | |||||
| Inventories | 117,861 | 205,291 | ||||||
| Prepaid expenses and other current assets | (698,284 | ) | 174,754 | |||||
| Other assets | (204,037 | ) | 108,054 | |||||
| Increase (decrease) in operating liabilities, net: | ||||||||
| Accounts payable | 628,033 | (164,669 | ) | |||||
| Other current liabilities | (414,402 | ) | (830,644 | ) | ||||
| Customer advances | (567,914 | ) | (964,510 | ) | ||||
| Billings in excess of costs and estimated earnings on uncompleted contracts | 142,217 | (4,045 | ) | |||||
| Other liabilities | 253,559 | (101,304 | ) | |||||
| Due to related medical practices | 1,885 | 474 | ||||||
| Income tax payable | (80,499 | ) | 25,000 | |||||
| NET CASH PROVIDED BY OPERATING ACTIVITIES | 7,539,144 | 7,413,345 | ||||||
See accompanying notes to consolidated financial statements.
| 56 |
| FONAR CORPORATION AND SUBSIDIARIES |
CONSOLIDATED STATEMENTSTATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE YEAR ENDED JUNE 30, 2011
Comprehensive
Total Income (Loss)
------------ -------------
Balance - June 30, 2010 $(5,775,966) $ -
Net income 3,309,019 3,309,019
Other comprehensive loss, net of tax:
Unrealized gains on securities arising
during the year, net of tax 2,310 2,310
Stock issued to employees under stock bonus plans 204,486 -
Issuance of stock for goods and services 862,811 -
Capital contribution in Fair Haven
acquisition 28,964 -
Payments on notes receivable from
employee stockholders 75,862 -
Proceeds from non controlling interests 6,700,000 -
Distributions to non controlling interests (22,500) -
Purchase of non controlling interest (10,500) -
Effect of change from equity method to
consolidation of investment (Note 13) 491,328 -
------------ ------------
Balance - June 30, 2011 $ 5,865,814 $ 3,311,329
============ =============
CASH FLOWS
| For the Years Ended June 30, | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | 2013 | 2012 | ||||||
| Purchases of property and equipment | $ | (1,135,382 | ) | $ | (1,081,209 | ) | ||
| Cost of acquisition | (40,000,000 | ) | — | |||||
| Cost of patents | (159,907 | ) | (146,163 | ) | ||||
| NET CASH USED IN INVESTING ACTIVITIES | (41,295,289 | ) | (1,227,372 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from debt | 14,689,646 | 246,000 | ||||||
| Proceeds from sale of equipment | 700,000 | — | ||||||
| Repayment of borrowings and capital lease obligations | (1,821,617 | ) | (1,387,225 | ) | ||||
| Repayment of notes receivable from employee stockholders | 15,993 | 44,492 | ||||||
| Distributions to noncontrolling interests | (1,799,950 | ) | (1,135,000 | ) | ||||
| Redemption of noncontrolling interests | (1,424,900 | ) | (1,200,000 | ) | ||||
| Buyout of noncontrolling interests | (564,315 | ) | — | |||||
| Proceeds from noncontrolling interest | 19,800,000 | 16,031 | ||||||
| Sale to noncontrolling interest | — | 10,500 | ||||||
| NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | 29,594,857 | (3,405,202 | ) | |||||
| NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (4,161,288 | ) | 2,780,771 | |||||
| CASH AND CASH EQUIVALENTS – BEGINNING OF YEAR | 12,032,015 | 9,251,244 | ||||||
| CASH AND CASH EQUIVALENTS – END OF YEAR | $ | 7,870,727 | $ | 12,032,015 | ||||
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY AND COMPREHENSIVE LOSS
FOR THE YEAR ENDED JUNE 30, 2010
Class A
Non-Voting Common Stock
Preferred --------------------------
Stock Shares Amount
------------ ------------ ------------
Balance - June 30, 2009 $ 31 4,906,275 $ 491
Net loss - - -
Other comprehensive loss, net of tax:
Unrealized gains on securities arising
during the year, net of tax - - -
Stock issued to employees under stock
bonus plans - 67,932 6
Payments on notes receivable
from employee stockholders - - -
=----------- ------------ ------------
Balance - June 30, 2010 $ 31 4,974,207 $ 497
============ ============ ============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY AND COMPREHENSIVE LOSS
FOR THE YEAR ENDED JUNE 30, 2010
Paid-in
Class B Class C Capital in
Common Common Excess of
Stock Stock Par Value
------------ ------------ ------------
Shares
------------
Balance - June 30, 2009 158 $ 38 $172,280,600
Net loss - - -
Other comprehensive loss, net of tax:
Unrealized gains on securities arising
during the year, net of tax - - -
Stock issued to employees under
stock bonus plans - - 99,263
Payments on notes receivable from
employee stockholders - - -
------------ ------------ ------------
Balance - June 30, 2010 158 $ 38 $172,379,863
============ ============ ============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY AND COMPREHENSIVE LOSS
FOR THE YEAR ENDED JUNE 30, 2010
Notes
Receivable Accumulated
From Other
Treasury Employee Comprehensive
Stock Stockholders Loss
------------ ------------ ------------
Balance - June 30, 2009 $ (675,390) $ (267,030) $ (20,995)
Net loss - - -
Other comprehensive loss, net of tax:
Unrealized gains on securities arising
during the year, net of tax - - 2,506
Stock issued to employees under stock
bonus plans - - -
Payments on notes receivable
from employee stockholders - 75,863 -
------------ ------------ ------------
Balance - June 30, 2010 $ (675,390) $ (191,167) $ (18,489)
============ ============ ============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY AND COMPREHENSIVE LOSS
FOR THE YEAR ENDED JUNE 30, 2010
Accumulated Comprehensive
Deficit Total Income (Loss)
------------ ------------ -------------
Balance - June 30, 2009 $(174,258,607) $(2,940,862) $ -
Net loss (3,012,742) (3,012,742) (3,012,742)
Other comprehensive loss, net of tax:
Unrealized gains on securities arising
during the year, net of tax - 2,506 2,506
Stock issued to employees under stock
bonus plans - 99,269 -
Payments on notes receivable
from employee stockholders - 75,863 -
------------ ------------ ------------
Balance - June 30, 2010 $(177,271,349) $(5,775,966) $(3,010,236)
============ ============ ============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30,
--------------------------
2011 2010
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 3,309,019 $(3,012,742)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in)
Operating activities:
Depreciation and amortization 2,073,006 1,445,065
Abandoned patents written off 79,958 391,415
Provision for bad debts 963,009 1,378,500
Compensatory element of stock issuances 204,486 99,269
Stock issued for costs and Expenses 862,811 -
Discount on note receivable - 350,000
(Increase) decrease in operating
assets, net:
Accounts, management fee and medical receivable (1,550,287) 435,498
Notes receivable (336,717) 180,012
Costs and estimated earnings in excess of
Billings on uncompleted contracts 107,941 1,198,322
Inventories 425,971 346,186
Prepaid expenses and other current assets 200,894 (80,403)
Other assets (57,724) (162,638)
Advances and notes to related
Parties medical practices 83,423 170,220
Increase (decrease) in operating
Liabilities, net:
Accounts payable (1,012,493) (448,195)
Other current liabilities 699,929 (13,390)
Customer advances 32,467 (4,424,594)
Billings in excess of costs and estimated
Earnings on uncompleted contracts (2,739,353) 716,957
Other liabilities 27,255 47,398
Due to related medical practices (299,624) (115,244)
Income tax payable 75,000 -
------------ ------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 3,148,971 (1,498,364)
------------ ------------
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30,
--------------------------
2011 2010
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Sales of marketable securities $ (2,608) $ (2,455)
Purchases of property and equipment (532,562) (24,339)
Costs of capitalized software development (67,258) (203,644)
Proceeds from note receivable - 1,580,862
Cash acquired from business combination 290,102 -
Cost of patents (135,210) (195,851)
------------ ------------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES (447,536) 1,154,573
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from non controlling interests 6,700,000 -
Proceeds from debt - 580,000
Repayment of borrowings and capital
Lease obligations (1,492,546) (238,198)
Repayment of notes receivable from
employee stockholders 75,862 75,863
Distributions to non controlling interests (22,500) -
Purchase of non controlling interest (10,500) -
------------ ------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 5,250,316 417,665
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 7,951,751 73,874
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 1,299,493 1,225,619
------------ ------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 9,251,244 $ 1,299,493
============ ============
See accompanying notes to consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
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| FONAR CORPORATION AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
2013 and 2012
NOTE 1 - DESCRIPTION OF BUSINESS, AND LIQUIDITY AND CAPITAL RESOURCES
Description of Business
-----------------------
FONAR Corporation (the "Company"“Company” or "FONAR"“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 itsour installed-base of customers through itsour 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.
The
On March 5, 2013, the Company completedacquired a private placement of equity and succeeded in raising
$6,000,000 by May 2, 2011. The offering consisted of Preferred Class A
membership interestsmajority interest in a newly formed limited liability company, ImperialHealth Diagnostics Management Services, LLC ("Imperial"). Class B membership interests, all(HDM), a business managing 12 Stand-Up MRI centers and 2 other scanning centers located in Florida and New York for a total cost of which were retained by the Company's subsidiary, HMCA, holds$40 million. HDM has a 75% equity
interest in Imperial. The Class A membership interests are entitled to receive a
dividend of 18% per annum of their cash capital contribution of $6,000,000 to
the limited liability company.perpetual existence. See Note 9.
During May 2011, HMCA contributed all of its assets together with its liabilities to a newly formed limited liability company, Imperial as HMCA's capital contribution. The Imperial
operating agreement provides for the Class A members to receive priority
distributions until their original capital contributions are returned.Management Services, LLC (“Imperial”), which has a perpetual existence. As of June 30, 2011,2013, Imperial manages 1011 diagnostic imaging facilities located in states of New York and Florida.
On October 1, 2010, the Company purchased 100% of the stock of Fair Haven
Services Inc., an entity wholly owned by Raymond Damadian. The entity is in the
business of leasing medical equipment to various unrelated PC's.
During the year, the Company purchased a 50% controlling interest in an entity
from an unrelated party that provides management services to a diagnostic center
in the New York Metropolitan area. The Company also has another 50% controlling
interest in an entity that will provide management services to a diagnostic
center in New York. The center is in the process of being installed.
Liquidity and Going Concern
---------------------------
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("US GAAP") and assume that the Company will continue as a going
concern.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
NOTE 1 - DESCRIPTION OF BUSINESS AND LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Going Concern (Continued)
---------------------------
At June 30, 2011, the Company had a working capital deficit of approximately
$576,000 and stockholders' equity of approximately $5.9 million. For the year
ended June 30, 2011, the Company's share of net income was approximately $3.2
million, which included non-cash expenses of approximately $4.2 million.
The Company's backlog as of September 20, 2011 is $9.4 million.
Management's plans include focusing its efforts on increased marketing
campaigns, which management believes will strengthen the demand for the
Company's products and services. Management anticipates that its capital
resources will improve if Fonar's MRI scanner products gain wider market
recognition and acceptance resulting in increased product sales. The Company's
subsidiary, Imperial Management Services LLC ("Imperial") has focused its
efforts to market the scanning services of its customers (related and non-
related professional corporations or "PCs") and to expand the number of PCs for
which it performs management services. The Company is planning to raise
additional capital through obtaining financing in the capital market. Current
economic credit conditions have contributed to a slowing business environment.
Given such liquidity and credit constraints in the markets, the business has and
may continue to suffer, should the credit markets not improve in the near
future. The direct impact of these conditions is not fully known. However, there
can be no assurance that the Company would be able to secure additional funds if
needed and that if such funds were available, whether the terms or conditions
would be acceptable to the Company. In such case, the further reduction in
operating expenses might need to be substantial in order for the Company to
generate positive cash flow to sustain the operations of the Company.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. The accompanying consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of FONAR Corporation, its majority and wholly-owned subsidiaries and partnerships. The operating activities of subsidiaries are included in the accompanying consolidated statements from the date of acquisition. All significant intercompany accounts and transactions have been eliminated in consolidation.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 and related tax asset valuation allowances, useful lives of property and equipment, contingencies, revenue recognition and the assessment of 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 Financial Accounting Standards
Board ("FASB"), Accounting Standard Codification ("ASC") Topic 820, "Fair Value
Measurements
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| FONAR CORPORATION AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013 and Disclosures". This standard requires that certain debt and
equity securities be adjusted to market value at the end of each accounting
period. Unrealized market value gains and losses are charged to operations if
the securities are traded for short-term profit. Otherwise, such unrealized
gains and losses are charged or credited to other comprehensive income (loss).
Management determines the proper classifications of investments in obligations
with fixed maturities and marketable equity securities at the time of purchase
and re-evaluates such designations as of each balance sheet date. At June 30,
2011 and 2010, all securities covered by Topic 820 were designated as available
for sale. Accordingly, these securities are stated at fair market value, with
unrealized gains and losses reported in comprehensive income (loss). Realized
gains and losses on sales of investments, as determined on a specific
identification basis, are included in investment income in the accompanying
consolidated statements of operations.
2012
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Inventories
-----------
Inventories consist of purchased parts, components and supplies, as well as work-in-process, and are stated at the lower of cost, determined on the first-
in,first-in, first-out method, or market.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
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.lives. 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 $334,000$598,000 and $282,000$371,000 for the years ended June 30, 20112013 and 2010,2012, respectively. The estimated useful lives in years are generally as follows:
| Diagnostic equipment under capital lease | 2.5 | |||
| Diagnostic equipment | 5–13 | |||
| Research, development and demonstration equipment | 3-7 | |||
| Machinery and equipment | 2-7 | |||
| Furniture and fixtures | 3-9 | |||
| Leasehold improvements | 2–10 | |||
| Building | 27.5 |
Long-Lived Assets
The Company periodically assesses the recoverability of long-lived assets, including property and equipment and intangibles, other than goodwill, 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.
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'sCompany’s computer software is generally based upon achievement of a detail program design free of high risk development issues and the completion of research and development on the product hardware in which it is to be used. The establishment of technological feasibility and the ongoing assessment of recoverability of capitalized computer software development costs require considerable judgment by management with respect to certain external factors, including, but not limited to, technological feasibility, anticipated future gross revenue, estimated economic life and changes in software and hardware technology. Prior to reaching technological feasibilty those costs are expensed as incurred and included in research and development.
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| FONAR CORPORATION AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013 and 2012
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Other Intangible Assets (Continued)
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 bearbears 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
3) Management Agreement
The management agreement was being amortized on the straight line basis over the length of the agreement (15 years). For the year ended June 30, 2013, the Company recorded an impairment of $357,500 as a result of the closing of a scanning center in New York.
4) Non-Competition Agreements
The non-competition agreements are being amortized on the straight line basis over the length of the agreement (7 years).
5) Customer Relationships
Amortization is calculated on the straight line basis over 20 years.
Goodwill
Generally accepted accounting principles in the United States require the Company to perform a goodwill impairment test annually and more frequently when negative conditions or a triggering event arises. Impairment of goodwill is tested at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill to the fair value of the reporting unit. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered potentially impaired and a second step is performed to measure the amount of impairment loss, if any.
Acquired assets and assumed liabilities
Pursuant to ASC No. 805-10-25, if the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, but during the allowed measurement period not to exceed one year from the acquisition date, the company retrospectively adjusts the provisional amounts recognized at the acquisition date by means of adjusting the amount recognized for goodwill.
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| FONAR CORPORATION AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
2013 and 2012
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"“product sales” in the accompanying consolidated statements of operations, is recognized under the percentage-of-completion method in accordance with FASB ASC 605-35, "Revenue“Revenue Recognition -– Construction-Type and Production-Type Contracts"Contracts”. The Company manufactures its scanners under specific contracts that provide for progress payments. Production and installation take approximately three to six months. The percentage of completion is determined by the ratio of costs incurred to date on completed sub-assemblies to the total estimated cost for each scanner. Contract costs include purchased parts and components, direct labor and overhead. Revisions in cost estimates and provisions for estimated losses on uncompleted contracts, if any, are made in the period in which such losses are determined. The asset, "Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts", represents revenues recognized in excess of amounts billed. The liability, "Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts", represents amounts billed in excess of revenues recognized.
Revenue on scanner service contracts is recognized on the straight-line method over the related contract period, usually one year.
Revenue from sales of other items is recognized upon shipment.
Revenue under management contracts is recognized based upon contractual agreements for management services rendered by the Company primarily under various long-term agreements with various medical providers (the "PCs"). As of June 30, 2011,2013, the Company has tentwenty management agreements of which three are with PC'sPC’s owned by Raymond V. Damadian, M.D., President and Chairman of the Board of FONAR ("(“the Related medical practices"practices”) and sevenseventeen are with PC's,PC’s, which are all located in the state of New York ("(“the New York PC's"PC’s”), owned by onetwo unrelated radiologist.radiologists. The contractual fees for services rendered to the PCs consists of fixed monthly fees per diagnostic imaging facility ranging from approximately $100,000$35,000 to $212,000.$241,000. All fees are re-negotiable at the anniversary of the agreements and each year thereafter. Revenue under lease contracts areis recognized based upon contractual agreements for the leasing of medical equipment primarily under long term contracts to various unrelated PC's.PC’s. The lease fees for the medical equipment consistsconsist of fixed monthly fees ranging from $2,500$2,000 to $21,000.$19,000. All fees are re-negotiable at the anniversary of the agreements and each year thereafter.
FONAR CORPORATION AND SUBSIDIARIES
Patient fee revenue, net of contractual allowance and discounts, consist of net patient fees received from insurance companies, third party payors (including federal and state agencies under Medicare and Medicaid programs), hospitals and patients themselves based mainly upon established contractual billing rates, less allowances for contractual adjustments and discounts. Patient fee revenue is recorded in the period in which services are provided.
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| FONAR CORPORATION AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
2013 and 2012
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition
The Company’s patient fee revenue, net of contractual allowances and discounts less the provision for bad debts for the years ended June 30, 2013 and 2012 are summarized in the following table.
| For the Year Ended June 30, | ||||||||
| 2013 | 2012 | |||||||
| Commercial Insurance/ Managed Care | $ | 1,360,536 | $ | — | ||||
| Medicare/Medicaid | 541,602 | — | ||||||
| Workers' Compensation/Personal Injury | 3,597,416 | — | ||||||
| Other | 1,982,311 | — | ||||||
| Patient Fee Revenue, net of contractual allowances and discounts | 7,481,865 | — | ||||||
| Provision for Bad Debts | (2,584,669 | ) | — | |||||
| Net Patient Fee for Revenue | $ | 4,897,196 | $ | — | ||||
Allowance for Doubtful Accounts – Patient Fee
The Company provides for medical receivables that could become uncollectible by establishing an allowance for doubtful accounts in order to adjust medical receivables to estimated net realizable value. In evaluating the collectability of medical receivables, the Company considers a number of factors, including the age of the account, historical collection experiences, payor type, current economic conditions and other relevant factors. There are various factors that impact collection trends, such as payor mix, changes in the economy, increase burden on copayments to be made by patients with insurance and business practices related to collection efforts. These factors continuously change and can have an impact on collection trends and the estimation process.
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 $466,000$835,000 and $415,000$715,000 for the years ended June 30, 20112013 and 2010,2012, respectively.
Shipping Costs
--------------
The Company'sCompany’s shipping and handling costs are included in revenue from product sales and the related expense included in costs related to product sales is $49,712$5,838 and $45,930$26,425 for the years ended June 30, 20112013 and 2010,2012, respectively.
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| FONAR CORPORATION AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013 and 2012
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
------------
Deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse.
Customer Advances
-----------------
Cash advances and progress payments received on sales orders are reflected as customer advances until such time as revenue recognition begins.
Earnings (Loss) Per Share
-------------------------
Basic earnings (loss) per share ("EPS"(“EPS”) is computed based onupon the weighted average number of shares of common stock and stock equivalents outstanding, and excludes any potential dilution.net of common stock. In accordance with ASC topic 260-10, "Participating“Participating Securities and the Two-Class Method"Method”, the Company
uses the two-class method to calculate the effect of the Company's participating
convertible securities on basic EPS, which include the Class A Non-voting
Preferred stock, Class B common stock and Class C common stock, and the
if-converted method is used to calculate the effect of participating convertible
securities on diluted EPS. These participating convertible securities were not
included in the computation of basic EPS for the year ended June 30, 2010
because the participating securities did not have a contractual obligation to
share in the losses of the Company. For the year ended June 30, 2011, the Company used the Two-Class method for calculating basic earnings per share and applied the if converted method in calculating diluted earnings per share.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNEshare for the years ended June 30, 2011
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings (Loss) Per Share (Continued)
-------------------------
2013 and June 30, 2012.
Diluted EPS reflects the potential dilution from the exercise or conversion of all dilutive securities into common stock based on the average market price of common shares outstanding during the period. The number of common shares
potentially issuable upon the exercise of options and warrants or conversion of
the participating convertible securities that were excluded from the diluted EPS
calculation, because they are antidilutive as a result of the net losses, was
195,896 as of June 30, 2010. For both the year ended June 30, 2011, the number of
common shares potentially issuable upon the exercise of certain options of
22,537 have not been included in the computation of2013 and June 30, 2012, diluted EPS since the effect
would be antidilutive.
June 30, 2011 June 30, 2010
----------------------------------- -------------for common shareholders includes 127,504 shares upon conversion of Class C Common Common
Total Stock Stock
Basic ----------- ------------ --------
-----
Numerator:
Net income (loss) available
to stockholders $3,160,910 $ 2,941,026 $ 55,998 $ (3,012,742)
=========== ============ ======= =============
Denominator:
Weighted average shares
outstanding $5,264,795 5,264,795 382,513 4,932,044
=========== ============ ======= =============
Basic income (loss)
per common share $ 0.60 $ 0.56 $0.15 $ (0.61)
=========== ============ ======= =============
Diluted
-------
Denominator:
Weighted average shares
outstanding 5,264,795 382,513 4,932,044
Stock options - - -
Convertible Class C Stock 127,504 - -
------------ ------- -------------
Total Denominator for diluted
earnings per share 5,392,299 382,513 4,932,044
============ ======= =============
Diluted income (loss) per
common share $ 0.55 $ 0.15 $ (0.61)
============ ======= =============
FONAR CORPORATION AND SUBSIDIARIES
Common.
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| FONAR CORPORATION AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
2013 and 2012
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
| June 30, 2013 | June 30, 2012 | |||||||||||||||||||||||
| Basic | Total | Common Stock | Class C Common Stock | Total | Common Stock | Class C Common Stock | ||||||||||||||||||
| Numerator: | ||||||||||||||||||||||||
| Net income Available to common stockholders | $ | 8,678,542 | $ | 8,107,367 | $ | 145,467 | $ | 5,776,481 | $ | 5,392,212 | $ | 97,863 | ||||||||||||
| Denominator: | ||||||||||||||||||||||||
| Weighted average shares outstanding | 5,933,318 | 5,933,318 | 382,513 | 5,778,695 | 5,778,695 | 382,513 | ||||||||||||||||||
| Basic income per common share | $ | 1.46 | $ | 1.37 | $ | 0.38 | $ | 1.00 | $ | 0.93 | $ | 0.26 | ||||||||||||
| Diluted | ||||||||||||||||||||||||
| Denominator: | ||||||||||||||||||||||||
| Weighted average shares outstanding | 5,933,318 | 382,513 | 5,778,695 | 382,513 | ||||||||||||||||||||
| Class C Common Stock | 127,504 | — | 127,504 | — | ||||||||||||||||||||
| Total Denominator for diluted earnings per share | 6,060,822 | 382,513 | 5,906,199 | 382,513 | ||||||||||||||||||||
| Diluted income per common share | $ | 1.34 | $ | 0.38 | $ | 0.91 | $ | 0.26 | ||||||||||||||||
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| FONAR CORPORATION AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013 and 2012
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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, 2011,2013, the Company had cash on deposit of approximately $7,812,000$6,030,000 in excess of federally insured limits of $250,000.
Related Parties: Net revenues from related parties accounted for approximately 16%15% and 13%17% of the consolidated net revenues for the years ended June 30, 20112013 and 2010,2012, respectively. Net management fee receivables from the related medical practices accounted for approximately 16%9% and 21%13% of the consolidated accounts receivable for the years ended June 30, 20112013 and 2010,2012, respectively.
See Note 3 regarding the Company’s concentrations in the healthcare industry.
Fair Value of Financial Instruments
-----------------------------------
The financial statements include various estimated fair value information at June 30, 20112013 and 2010,2012, as required by ASC topic 820, "Disclosures about Fair Value of Financial Instruments". Such information, which pertains to the Company's financial instruments, is based on the requirements set forth in that Statement and does not purport to represent the aggregate net fair value to the Company.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash and cash equivalents: The carrying amount approximates fair value because of the short-term maturity of those instruments.
Accounts receivable
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:
Notes receivable: The carrying amount approximates fair value because the discounted present value of the cash flow generated by the related parties approximates the carrying value of the amounts due to the Company.
Long-term debt, notes payable and accounts payable: The carrying amounts of debt and notes payable approximate fair value due to the length of the maturities, the interest rates being tied to market indices and/or due to the interest rates not being significantly different from the current market rates available to the Company.
All of the Company's financial instruments are held for purposes other than trading.
| 65 |
| FONAR CORPORATION AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
2013 and 2012
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accumulated Other Comprehensive Loss
------------------------------------
Accumulated other comprehensive loss generally includes all changes in equity
during a period, except those resulting from investments by stockholders and
distributions to stockholders.
Recent Accounting Pronouncements
--------------------------------
In June 2009,July 2012, the FASB issued ASC 860 (formerly SFASASU No. 166), "Accounting2012-02, Intangibles-Goodwill and Other (Topic 350) Testing Indefinite-Lived Intangible Assets for TransfersImpairment. This ASU simplifies how entities test indefinite-lived intangible assets for impairment which improves consistency in impairment testing requirements among long-lived asset categories. These amended standards permit an assessment of Financial Assets -qualitative factors to determine whether it is more likely than not that the fair value of an amendment of FASB Statement No. 140, ASC 860
requires additional disclosures concerning a transferor's continuing involvement
with transferred financial assets. ASC 860 eliminatesindefinite-lived intangible asset is less than its carrying value. For assets in which this assessment concludes it is more likely than not that the concept of a
"qualifying special-purpose entity"fair value is more than its carrying value, these amended standards eliminate the requirement to perform quantitative impairment testing as outlined in previously issued standards. The guidance is effective for annual and changes the requirements for
derecognizing financial assets. ASC 860 is effectiveinterim impairment tests performed for fiscal years beginning after NovemberSeptember 15, 2009. The Company adopted ASC topic 860 on July 1, 2010. The
adoption did not have a material impact on its consolidated financial
statements.
In June 2009, the FASB issued ASC 810 (formerly SFAS No. 167), "Amendments to
FASB Interpretation ("FIN") No. 46(R)," which changes how a reporting entity
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. The
determination of whether a reporting entity is required to consolidate another
entity is based on, among other things, the other entity's purpose and design
and the reporting entity's ability to direct the activities of the other entity
that most significantly impact the other entity's economic performance. ASC 810
will require a reporting entity to provide additional disclosures about its
involvement with variable interest entities and any significant changes in risk
exposure due to that involvement. A reporting entity will be required to
disclose how its involvement with a variable interest entity affects the
reporting entity's financial statements. ASC 810 is effective for fiscal years
beginning after November 15, 2009, and interim periods within those fiscal
years. The adoption of ASC 810 did not have a material impact on the Company's
consolidated financial statements.
In September 2009, the FASB reached final consensus on a new revenue recognition
standard, ASC topic 815 (formerly EITF Issue No. 08-1), "Revenue Arrangements
with Multiple Deliverables". ASC topic 815 addresses how to determine whether an
arrangement involving multiple deliverables contains more than one unit of
accounting, and how the arrangement consideration should be allocated among the
separate units of accounting. This Issue is effective for fiscal years beginning
after June 15, 2010 and may be applied retrospectively or prospectively for new
or materially modified arrangements. In addition,2012, early adoption is permitted. The adoption of ASC 815 didthis standard is not expected to have a material impact on the Company's
consolidated financial statements.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
--------------------------------
In September 2009, the EITF reached final consensus on a new revenue recognition
standard, ASC topic 350 (formerly EITF Issue No. 09-3), "Applicability of AICPA
Statement of Position 97-2 to Certain Arrangements That Contain Software
Elements". ASC topic 350 amends the scope of AICPA Statement of Position 97-2,
Software Revenue Recognition to exclude tangible products that include software
and non-software components that function together to deliver the product's
essential functionality. This Issue shall be applied on a prospective basis for
revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010. Earlier application is permitted as of the
beginning of a company's fiscal year provided the company has not previously
issued financial statements for any period within that year. An entity shall not
elect early application of this Issue unless it also elects early application of
Issue 08-1. The adoption of ADC 350 did not have a material impact on the
Company's consolidated financial statements.
In January 2010, the FASB issued Accounting Standards Update No. 2010-6,
Improving Disclosures about Fair Value Measurements. The Update provides
amendments to FASB ASC 820-10 that require entities to disclose separately the
amounts of significant transfers in and out of Level 1 and Level 2 fair value
measurements and describe the reasons for the transfers. In addition the Update
requires entities to present separately information about purchases, sales,
issuances, and settlements in the reconciliation for fair value measurements
using significant unobservable inputs (Level 3). The disclosures related to
Level 1 and Level 2 fair value measurements are effective for the Company in
2010 and the disclosures related to Level 3 fair value measurements are
effective for the Company in 2011. The Update requires new disclosures only, and
will have no impact on the Company's consolidated financial position, results of
operations, or cash flow.
In February 2010, the FASB issued ASU 2010-09, Subsequent Events (Topic 855) -
Amendments to Certain Recognition and Disclosure Requirements. ASU 2010-09
requires an entity that is an SEC filer to evaluate subsequent events through
the date that the financial statements are issued and removes the requirement
that an SEC filer disclose the date through which subsequent events have been
evaluated. ASC 2010-09 was effective upon issuance. The adoption of this
standard had no effect on the Company's consolidated financial position or
results of operations.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
--------------------------------
Issued in April 2010, ASC 2010-12, Income Taxes (Topic 740), Accounting for
Certain Tax Effect of the Health Care Reform Acts. On March 30, 2010, the
President of the United States ("U.S.") signed the Health Care and Education
Reconciliation Act of 2010, which is a reconciliation bill that amends the
Patient Protection and Affordable Act that was signed on March 23, 2010
(collectively, the "Acts"). ASU 2010-12 allows entities to consider the two Acts
together for accounting purposes. The adoption of this standard did not have a
material impact on the Company'sCompany’s consolidated financial position and results of operations.
FASB, the Emerging Issues Task Force and the SEC have issued certain other accounting standards, updates, and regulations as of June 30, 20112013 that will become effective in subsequent periods; however, management does not believe that any of those updates would have significantly affected our financial accounting measures or disclosures had they been in effect during 20112013 or 2010,2012, and it does not believe that any of those pronouncements will have a significant impact on our consolidated financial statements at the time they become effective.
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 income (losses) for any periods presented.
NOTE 3 -– ACCOUNTS RECEIVABLE, MEDICAL RECEIVABLES
The Company was assigned medical receivables valued at $11,775,000, in
connection with the satisfaction of the management fees and termination fees
related to a Termination and Replacement Agreement dated May 23, 2005. The
balance of the net medical receivables as of June 30, 2011 and 2010 was $0 and
$25,225, respectively. As of June 30, 2011 and June 30, 2010, the Company's
allowance for doubtful accounts totaled $1,622,000 on these receivables.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
NOTE 4 - MARKETABLE SECURITIES
The following is a summary of marketable securities at June 30, 2011 and 2010:
June 30, 2011
----------------------------------------
Unrealized Fair Market
Cost Loss Value
------------ ------------ ------------
Equities - other $ 48,710 $ (16,179) $ 32,531
============ ============ ============
June 30, 2010
----------------------------------------
Unrealized Fair Market
Cost Loss Value
------------ ------------ ------------
Equities - other $ 46,102 $ ( 18,489) $ 27,613
============ ============ ============
All marketable securities are deemed to be available for sale.
NOTE 5 - MANAGEMENT FEE RECEIVABLE AND ACCOUNTSMANAGEMENT AND OTHER FEES RECEIVABLE
The Company'sCompany’s customers are concentrated in the healthcare industry.
Management Fee Receivable
-------------------------
The Company's receivables from the related and non-related professional
corporations ("PCs") substantially consists of fees outstanding under management
agreements. Payment of the outstanding fees is dependent on collection by the
PCs of fees from third party medical reimbursement organizations, principally
insurance companies and health management organizations.
Payment of the management fee receivables from the PC's may be impaired by the
inability of the PC's to collect in a timely manner their medical fees from the
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
34% and 42%, respectively, of the PCs' 2011 and 2010 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.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
NOTE 5 - MANAGEMENT FEE RECEIVABLE AND ACCOUNTS RECEIVABLE (Continued)
Net revenues from management and other fees charged to the related medical
practices accounted for approximately 16% and 12%, of the consolidated net
revenues for the years ended June 30, 2011 and 2010, respectively.
Effective June 30, 2009, Tallahassee Magnetic Resonance Imaging, PA, Stand Up
MRI of Boca Raton, PA and Stand Up MRI & Diagnostic Center, PA (all related
medical practices) entered into a guaranty agreement, pursuant to which they
cross guaranteed all management fees which are payable to the Company, which
have arisen under each individual management agreement.
Accounts Receivable
-------------------
Credit risk with respect to the Company'sCompany’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.
| 66 |
| FONAR CORPORATION AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013 and 2012
NOTE 63 – ACCOUNTS RECEIVABLE, MEDICAL RECEIVABLE AND MANAGEMENT AND OTHER FEES RECEIVABLE (Continued)
Medical Receivable
Medical receivables are due under fee-for-service contracts from third party payors, such as hospitals, government sponsored healthcare programs, patient’s legal counsel and directly from patients. Substantially all the revenue relates to patients residing in Florida. The carrying amount of the medical receivable is reduced by an allowance that reflects management’s best estimate of the amounts that will not be collected. The Company continuously monitors collections from its clients and maintains an allowance for bad debts based upon the Company’s historical collection experience. The Company determines allowances for contractual adjustments and uncollectible accounts based on specific agings, specific payor collection issues that have been identified and based on payor classifications and historical experience at each site.
Management and Other Fees Receivable
The Company’s receivables from the related and non-related professional corporations (“PCs”) substantially consist of fees outstanding under management agreements. Payment of the outstanding fees is dependent on collection by the PCs of fees from third party medical reimbursement organizations, principally insurance companies and health management organizations.
Payment of the management fee receivables from the PC’s may be impaired by the inability of the PC’s to collect in a timely manner their medical fees from the 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 41% and 38%, respectively, of the PCs’ 2013 and 2012 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. The Company generally takes all legally available steps to collect its receivables. Credit losses associated with the receivables are provided for in the consolidated financial statements and have historically been within management's expectations.
Net revenues from management and other fees charged to the related medical practices accounted for approximately 15% and 17%, of the consolidated net revenues for the years ended June 30, 2013 and 2012, respectively.
Tallahassee Magnetic Resonance Imaging, PA, Stand Up MRI of Boca Raton, PA and Stand Up MRI & Diagnostic Center, PA (all related medical practices) entered into a guaranty agreement, pursuant to which they cross guaranteed all management fees which are payable to the Company, which have arisen under each individual management agreement.
The following table sets forth the number of our facilities for the year end June 30, 2013 and 2012.
| 67 |
| FONAR CORPORATION AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013 and 2012
NOTE 3 – ACCOUNTS RECEIVABLE, MEDICAL RECEIVABLE AND MANAGEMENT AND OTHER FEES RECEIVABLE (Continued)
Management and Other Fees Receivable (Continued)
| For The Year Ended June 30, | ||||||||
| 2013 | 2012 | |||||||
| Total Facilities Owned or Managed (at Beginning of Year) | 11 | 10 | ||||||
| Facilities Added by: | ||||||||
| Acquisition | 14 | — | ||||||
| Internal development | — | 1 | ||||||
| Managed Facilities Closed | (1 | ) | — | |||||
| Total Facilities Owned or Managed (at End of Year) | 24 | 11 | ||||||
NOTE 4 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND CUSTOMER ADVANCES
1) Information relating to uncompleted contracts as of June 30, 20112013 and 20102012 is as follows:
As of June 30,
--------------------------
2011 2010
----------- -----------
Costs incurred on uncompleted
Contracts $ 1,868,568 $ 6,115,699
Estimated earnings 1,077,387 3,659,324
----------- -----------
2,945,955 9,775,023
Less: Billings to date 2,780,557 12,241,037
----------- -----------
$ 165,398 $(2,466,014)
=========== ===========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
NOTE 6 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND CUSTOMER
ADVANCES (Continued)
| As of June 30, | ||||||||
| 2013 | 2012 | |||||||
| Costs incurred on uncompleted contracts | $ | 1,482,384 | $ | 3,745,307 | ||||
| Estimated earnings | 1,191,141 | 2,670,289 | ||||||
| 2,673,525 | 6,415,596 | |||||||
| Less: Billings to date | 2,370,000 | 5,287,000 | ||||||
| $ | 303,525 | $ | 1,128,596 | |||||
Included in the accompanying consolidated balance sheets under the following captions:
As of June 30,
--------------------------
2011 2010
------------ ------------
Costs and estimated earnings
in excess of billings on
uncompleted contracts $ 169,443 $ 277,384
Less: Billings in excess
of costs and estimated
earnings on uncompleted 4,045 2,743,398
contracts
------------ ------------
$ 165,398 $(2,466,014)
============ ============
| As of June 30, | ||||||||
| 2013 | 2012 | |||||||
| Costs and estimated earnings in excess of billings on uncompleted contracts | $ | 445,742 | $ | 1,128,596 | ||||
| Less: Billings in excess of costs and estimated earnings on uncompleted contracts | 142,217 | — | ||||||
| $ | 303,525 | $ | 1,128,596 | |||||
2) Customer advances consist of the following:
As of June 30, 2011
---------------------------------------
Related
Total Parties Other
----------- ------------ -----------
Total advances $ 7,626,351 $ - $ 7,626,351
Less: Advances on contracts
Under construction 2,780,557 - 2,780,557
----------- ------------ -----------
$ 4,845,794 $ - $ 4,845,794
=========== ============ ===========
As of June 30, 2010
--------------------------------------
Related
Total Parties Other
----------- ------------ -----------
Total advances $17,054,364 $ - $17,054,364
Less: Advances on contracts
Under construction 12,241,037 - 12,241,037
----------- ------------ -----------
$ 4,813,327 $ - $ 4,813,327
=========== ============ ===========
FONAR CORPORATION AND SUBSIDIARIES
| As of June 30, | ||||||||
| 2013 | 2012 | |||||||
| Total advances | $ | 4,227,870 | $ | 9,168,284 | ||||
| Less: Advances on contracts under construction | 2,370,000 | 5,287,000 | ||||||
| $ | 1,857,870 | $ | 3,881,284 | |||||
| 68 |
| FONAR CORPORATION AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
2013 and 2012
NOTE 7 -5 – INVENTORIES
Inventories included in the accompanying consolidated balance sheets consist of:
As of June 30,
--------------------------
2011 2010
------------ ------------
Purchased parts, components and supplies $ 1,818,542 $ 1,774,958
Work-in-process 581,698 1,051,253
------------ ------------
$ 2,400,240 $ 2,826,211
============ ============
| As of June 30, | ||||||||
| 2013 | 2012 | |||||||
| Purchased parts, components and supplies | $ | 1,783,847 | $ | 1,672,494 | ||||
| Work-in-process | 293,241 | 522,455 | ||||||
| $ | 2,077,088 | $ | 2,194,949 | |||||
NOTE 86 - PROPERTY AND EQUIPMENT
Property and equipment, at cost, less accumulated depreciation and amortization, at June 30, 20112013 and 2010,2012, is comprised of:
As of June 30,
--------------------------
2011 2010
------------ ------------
Diagnostic equipment under
capital leases $ 2,270,719 $ 633,675
Diagnostic equipment 2,518,035 1,641,808
Research, development and
demonstration equipment 9,605,961 9,605,961
Machinery and equipment 4,982,085 4,982,085
Furniture and fixtures 2,127,809 2,101,603
Leasehold improvements 4,663,666 4,785,102
Building 939,614 939,614
------------ =-----------
27,107,889 24,689,848
Less: Accumulated depreciation
and amortization 23,338,465 22,581,292
------------ ------------
$ 3,769,424 $ 2,108,556
============ ============
| As of June 30, | ||||||||
| 2013 | 2012 | |||||||
| Diagnostic equipment under capital leases | $ | 620,307 | $ | 1,417,300 | ||||
| Diagnostic equipment | 18,567,787 | 4,138,898 | ||||||
| Research, development and demonstration equipment | 3,500,902 | 9,861,199 | ||||||
| Machinery and equipment | 4,987,159 | 4,985,215 | ||||||
| Furniture and fixtures | 2,952,449 | 2,212,149 | ||||||
| Leasehold improvements | 5,669,338 | 4,545,974 | ||||||
| Building | 939,614 | 939,614 | ||||||
| 37,237,556 | 28,100,349 | |||||||
| Less: Accumulated depreciation and amortization | 19,713,062 | 24,926,902 | ||||||
| $ | 17,524,494 | $ | 3,173,447 | |||||
Depreciation and amortization of property and equipment for the years ended June 30, 20112013 and 20102012 was $1,464,055$1,554,458 and $808,163,$1,677,186, respectively.
Depreciation and amortization of diagnostic equipment under capital leases for the years ended June 30, 20112013 and 20102012 was $869,561$248,123 and $105,631,$646,620, respectively. Accumulated depreciation and amortization of diagnostic equipment under capital leases for the years ended June 30, 20112013 and 20102012 was $1,503,236$525,281 and $633,675,$1,074,152, respectively.
| 69 |
| FONAR CORPORATION AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
2013 and 2012
NOTE 97 - OTHER INTANGIBLE ASSETS
Other intangible assets, net of accumulated amortization, at June 30, 20112013 and 20102012 are comprised of:
As of June 30,
-------------=------------
2011 2010
------------ ------------
Capitalized software
development costs $ 6,368,960 $ 6,301,702
Patents and copyrights 4,030,579 3,975,327
Management agreement 513,333 -
------------ ------------
10,912,872 10,277,029
Less: Accumulated amortization 6,594,561 5,985,610
------------ ------------
$4,318,311 $ 4,291,419
============ ============
| As of June 30, | ||||||||
| 2013 | 2012 | |||||||
| Capitalized software developmentcosts | $ | 7,668,959 | $ | 6,368,960 | ||||
| Patents and copyrights | 4,193,800 | 4,100,511 | ||||||
| Management agreement | — | 513,333 | ||||||
| Non-competition agreements | 4,100,000 | — | ||||||
| Customer relationships | 3,800,000 | — | ||||||
| 19,762,759 | 10,982,804 | |||||||
| Less: Accumulated amortization | 7,858,511 | 7,147,625 | ||||||
| $ | 11,904,248 | $ | 3,835,179 | |||||
Information related to the above intangible assets for the years ended June 30, 20112013 and 20102012 is as follows:
2011 2010
------------ ------------
Balance - Beginning of Year $ 4,291,419 $ 4,920,241
Amounts capitalized and other 715,801 399,495
Abandon patents written off (79,958) (391,415)
Amortization (608,951) (636,902)
------------ ------------
Balance - End of Year $ 4,318,311 $ 4,291,419
============ ============
| 2013 | 2012 | |||||||
| Balance – Beginning of Year | $ | 3,835,179 | $ | 4,318,311 | ||||
| Amounts capitalized | 9,359,907 | 146,163 | ||||||
| Abandon patents written off | (66,619 | ) | (76,231 | ) | ||||
| Impairment of management agreement | (357,500 | ) | — | |||||
| Amortization | (866,719 | ) | (553,064 | ) | ||||
| Balance – End of Year | $ | 11,904,248 | $ | 3,835,179 | ||||
Amortization of patents and copyrights for the years ended June 30, 20112013 and 20102012 amounted to $142,049$168,631 and $134,001,$156,310, respectively. The Company also recorded
a write off of abandon patents in the amount of $79,958 and $391,415 for the
years ended June 30, 2011 and June 30, 2010, respectively.
Amortization of capitalized software development costs for the years ended June 30, 20112013 and 20102012 was $448,569$335,350 and $502,901,$360,087, respectively.
Amortization of management agreement for the years ended June 30, 20112013 and 20102012 amounted to $18,333$100,833 and $36,667, respectively.
Amortization of non-competition agreements for the years ended June 30, 2013 and 2012 amounted to $195,238 and $0, respectively.
Amortization of customer relationships for the years ended June 30, 2013 and 2012 amounted to $66,667 and $0, respectively.
| 70 |
| FONAR CORPORATION AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
2013 and 2012
NOTE 97 - OTHER INTANGIBLE ASSETS (Continued)
The estimated amortization of patents and copyrights and capitalized software
development costsother intangible assets for the five years ending June 30, 20162018 and thereafter is as follows:
Capitalized
Software
For the Years Patents and Development Management
Ending June 30, Total Copyrights Costs Agreement
--------------- ---------- ------------ ------------ ----------
2012 $ 581,840 $ 147,686 $ 397,487 $ 36,667
2013 523,971 163,820 323,484 36,667
2014 476,697 179,954 260,076 36,667
2015 447,997 196,088 215,242 36,667
2016 459,054 203,576 218,811 36,667
Thereafter 1,828,752 1,413,975 103,112 311,665
---------- ------------ ------------ ----------
$4,318,311 $ 2,305,099 $ 1,518,212 $ 495,000
========== ============ ============ ==========
| For the Years Ending June 30, | Total | Patents and Copyrights | Capitalized Software Development Costs | Non-competition | Customer Relationships | |||||||||||||||||
| 2014 | $ | 1,406,735 | $ | 185,745 | $ | 445,276 | $ | 585,714 | $ | 190,000 | ||||||||||||
| 2015 | 1,378,035 | 201,879 | 400,442 | 585,714 | 190,000 | |||||||||||||||||
| 2016 | 1,397,159 | 217,434 | 404,011 | 585,714 | 190,000 | |||||||||||||||||
| 2017 | 1,418,301 | 232,987 | 409,600 | 585,714 | 190,000 | |||||||||||||||||
| 2018 | 1,370,948 | 234,900 | 360,334 | 585,714 | 190,000 | |||||||||||||||||
| Thereafter | 4,933,070 | 1,070,433 | 103,112 | 976,192 | 2,783,333 | |||||||||||||||||
| $ | 11,904,248 | $ | 2,143,378 | $ | 2,122,775 | $ | 3,904,762 | $ | 3,733,333 | |||||||||||||
The weighted average amortization period for other intangible assets is 9.211.2 years and hasthey have no expected residual value.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
NOTE 10 - NOTES RECEIVABLE
Notes receivable as of June 30, 2011 and 2010 consist of the following:
As of June 30,
--------------------------
2011 2010
------------ ------------
Note Receivable - (a) $ 65,000 65,000
Note Receivable - (b) 264,985 -
Note Receivable - (c) - 185,686
Note Receivable - (d) 207,842 136,110
------------ ------------
Total Notes Receivable 537,827 386,796
Allowance (65,000) (115,000)
------------ ------------
Net Notes Receivable $ 472,827 $ 271,796
============ ============
Current Portion $ 114,058 $ 271,796
Long-Term $ 358,769 $ -
Portion
a) This note receivable represents a note due from a customer for the purchase
of a system. The note was payable over two years. The Company has an allowance
for doubtful accounts of $65,000 as of June 30, 2011 and 2010 on this note.
b) This note receivable represents a note due from a customer for the purchase
of an Upright MRI system. The note is payable in 60 consecutive equal monthly
payments of principal and interest of $5,798 commencing November 2010.
c) This note receivable represents a note due from a customer for the purchase
of an Upright MRI system. The note was payable in 48 consecutive equal monthly
payments of principal and interest of $8,426. This note was written off during
the year ended June 30, 2011.
d) This represents notes from a customer for past due service provided to two
Upright MRI systems. The notes are payable in monthly payments of principal and
interest of $5444.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
NOTE 11 - ADVANCES AND NOTES TO RELATED MEDICAL PRACTICES
The Company had advanced a former subsidiary, Tallahassee Magnetic Resonance
Imaging, P.A., $546,183. This balance was evidenced by a promissory note and is
payable as follows: $546,183 in 40 monthly installments commencing September
2007, including interest at 6%. The balance due under this note as of June 30,
2011 was $0. Interest income on this note for the years ended June 30, 2011 and
2010 amounted to $1,564 and $10,926, respectively.
NOTE 128 - CAPITAL STOCK
The Company amended its certificate of incorporation decreasing the number of
authorized shares of
Common Stock from 30,000,000 to 8,500,000, Class B Common
Stock from 800,000 to 227,000, Class C Common Stock from 2,000,000 to 567,000,
Class A Non-voting Preferred Stock from 1,600,000 to 453,000 and Preferred Stock
from 2,000,000 to 567,000.
Common Stock
------------
Cash dividends payable on the common stock shall, in all cases, be on a per share basis, one hundred twenty percent (120%) of the cash dividend payable on shares of Class B common stock and three hundred sixty percent (360%) of the cash dividend payable on a share of Class C common stock.
Class B Common Stock
--------------------
Class B common stock is convertible into shares of common stock on a one-for-
oneone-for-one basis. Class B common stock has 10 votes per share. There were 146 and 158 of such shares outstanding at June 30, 20112013 and 2010.
2012, respectively.
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.
| 71 |
| FONAR CORPORATION AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013 and 2012
NOTE 8 - CAPITAL STOCK (Continued)
Class A Non-Voting Preferred Stock
----------------------------------
On April 3, 1995, the stockholders ratified a proposal consisting of the creation of a new class of Class A non-voting preferred stock with special dividend rights and the declaration of a stock dividend on the Company's common stock consisting of one share of Class A non-voting preferred stock for every five shares of common stock. The stock dividend was payable to holders of common stock on October 20, 1995. Class A non-voting preferred stock issued pursuant to such stock dividend approximates 313,000 shares.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
NOTE 12 - CAPITAL STOCK (Continued)
Class A Non-Voting Preferred Stock (Continued)
----------------------------------
The Class A non-voting preferred stock is entitled to a special dividend equal to 3-1/4% of first $10 million, 4-1/2% of next $20 million and 5-1/2% on amounts in excess of $30 million of the amount of any cash awards or settlements received by the Company in connection with the enforcement of five of the Company's patents in its patent lawsuits, less the revised special dividend payable on the common stock with respect to one of the Company's patents.
The Class A non-voting preferred stock participates on an equal per share basis with the common stock in any dividends declared and ranks equally with the common stock on distribution rights, liquidation rights and other rights and preferences (other than the voting rights).
Stock Bonus Plans
On April 23, 2010, the Board approved the 2010 Stock Bonus Plan. The plan entitles the Company to reserve 2,000,000 shares of common stock. On August 10, 2010, the Company filed Form S-8 to register the 2,000,000 shares. As of June 30, 2013, 1,005,075 shares of common stock of FONAR were available for future grant under this plan. 67,870 shares were issued during the year ended June 30, 2013.
Options
-------
The Company has stock option plans, which provide for the awarding of incentive and non-qualified stock options to employees, directors and consultants who may contribute to the success of the Company. The options granted vest either immediately or ratably over a period of time from the date of grant, typically three or four years, at a price determined by the Board of Directors or a committee of the Board of Directors, generally the fair value of the Company's common stock at the date of grant. The options must be exercised within ten years from the date of grant.
FONAR's 1997 Nonstatutory Stock Option Plan, adopted on May 9, 1997, permits the
issuance of stock options covering an aggregate of 200,000 shares of common
stock of FONAR. The options may be issued at such prices and upon such terms and
conditions as are determined by FONAR. The 1997 Plan terminated on May 8, 2007.
During the year ended June 30, 2011, 2,384 options were forfeited and 42,016
options expired, therefore of the options granted under this plan 8,272 remain
outstanding.
FONAR's
FONAR’s 2002 Incentive Stock Option Plan (the "FONAR“FONAR 2002 Plan"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 terminateterminated on June 30, 2012. As of June 30, 2011, 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, 2011, 1,2972013, 7,412 options were forfeited,expired, therefore 14,265
shares6,610 options remain outstanding.
FONAR CORPORATION AND SUBSIDIARIES
| 72 |
| FONAR CORPORATION AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
2013 and 2012
NOTE 128 - CAPITAL STOCK (Continued)
Options(Continued)
-------
FONAR's
��
FONAR’s 2005 Incentive Stock Option Plan (the "FONAR“FONAR 2005 Plan"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, 2011,2013, 80,000 shares of common stock of FONAR were available for future grant under this Plan.
Stock option activity and weighted average exercise prices under these plans and grants for the years ended June 30, 20112013 and 20102012 were as follows:
Weighted
Average Aggregate
Number
| Number of Options | Weighted Average Exercise Price | Aggregate Intrinsic Value | ||||||||||
| Outstanding, June 30, 2011 | 22,537 | 30.27 | — | |||||||||
| Granted | — | — | — | |||||||||
| Exercised | — | — | — | |||||||||
| Forfeited / Expired | (8,515 | ) | 34.41 | — | ||||||||
| Outstanding, June 30, 2012 | 14,022 | 27.76 | — | |||||||||
| Granted | — | — | — | |||||||||
| Exercised | — | — | — | |||||||||
| Forfeited / Expired | (7,412 | ) | 26.65 | — | ||||||||
| Outstanding, June 30, 2013 | 6,610 | 29 | — | |||||||||
| Exercisable at: | ||||||||||||
| June 30, 2012 | 14,022 | $ | 27.76 | |||||||||
| June 30, 2013 | 6,610 | $ | 29.00 | |||||||||
| 73 |
| FONAR CORPORATION AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013 and 2012
NOTE 9 – CONTROLLING AND NONCONTROLLING INTERESTS
On February 13, 2013 the Company entered into an agreement with outside investors to acquire a 50.5% controlling interest in a newly formed limited liability company, Health Diagnostics Management LLC (HDM). According to the February 13, 2013 LLC operating agreement of Exercise Intrinsic
Options Price Value
--------- -------- ---------
Outstanding,HDM there are two classes of members; Class A members and one Class B member. The Class A members have an ownership interest of 49.5% of HDM. The Class B member (HMCA) has an ownership of 50.5% of HDM. On all matters on which members may vote every member is entitled to cast the percentage of votes equal to their percentage of ownership interest. Profits and losses an all items of income, gain or loss, deductions or other allocations of the Company will be allocated among the members in the same proportions as their membership interests in the Company bear to all the Class A and Class B membership interests of the Company in the aggregate outstanding. All of the depreciation and amortization of the assets of the Company will be allocated solely to the Class A members, unless and until their interests have been redeemed by the Company in full pursuant to the provisions of the operating agreement. During March 2013 the Company contributed $20,200,000 to HDM and the group of outside investors contributed $19,800,000 for its non-controlling membership interest.
To fund its capital contribution the Company borrowed a total of $14,000,000 from a bank in the form of a term loan aggregating $11,000,000 and a revolving credit loan aggregating $3,000,000. The term loan is payable in 60 consecutive monthly installments, commencing September 1, 2013. The term loan bears interest at 4.75% per annum and is payable monthly. The revolving credit loan is due March 5, 2016. The Company can prepay the loan in whole or in part in multiples of $100,000 at any time without penalty. The revolving credit note bears interest at a rate of 4% per annum and is payable monthly. All borrowings under the loan agreements are collateralized by substantially all of the Company’s assets. The loan agreements also contain certain financial covenants that must be met on a periodic basis.
On March 5, 2013 HDM purchased from Health Diagnostics, LLC (“HD”) and certain of its subsidiaries, a business managing twelve (12) Stand-Up® MRI Centers and two (2) other scanning centers located in the States of New York and Florida for a total purchase price (including consideration of $1.5 million to outside investors) aggregating $35.9 million. Concurrently with the acquisition, HDM entered into several consulting and non-competition agreements for a consideration of $4.1 million. The acquisition was accounted for using the purchase method in accordance with ASC 805, “Business Combinations”. The accompanying consolidated financial statements include the operations of HDM from the date of acquisition. The Company recognizes and measures goodwill as of the acquisition date, as the excess of the fair value of the consideration paid over the fair value of the identified net assets acquired.
| 74 |
| FONAR CORPORATION AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013 and 2012
NOTE 9 – CONTROLLING AND NONCONTROLLING INTERESTS (Continued)
The following table summarizes the estimated fair values of the assets and liabilities assumed at the acquisition date:
| Management fee receivable | $ | 6,667,259 | ||
| Medical receivables | 7,389,953 | |||
| Prepaid expenses and other current assets | 10,262 | |||
| Property and equipment | 14,912,650 | |||
| Intangible assets | 9,200,000 | |||
| Goodwill | 1,767,098 | |||
| Other assets | 332,949 | |||
| Other current liabilities | (6,323 | ) | ||
| Long term debt | (273,848 | ) | ||
| Net assets acquired | $ | 40,000,000 |
The purchase price was allocated to the tangible and intangible assets and liabilities assumed based on estimates of their respective fair values at the date of acquisition with the remaining unallocated purchase price recorded as goodwill. Management is responsible for the valuation of net assets acquired and considered a number of factors, including valuations and appraisals, when estimating the fair values and estimated useful lives of acquired assets and liabilities. The intangible assets, excluding goodwill, are being amortized on a straight-line basis over their weighted average lives as follows:
| Fair Value | ||||||||
| Non compete | $ | 4,100,000 | 7 years | |||||
| Customer relationships | 3,800,000 | 20 years | ||||||
| Developed software | 1,300,000 | 5 years | ||||||
| Total intangible assets | $ | 9,200,000 |
The following unaudited pro forma results of operations for the twelve months ended June 30, 2009 96,014 30.69 -
Granted - - -
Exercised - - -
Forfeited / Expired (27,780) 26.27 -
--------- --------
Outstanding,2013 and 2012 assumes that the above acquisitions were made at the beginning of the year prior to acquisition. The unaudited pro forma information does not purport to be indicative of the results that would have been obtained if the acquisitions had actually occurred at the beginning of the year prior to acquisition, nor of the results that may be reported in the future.
| 75 |
| FONAR CORPORATION AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013 and 2012
NOTE 9 – CONTROLLING AND NONCONTROLLING INTERESTS (Continued)
| Year ended June 30 | ||||||||
| 2013 | 2012 | |||||||
| Total Revenues - Net | $ | 69,723,542 | $ | 68,725,401 | ||||
| Net Income - Controlling Interests | 17,442,337 | (19,292,852 | ) | |||||
| Net Income Available to Common Stockholders | 16,294,377 | (19,292,852 | ) | |||||
| Net Income Available to Class A Non-Voting Preferred Stockholders | 855,597 | — | ||||||
| Net Income Available to Class C Common Stockholders | 292,363 | — | ||||||
| Basis Net Income Per Common Share Available to Common Stockholders | 2.75 | (3.34 | ) | |||||
| Diluted Net Income Per Common Share Available to Common Stockholders | 2.69 | (3.34 | ) | |||||
| Basic and Diluted Income Per Share - Common C | $ | 0.76 | $ | — | ||||
| Weighted Average Basic Shares Outstanding | 5,933,318 | 5,778,695 | ||||||
| Weighted Average Diluted Shares Outstanding | 6,060,822 | 5,909,199 | ||||||
| Weighted Average Basic and Diluted Shares Outstanding - Class C Common | 382,513 | 382,513 | ||||||
HDM’s total net revenues and income from operations for the period from the acquisition date (March 5, 2013) to June 30, 2010 68,234 29.63 -
Granted - - -
Exercised - - -
Forfeited / Expired (45,697) 29.31 -
--------- --------
Outstanding, June 30, 2011 22,537 30.27 -
========= ========
Exercisable at:
June 30, 2010 68,234 $29.63
June 30, 2011 22,537 $30.27
The range2013 was$14,834,143 and $1,958,714, respectively.
Amount of exercise prices for options outstandingeach class of members’ equity as of June 30, 2011 was as
follows:
Weighted
Average
Number of Remaining
Range of Options Contractual
Exercise Price Outstanding Life in Years
--------------- ----------- -------------
$25.00 - $28.13 10,229 1.0
$29.00 - $34.38 10,081 2.0
$46.88 2,227 0.1
-----------
22,537
===========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
NOTE 12 - CAPITAL STOCK (Continued)
Stock Bonus Plans
-----------------
On April 23, 2010, the Board approved the 2010 Stock Bonus Plan. The plan
entitles the Company to reserve 2,000,000 shares of common stock. On August 10,
2010, the Company filed Form S-8 to register the 2,000,000 shares. As of June
30, 2011, 1,349,279 shares of common stock of FONAR were available for future
grant under this plan. 650,721 shares were issued during the year ended June 30,
2011.
NOTE 13 - CONTROLLING INTERESTS
2013
| Class A Members | Class B Member | |||||||
| Opening Members’ Equity | $ | — | $ | — | ||||
| Share of Net Income | 543,225 | 1,397,080 | ||||||
| Contributions | 19,800,000 | 20,200,000 | ||||||
| Distributions | (816,750 | ) | (833,250 | ) | ||||
| Ending Members’ Equity at June 30, 2013 | $ | 19,526,475 | $ | 20,763,830 |
On May 2, 2011, the Company completed a private placement of equity and succeeded in raising $6,000,000. The offering consisted of Preferred Class A membership interests in a newly formed limited liability company, Imperial Management Services, LLC ("Imperial"(“Imperial”). The Class B membership interests in Imperial, all of which were retained by the Company'sCompany’s subsidiary, HMCA, holdsinitially held a 75% equity interest in Imperial. The Class A membership interests are entitled to receive a dividend of 18% per annum of their cash capital contribution of $6,000,000 to
the limited liability company.contribution. HMCA contributed all of its assets, together with its liabilities, to Imperial as HMCA'sHMCA’s capital contribution. The Imperial operating agreement provides for the Class A members to receive priority distributions until their original capital contributions are returned. Dividends are payable quarterly beginning August 1, 2011. On May 1, 2013 and on May 1, 2012, the Company returned a portion of the Class A Members capital contribution in the amount of $1,424,900 and $1,200,000, respectively. As of June 30, 2013, the Company’s subsidiary, HMCA, now owns an 86% interest in Imperial Management Services.
| 76 |
| FONAR CORPORATION AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013 and 2012
NOTE 9 – CONTROLLING AND NONCONTROLLNG INTERESTS (Continued)
Amount of each class of members’ equity as of June 30, 2013 and 2012
| June 30, 2013 | June 30, 2012 | |||||||||||||||
| Class A Members | Class B Member | Class A Members | Class B Member | |||||||||||||
| Opening Members’ Equity | $ | 4,918,365 | $ | 3,824,945 | $ | 6,069,642 | $ | 208,925 | ||||||||
| Share of Net Income | 959,254 | 3,947,836 | 1,128,723 | 3,616,020 | ||||||||||||
| Contributions | — | — | — | — | ||||||||||||
| Distributions | (853,200 | ) | — | (1,080,000 | ) | — | ||||||||||
| Redemption | (1,424,900 | ) | — | (1,200,000 | ) | — | ||||||||||
| Ending Members’ Equity at June 30, | $ | 3,599,519 | $ | 7,772,781 | $ | 4,918,365 | $ | 3,824,945 | ||||||||
On May 1, 2010, the Company purchased a 15.2% interest from an unrelated party of an entity that provides management services to a diagnostic center in the New York Metropolitan area. On January 1, 2011, the Company purchased an additional 34.8% interest by the issuance of a promissory note of $400,000. Commencing with
January 1, 2011, the Company has consolidatedconsolidates the activity of this entity
commencing on Januaryentity. On June 1, 2011. The fair values assigned to2013, the assets acquired
and liabilities assumed were as follows:
Cash $ 289,185
Property and equipment-net 303,659
Management contracts-net 513,333
Security deposits 45,784
Accounts payable ( 47,026)
Notes payable (130,650)
Non controlled interests (491,328)
Less prior investment ( 82,957)
----------
Subtotal 400,000
Purchase price (400,000)
----------
Cash used in purchase 0
==========
Company purchased from the noncontrolling members their remaining 50% interest for $700,000.
The Company also has a 50% controlling interest in an entity which the Company consolidates, that will provideprovides management services to a diagnostic center in the New York Metropolitan area. The center is in the processbegan operations during January 2012. The noncontrolling interest as of being installed.
FONAR CORPORATION AND SUBSIDIARIES
June 30, 2013 and 2012 aggregated $559,221 and $561,167, respectively.
| 77 |
| FONAR CORPORATION AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
2013 and 2012
NOTE 1410 - LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASES
Long-term debt, notes payable and capital leases consist of the following:
June 30,
---------- ----------
2011 2010
---------- ----------
Capital lease requiring monthly payments of $13,623,
including interest at a rate of 10.51% per annum through
July 2010. The lease was restructured in July 2008,
requiring twelve monthly payments of $6,923 followed by
31 monthly payments of $9,585 through January 2012,
including interest at a rate of 11.82%. The lease is
collateralized by the related equipment. $ 73,390 $ 181,033
Notes payable of $580,000 entered into in order to pay
back a customer deposit of $580,000 requiring aggregate
monthly payments of $20,106, including interest at a
rate of 15% per annum through June 2013. Amount due to a
related party as of June 30, 2011 is $57,196. 399,024 580,000
Note payable requiring monthly payments of interest at a
rate of 7% until May 2009 followed by 240 monthly
payments of $4,472 through October 2026. The loan is
collateralized by the related building. 500,411 519,203
Note payable requiring monthly payments of $12,150,
including interest at a rate of 5% per annum through
August 2014 and a final payment of $5,091 in September
2014. 544,555 659,992
Note payable requiring monthly payments of $8,325,
including interest at a rate of 10% per annum through
April 2012. 72,341 160,176
Note payable from the Fair Haven acquisition requires
three monthly payments of $15,000, twelve monthly
payments of $20,000 and six monthly payments of $25,000,
including interest at a rate of 8.58% per annum through
November 2011 then 6 payments of $25,000. The loan is
collateralized by the related equipment. 257,246 -
Note payable from the Fair Haven acquisition requires
monthly payments of $21,000, including interest at a
rate of 4.5% per annum through February 2011 and a final
payment of $533,783 in March 2011. The loan is
collateralized by the related equipment. 510,771 -
FONAR CORPORATION AND SUBSIDIARIES
| June 30, | ||||||||
| 2013 | 2012 | |||||||
| Notes payable of $580,000 requiring aggregate monthly payments of $20,106, including interest at a rate of 15% per annum through June 2013. | $ | — | $ | 214,355 | ||||
| Note payable requiring monthly payments of interest at a rate of 7% until May 2009 followed by 240 monthly payments of $4,472 through October 2026. The loan is collateralized by a building with a net book value of $720,841 as of June 30, 2013. | 461,648 | 481,615 | ||||||
| Note payable requiring monthly payments of $12,150, including interest at a rate of 5% per annum through January 2014, seven monthly payments of $31,000 commencing February 2014 and a final payment of $5,091 in September 2014. | 271,340 | 423,280 | ||||||
| Note payable from the Fair Haven acquisition requires three monthly payments of $15,000, twelve monthly payments of $20,000 and six monthly payments of $25,000, including interest at a rate of 8.58% per annum through November 2011 then 6 payments of $25,000. The loan is collateralized by equipment which, as of June 30, 2013, has been fully depreciated. | — | 42,500 | ||||||
| Note payable from the Fair Haven acquisition requires monthly payments of $21,000, including interest at a rate of 4.5% per annum through February 2011 and a final payment of $533,783 in March 2011. The loan is collateralized by equipment which, as of June 30, 2013, has been fully depreciated. | — | 187,707 | ||||||
| Note payable from the Fair Haven acquisition requires monthly payments of $18,850, including interest at a rate of 11.2% per annum through January 2014. The loan is collateralized by equipment with a net book value of $95,026 as of June 30, 2013. | 127,173 | 326,890 | ||||||
| Note payable requiring monthly principal installments of $4,100 and interest computed on the unpaid principal amount at a rate of 5% per annum through April 2017. The note is secured by certain assets of the Company. | 188,600 | 237,800 | ||||||
| 78 |
| FONAR CORPORATION AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
2013 and 2012
NOTE 1410 - LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASES (Continued)
June
| June 30, | ||||||||
| 2013 | 2012 | |||||||
| Note payable of $400,000 entered into for the purchase of 34.2% interest in a management company requiring payments of $100,000 on January 2, 2012 and $300,000 on January 2, 2013, including interest at a rate of 10% per annum through January 2013. The lender had a security interest in Imperial’s members interest until the note was paid in full. | $ | — | $ | 300,000 | ||||
| The revolving credit note is due by March 5, 2016. The Company can prepay the loan in whole or part in multiples of $100,000 at any time without penalty. The note bears interest at a rate of 4% per annum and is payable monthly. The loan is collateralized by substantially all of the Company’s assets. The loan also contains certain financial covenants that must be met on a periodic basis. | 2,400,000 | — | ||||||
| The term loan is payable with interest only for 6 consecutive months commencing at the inception of the loan followed by 60 consecutive monthly installments, commencing October 1, 2013. The term loan bears interest at 4.75% per annum and is payable monthly. The loan is collateralized by substantially all of the Company’s assets. The loan also contains certain financial covenants that must be met on a periodic basis. | 11,000,000 | — | ||||||
| Note payable requiring 12 consecutive interest only payments commencing at the inception of the loan followed by 48 consecutive monthly payments, commencing May 1, 2014. The note bears interest at a rate of 4.75% per annum and is payable monthly. The loan is collateralized by substantially all of the Company’s assets. The loan also contains certain financial covenants that must be met on a periodic basis. | 689,646 | — | ||||||
| Other (including capital leases for property and equipment). | 634,367 | 416,750 | ||||||
| 15,772,774 | 2,630,897 | |||||||
| Less: Current portion | 2,885,769 | 1,853,623 | ||||||
| $ | 12,887,005 | $ | 777,274 | |||||
| 79 |
| FONAR CORPORATION AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, ---------- ----------
2011 2010
---------- ----------
Note payable from the Fair Haven acquisition requires
monthly payments of $18,850, including interest at a
rate of 11.2% per annum through January 2014. The loan
is collateralized by the related equipment. $ 533,5022013 and 2012
NOTE 10 - Note payable of $400,000 entered into for the purchase
of 34.2% interest in a management company requiring 2
payments of $100,000 and $300,000 including interest at
a rate of 10% per annum through January 2013. 400,000 -
Other (including capital leases for property and
equipment). 480,882 205,830
---------- ----------
3,772,122 2,306,234
Less: Current portion 2,025,836 667,271
---------- ----------
$1,746,286 $1,638,963
========== ==========
LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASES (Continued)
The maturities of long-term debt over the next five years and thereafter are as follows:
Years Ending
June 30,
------------
2012 $2,025,836
2013 861,725
2014 377,859
2015 89,815
2016 24,791
Thereafter 392,096
----------
$3,772,122
==========
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
| Years Ending June 30, | ||||||
| 2014 | $ | 2,885,769 | ||||
| 2015 | 2,488,426 | |||||
| 2016 | 4,882,554 | |||||
| 2017 | 2,440,100 | |||||
| 2018 | 2,372,503 | |||||
| Thereafter | 703,422 | |||||
| $ | 15,772,774 |
NOTE 1511 - INCOME TAXES
Effective January 1, 2007, the Company adopted the provisions of ASC topic 740 (formerly FASB Interpretation No. 48/FASB Statement No. 109, "Accounting“Accounting for Uncertainty in Income Taxes"Taxes”). ASC topic 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a corporate tax return. For those benefits to be recognized, a tax position must be more-
likely-than-notmore-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"“unrecognized benefits”. A liability is recognized (or amount of net operating loss carryforward or amount of tax refundable is reduced) for an unrecognized tax benefit because it represents an enterprise'senterprise’s potential future obligation to the taxing authority for a tax position that was not recognized as a result of applying the provisions of ASC topic 740.
In accordance with ASC topic 740, interest costs related to unrecognized tax benefits are required to be calculated (if applicable) and would be classified as "Interest“Interest expense, net"net”. Penalties if incurred would be recognized as a component of "Selling,“Selling, general and administrative"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 2006.
Upon the adoption and as of June 30, 2011, no liability for unrecognized tax
benefits was required to be recorded. 2008.
The Company does not expect its
unrecognized tax benefit position to change during the next 12 months.
The Company recognizednetted a deferred tax asset of $784,348$2,935,750 and a deferred tax liability of $784,348$461,858 as of June 30, 2011,2013, primarily relating to net operating loss carryforwards of approximately $163,660,000$142,788,000 available to offset future taxable income through 2031.2030. The net operating losses begin to expire in 20122019 for federal tax purposes and in 20122013 for state income tax purposes.
The ultimate realization of deferred tax assets is dependent on the generation of future taxable income during the periods in which those temporary differences become deductible. The Company considers projected future taxable income and tax planning strategies in making this assessment. At present, the Company does not
have a sufficient history of income to concludeand anticipates profitability in the coming years and has concluded that it is more-likely-than-not that the Company will be able to realize alla portion of its tax benefits in the near future and therefore a valuation allowance was established for the fullpartial value of the deferred tax asset.
| 80 |
| FONAR CORPORATION AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013 and 2012
NOTE 11 - INCOME TAXES (Continued)
A valuation allowance will be maintained until sufficient positive evidence exists to support the reversal of any portion or all of the valuation. Should the Company becomecontinue to remain profitable in future periods with supportable trends, the valuation allowance will be reversed accordingly.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
NOTE 15 - INCOME TAXES (Continued)
Components of the current provisionbenefit (provision) for income taxes are as follows:
Years Ended June 30,
--------------------------
2011 2010
------------ ------------
Current:
Federal $ 75,000 $ -
State 475 -
------------ ------------
$ 75,475 $ -
============ ============
| Years Ended June 30, | ||||||||
| 2013 | 2012 | |||||||
| Current: | ||||||||
| Federal | $ | (125,000 | ) | $ | (112,000 | ) | ||
| State | (71,001 | ) | (29,125 | ) | ||||
| (196,001 | ) | (141,125 | ) | |||||
| Deferred: | ||||||||
| Federal | 2,336,454 | — | ||||||
| State | 137,438 | — | ||||||
| 2,473,892 | — | |||||||
| Benefit (Provision) for income taxes | $ | 2,277,891 | $ | (141,125 | ) | |||
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,
--------------------------
2011 2010
------------ ------------
Taxes at federal statutory rate 34.0)% (34.0)%
State and local income
Taxes (benefit), net of
Federal benefit (6.0) (6.0)
Permanent differences (decrease) 1.9 1.0
Increase in the valuation
Allowance and true ups 30.3 39.0
------------ ------------
Effective income tax rate (7.8)% 0.0%
============ ============
| Years Ended June 30, | ||||||||
| 2013 | 2012 | |||||||
| Taxes at federal statutory rate | 34.0 | % | (34.0 | )% | ||||
| State and local income taxes (benefit), net of federal benefit | 6.0 | (6.0 | ) | |||||
| Permanent differences | 0.6 | 1.2 | ||||||
| (Decrease) increase in the valuation allowance and true ups | (76.2 | ) | 40.8 | |||||
| Effective income tax rate | (35.6 | )% | 2.0 | % | ||||
As of June 30, 2011,2013, the Company has net operating loss ("NOL"(“NOL”) carryforwards of approximately $163,660,000$142,788,000 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 Company has, for federal income tax purposes, research and development tax credit carryforwards aggregating $4,323,000,$4,298,000, which are accounted for under the flow-through method. The Company also has $482,000 in alternative minimum tax credits.
In addition, for New York State income tax purposes, the Company has tax credit carryforwards, aggregating approximately $1,135,000,$1,139,000, which are accounted for under the flow-through method. The tax credit carryforwards expire during the years ending June 30, 20122013 to June 30, 2031.
FONAR CORPORATION AND SUBSIDIARIES
2028.
| 81 |
| FONAR CORPORATION AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
2013 and 2012
NOTE 1511 - INCOME TAXES (Continued)
Significant components of the Company's deferred tax assets and liabilities at June 30, 20112013 and 20102012 are as follows:
June 30,
--------------------------
2011 2010
------------ ------------
Deferred tax assets:
Allowance for doubtful accounts $ 4,256,391 $ 4,453,601
Non-deductible accruals 273,497 227,547
Net operating carryforwards 65,464,211 66,544,239
Tax credits 5,559,462 5,177,209
Inventory capitalization for
tax purposes (42,793) -
Property and equipment and
depreciation 1,742,367 1,456,302
Other - -
------------ ------------
77,253,135 77,858,898
Valuation allowance (76,468,787) (77,101,373)
------------ ------------
Net deferred tax assets 784,348 757,525
------------ ------------
Deferred tax liabilities:
Capitalized software
Development costs (784,348) (757,525)
------------ ------------
Gross deferred tax liabilities (784,348) (757,525)
------------ ------------
Net deferred tax liabilities $ - $ -
============ ============
| June 30, | ||||||||
| 2013 | 2012 | |||||||
| Deferred tax assets: | ||||||||
| Allowance for doubtful accounts | $ | 6,139,291 | $ | 4,656,468 | ||||
| Non-deductible accruals | 264,062 | 221,897 | ||||||
| Net operating carryforwards | 58,052,831 | 61,772,391 | ||||||
| Tax credits | 5,873,204 | 5,769,943 | ||||||
| Property and equipment and depreciation | 1,070,291 | 1,990,284 | ||||||
| Inventory | 84,136 | — | ||||||
| 71,483,815 | 74,410,983 | |||||||
| Valuation allowance | (68,548,065 | ) | (73,754,414 | ) | ||||
| Total deferred tax assets | 2,935,750 | 656,569 | ||||||
| Deferred tax liabilities: Inventory | — | (51,109 | ) | |||||
| Capitalized software development costs | (461,858 | ) | (605,460 | ) | ||||
| Total deferred tax liabilities | (461,858 | ) | (656,566 | ) | ||||
| Net deferred tax asset | $ | 2,473,892 | $ | — | ||||
The net change in the valuation allowance for deferred tax assets decreased by approximately $632,000$5,206,000 during the year ended June 30, 20112013 and increaseddecreased by approximately $1,309,000$2,714,000 during the year ended June 30, 2010.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
2012.
NOTE 1612 - OTHER CURRENT LIABILITIES
Included in other current liabilities are the following:
June 30,
------------ ------------
2011 2010
------------ ------------
Accrued salaries, commissions and
payroll taxes $ 839,531 $ 637,856
Accrued interest 156,571 122,108
Litigation accruals 193,349 193,349
Sales tax payable 2,731,751 2,597,352
Legal and other professional fees 693,590 736,622
Accounting fees 435,000 474,590
Insurance premiums 21,633 45,989
Interest and penalty - Sales tax 1,922,804 1,687,040
Penalty - 401k plan 250,000 250,000
Purchase scanners 105,000 390,000
Rent 461,413 356,247
Other 425,463 573,916
------------ ------------
$ 8,236,105 $ 8,065,069
============ ============
NOTE 17 - ACQUISITION OF FAIR HAVEN SERVICES
On October 1, 2010, the Company purchased 100% of the stock of Fair Haven
Services, an entity wholly owned by Raymond V. Damadian for $10. The entity is
in the business of leasing medical equipment to various unrelated PCs. The
transaction was accounted for as a merger of commonly-controlled entities. The
carrying value of the assets and liabilities at the acquisition date
approximated the fair value. The carrying value of the assets acquired and
liabilities assumed consisted of the following:
Accounts Receivable $ 182,000
Equipment 2,288,703
Short term portion of debt (1,733,955)
Other accrued expenses (13,955)
Long term debt less
current portion (693,829)
-----------
Net Capital Contributed $ 28,964
===========
FONAR CORPORATION AND SUBSIDIARIES
| June 30, | ||||||||
| 2013 | 2012 | |||||||
| Accrued salaries, commissions and payroll taxes | $ | 710,897 | $ | 569,966 | ||||
| Accrued interest | 117,480 | 190,712 | ||||||
| Litigation accruals | 809,349 | 493,349 | ||||||
| Sales tax payable | 2,858,652 | 2,764,297 | ||||||
| Legal and other professional fees | 569,049 | 577,435 | ||||||
| Accounting fees | 305,000 | 345,000 | ||||||
| Insurance premiums | 13,443 | 12,634 | ||||||
| Interest and penalty – sales tax | 2,321,858 | 2,115,539 | ||||||
| Penalty – 401k plan | 250,000 | 250,000 | ||||||
| Rent | 147,665 | 207,823 | ||||||
| Other | 390,968 | 166,486 | ||||||
| $ | 8,494,361 | $ | 7,693,241 | |||||
| 82 |
| FONAR CORPORATION AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
2013 and 2012
NOTE 1813 - COMMITMENTS AND CONTINGENCIES
Leases
------
The Company rents its operating facilities and certain equipment, pursuant to operating lease agreements expiring at various dates through March 2016.December 2022. The leases for certain facilities contain escalation clauses relating to increases in real property taxes as well as certain maintenance costs.
Future minimum operating lease commitments consisted of the following at June 30, 2011:
Facilities
And
Equipment
Year Ending (Operating
June 30, Lease)
----------- -----------
2012 $ 2,309,886
2013 2,345,707
2014 1,747,615
2015 1,544,006
2016 1,005,028
-----------
Total minimum obligations $ 8,952,242
===========
2013:
| Year Ending June 30, | Facilities And Equipment (Operating Lease) | |||||
| 2014 | $ | 4,211,719 | ||||
| 2015 | 3,586,189 | |||||
| 2016 | 2,874,483 | |||||
| 2017 | 1,208,342 | |||||
| 2018 | 835,680 | |||||
| Thereafter | 1,245,804 | |||||
| Total minimum obligations | $ | 13,962,217 |
Rent expense for operating leases approximated $2,436,000$4,035,000, including a payment of approximately $690,000 to terminate a lease early and $2,162,000$2,253,000 for the years ended June 30, 20112013 and 2010,2012, respectively.
License Agreements
------------------
In July 2000, the Company entered into a non-exclusive sales representative
agreement with an unrelated third party. The agreement requires the third party
to sell at least two Fonar MRI scanners or if it does not, pay an amount equal
to the Company's gross margin on the unsold MRI scanners. The Company received
the last gross margin payment of $585,493 in July 2009, which has been included
in revenue for the year ended June 30, 2010. As of April 2009, this agreement
has expired.
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
NOTE 18 - COMMITMENTS AND CONTINGENCIES (Continued)
Employee Benefit Plans
----------------------
The Company has a non-contributory 401(k) Plan (the "401(k) Plan"“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, 20112013 and 2010.2012. (see Other Matters below)
The stockholders of the Company approved the 2000 Employee Stock Purchase Plan ("ESPP"(“ESPP”) at the Company'sCompany’s annual stockholders'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, 2011.
2013.
| 83 |
| FONAR CORPORATION AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013 and 2012
NOTE 13 - COMMITMENTS AND CONTINGENCIES (Continued)
Stipulation Agreements
The Company has entered into stipulation agreements with a number of its creditors that in the aggregate total $795,766, which is included in other current liabilities and other liabilities on the Company’s balance sheet as of June 30, 2013. The monthly payments total $27,152.
The amounts to be paid over the next five years are as follows:
| Year Ending June 30, | ||||||
| 2014 | $ | 419,766 | ||||
| 2015 | 96,000 | |||||
| 2016 | 96,000 | |||||
| 2017 | 96,000 | |||||
| 2018 | 88,000 | |||||
| $ | 795,766 |
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.
On or about June 30, 2010, one of the Company'sFonar’s customers, Golden Triangle Company, commenced an action against Fonar and certain individual defendants employed or formerly employed by Fonar, in the United States District Court for the Eastern District of New York based on the alleged wrongful failure of Fonar to deliver a scanner in Kuwait. The claim allegesalleged various causes of action including breach of contract, fraud, conspiracy to defraud and conversion.Golden Triangle Company v. Fonar Corporation et al, CV10-2933. The plaintiff seeks reliefPlaintiff contracted with Fonar to purchase a scanner, and paid $1,455,500 in the amount ofadvance. The scanner was never delivered, but Plaintiff never designed a site for delivery either. Alleging other damages, fraud and deceptive trade practices, Plaintiff sought up to $5,000,000. The Company believes that
the plaintiff's claims are without merit andFonar made a motion to dismiss the complaint, as tothe outcome of which left Plaintiff with only a cause of action for breach of contract. The claims against the individual defendantsofficers and mostemployees of Fonar were dismissed. Fonar filed its answer, together with a counterclaim alleging that the Plaintiff, by attempting to overcharge the end-customer, had damaged Fonar’s reputation and ability to sell in Kuwait. The case was settled in June 2013 for $480,000 in cash and 30,000 shares of Fonar’s common stock payable in installments. The Company recorded a gain of $755,500 on the statements of income for the year ended June 30, 2013.
| 84 |
| FONAR CORPORATION AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013 and 2012
NOTE 13 - COMMITMENTS AND CONTINGENCIES (Continued)
Litigation(Continued)
Jack Shapiro v. Fonar Corporation, Supreme Court of the causesState of action.New York, Nassau County, was commenced by plaintiff in July, 2009 to recover $500,000 based on Fonar’s failure to refund a deposit on an MRI scanner and termination of plaintiff’s sales representative agreement. Plaintiff alleged that the deposit on the machine was in part consideration for the sales representative agreement. Fonar’s view was that the sales agreement and sales representative agreement were separate and (1) Fonar was entitled to keep the deposit on the sale when plaintiff failed to proceed with the transaction and (2) properly terminated the sales representative agreement in accordance with its terms. The motioncase has been grantedsettled for $323,000 payable in installments, subject to Fonar obtaining a sale and the Company will serve its answer and a
counterclaim.
In addition,customer paying the Company is a party to additional less significant actions in
whichinstallments of the customers are seeking to obtain a return of their deposits for MRI
scanners due to various contingencies that failed to materialize. Upright MRI of
Chicago, LLC v. Fonar, Circuit Court of Cook County, Illinois ($310,000), purchase price.
Matt Malek Madison v. Fonar U.S.Corporation,United States District Court, Northern District of California, ($300,000)was commenced by plaintiff on August 27, 2007 to recover a down payment for a scanner in the amount of $300,000, with interest. The plaintiff sought costs of suit and attorney’s fees as well. Fonar answered the complaint and sued the plaintiff for breach of contract in the amount of $450,000. Although down payments are usually expressly non-refundable in Fonar’s quotations and agreements, in this case, the quotation contemplated the sale of four scanners, and provided that the deposit would be refundable with interest, if the customer were unable to find suitable locations in the San Francisco Bay area. The issue was whether the customer made a good faith effort to find locations; Fonar’s position was that the customer did not. The case went to trial before a judge; the parties submitted post-trial briefs, and judgment was awarded to the plaintiff. Fonar appealed the trial court’s decision, but on January 31, 2012, the U.S. Court of Appeals for the 9th Circuit affirmed the lower court’s decision awarding the plaintiff the $300,000 deposit with prejudgment interest from July 1, 2006. Fonar sought to have the Court of Appeals reconsider the decision en banc, (by all or a larger number of the judges on the Circuit Court of Appeals), and Jack Shapirobut this was not granted. Although the case has been concluded, the plaintiff has not taken any steps to collect the judgment.
Bonutti Research v. Fonar Corporation, SupremeHealth Management Corporation of America, Health Diagnostics, LLC et al, was commenced on December 2, 2011. Bonutti Research filed a patent infringement action in the U.S. District Court Nassau County,for the Eastern District Court of New York, ($500,000 althoughalleging that Fonar’s Upright® MRI scanners infringe plaintiff’s patent which relates to the actual depositmoving of a patient into the scanner. Fonar believes plaintiff’s claims are without merit and further, that the patent is invalid. The parties are engaged in jurisdictional discovery to determine whether the plaintiff owned the patent claimed to have been infringed at the time of the commencement of the lawsuit. Discovery on the merits has been stayed pending the outcome of the jurisdictional discovery. The parties, are engaged in serious settlement negotiations. No specified amount of damages was $323,000). Inspecified in the Anchorage
Neurological Associates, Inc. v. Fonar case,complaint. The patent has expired and as a stipulation of settlement
agreement was entered into on December 23, 2010 to pay Anchorage their deposit
of $155,000 in monthly payments until March 2014. The Company's down paymentsresult, only past damages are generally non-refundable, but in some instances, where specified conditions
are met, Fonar will refund a down payment. In the Upright MRI of Chicago case,
the down payment was specifically stated to be non- refundable and the case,
although still pending, is close to being settled. In the Madison case, the
Court recently granted summary judgment to Madison for the deposit and
prejudgment interest.
FONAR CORPORATION AND SUBSIDIARIES
at issue.
| 85 |
| FONAR CORPORATION AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
2013 and 2012
NOTE 1813 - COMMITMENTS AND CONTINGENIESCONTINGENCIES (Continued)
Stipulation Agreements
----------------------
Litigation(Continued)
Bolt MRI Technologies v. Fonar Corporation, Health Management Corporation of America & Health Diagnostics, LLC, was commenced on July 22, 2013, when Bolt MRI Technologies filed an action against Fonar Corporation, Health Management Corporation of America and Health Diagnostics, LLC alleging infringement of the same patent which is the subject of the Bonutti case. Bolt alleges that the patent was assigned to Bolt on or about June 8, 2012. The Company has entered into stipulation agreementsparties have been negotiating to settle the case in conjunction with a numberthe settlement of its
creditors that in the aggregate totals $336,700 as of June 30, 2011. The monthly
payments total $38,052.
The amounts to be paid over the next four years are as follows:
Year Ending
June 30,
-----------
2012 $ 234,700
2013 48,000
2014 48,000
2015 6,000
--------
336,700
========
Bonutti case.
Other Matters
-------------
The Company is also delinquent in filing sales tax returns for certain states, for which the Company has transacted business. The Company has recorded tax obligations of $2,376,000$2,648,000 plus interest and penalties of approximately $1,923,000.$2,322,000. The Company is in the process of determining isits regulatory requirements in order to become compliant.
The Company hadhas determined they may not be in compliance with the Department of Labor and Internal Revenue Service regulations concerning the requirements to file Form 5500 to report activity of its 401K Employee Benefit Plan. The filings do not require the Company to pay tax, however they may be subject to penalty for non-compliance. The Company has recorded provisions for any potential penalties totaling $250,000. The amount was the Company'sCompany’s best estimate of potential penalties. Management is unable to determine the outcome of this uncertainty. The Company has engaged outside counsel to handle such matters to determine the necessary requirements to ensure compliance. On August 31, 2011, the Company has submitted with the Internal Revenue Service a request for a compliance statement and a determination letter for our 401K plan.
NOTE 14 - OTHER INCOME
Other income consists of:
| For the Years Ended June 30, | ||||||||||
| 2013 | 2012 | |||||||||
| Loss from investment | $ | (48,777 | ) | $ | — | |||||
| Litigation settlement | 716,250 | 56,194 | ||||||||
| Gain on sale of equipment | 557,473 | — | ||||||||
| Impairment of management agreement | (357,500 | ) | — | |||||||
| Other expense | (141,958 | ) | (11,138 | ) | ||||||
| $ | 725,488 | $ | 45,056 | |||||||
| 86 |
| FONAR CORPORATION AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
2013 and 2012
NOTE 19 - OTHER (EXPENSE) INCOME
Other (expense) income consists of:
For the Years Ended June 30,
----------------------------
2011 2010
---------- -----------
(Loss) income from investment $ (61,466) $ 14,982
Litigation settlement - 33,147
Loss on abandonment of property (64,565) -
Other income (expense) 9,414 (2,455)
---------- -----------
$(116,617) $ 45,674
========== ===========
NOTE 2015 - SUPPLEMENTAL CASH FLOW INFORMATION
During the years ended June 30, 20112013 and 2010,2012, the Company paid $309,003$389,907 and $195,269$168,062 for interest, respectively.
Non-cash investing
During the years ended June 30, 2013 and financing activities related to business combinations:
October 1, 2010 January 1, 2011
Acquisition Acquisition Total
--------------- --------------- --------------
Accounts receivable $ 182,000 - $ 182,000
Property & equipment 2,288,703 303,659 2,592,362
Management agreement - 513,333 513,333
Other assets - 45,784 45,784
Other current liabilities (13,955) - (13,955)
Accounts payable - (47,026) (47,026)
Notes payable (2,427,784) (530,650) (2,958,434)
Paid in capital (28,964) - (28,964)
Non-controlling interests - (491,328) (491,328)
Reclassification of investment
from other assets - (82,957) (82,957)
2012, the Company paid $277,000 and $116,125 for income taxes, respectively.
| Purchase consideration: | |||||
| Assets acquired: | |||||
| Management fee receivable | $ | 6,667,259 | |||
| Medical receivable | 7,389,953 | ||||
| Prepaid expenses and other current assets | 10,262 | ||||
| Property and equipment | 14,912,650 | ||||
| Intangible assets | 9,200,000 | ||||
| Goodwill | 1,767,098 | ||||
| Other assets | 332,949 | ||||
| Total assets acquired | $ | 40,280,171 | |||
| Less liabilities assumed: | |||||
| Other current liabilities | $ | 6,323 | |||
| Long term debt | 273,848 | ||||
| Total liabilities assumed | $ | 280,171 |
NOTE 21 -16 – DUE TO RELATED MEDICAL PRACTICES
In June 2009, an entity owned by the Company'sCompany’s Chairman of the Board, Tallahassee Scanning Services PA, sold its Upright MRI scanning system to the Company for $550,000 in exchange for 35 monthly payments of $18,769 to be made over a three year period, commencing October 18, 2009 including interest at a rate of 10.41% per annum. The Company used this scanning system to fulfill a sales order with an unrelated customer. The unpaid balance of as of June 30, 20112013 and 20102012 was $134,880 and $435,179, respectively.
FONAR CORPORATION AND SUBSIDIARIES
$134,880.
| 87 |
| FONAR CORPORATION AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
2013 and 2012
NOTE 2217 - SEGMENT AND RELATED INFORMATION
The Company provides segment data in accordance with the provisions of ASC topic 280, "Disclosures“Disclosures about Segments of an Enterprise and Related Information"Information”.
The Company operates in two industry segments - manufacturing and the servicing of medical equipment and management of diagnostic imaging services.
centers.
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.market-based. The Company evaluates performance based on income or loss from operations.
Summarized financial information concerning the Company'sCompany’s reportable segments is shown in the following table:
Manufacturing Management
and of
Servicing Diagnostic
of Medical Imaging
Equipment Centers Totals
------------- ------------- -------------
Fiscal 2011:
-----------
Net revenues from external
Customers $ 17,811,636 $ 15,324,759 $ 33,136,395
Intersegment net revenues $ 924,166 $ - $ 924,166
Income from operations $ 1,433,331 $ 2,358,138 $ 3,791,469
Depreciation and amortization $ 806,117 $ 1,266,889 $ 2,073,006
Compensatory element of stock
Issuances $ 139,308 $ 65,178 $ 204,486
Total identifiable assets $ 13,439,701 $ 18,140,973 $ 31,580,674
Capital expenditures $ 202,468 $ 532,562 $ 735,030
Fiscal 2010:
-----------
Net revenues from external
customers $ 20,726,727 $ 11,088,828 $ 31,815,555
Intersegment net revenues $ 930,000 $ - $ 930,000
Income (loss) from operations $ (1,121,696) $ (1,459,034) $( 2,580,730)
Depreciation and amortization $ 915,344 $ 529,721 $ 1,445,065
Compensatory element of stock
issuances $ 99,270 $ - $ 99,270
Total identifiable assets $ 14,695,150 $ 6,933,695 $ 21,628,845
Capital expenditures $ 401,310 $ 22,524 $ 423,834
FONAR CORPORATION AND SUBS IDIARIES
| Manufacturing and Servicing of Medical Equipment | Management of Diagnostic Imaging Centers | Totals | ||||||||||
| Fiscal 2013: | ||||||||||||
| Net revenues from external customers | $ | 14,891,075 | $ | 34,250,739 | $ | 49,141,814 | ||||||
| Intersegment net revenues | $ | 1,200,000 | $ | — | $ | 1,200,000 | ||||||
| Income from operations | $ | 139,390 | $ | 7,396,357 | $ | 7,535,747 | ||||||
| Depreciation and amortization | $ | 541,551 | $ | 1,879,626 | $ | 2,421,177 | ||||||
| Compensatory element of stock issuances | $ | 415,021 | $ | — | $ | 415,021 | ||||||
| Total identifiable assets | $ | 15,071,225 | $ | 58,079,425 | $ | 73,150,650 | ||||||
| Capital expenditures | $ | 237,636 | $ | 25,170,303 | $ | 25,407,939 | ||||||
| Fiscal 2012: | ||||||||||||
| Net revenues from external customers | $ | 18,707,006 | $ | 20,737,413 | $ | 39,444,419 | ||||||
| Intersegment net revenues | $ | 810,000 | $ | — | $ | 810,000 | ||||||
| Income from operations | $ | 2,666,574 | $ | 4,539,977 | $ | 7,206,551 | ||||||
| Depreciation and amortization | $ | 697,100 | $ | 1,533,150 | $ | 2,230,250 | ||||||
| Compensatory element of stock issuances | $ | 155,068 | $ | 25,350 | $ | 180,418 | ||||||
| Total identifiable assets | $ | 15,144,291 | $ | 18,471,177 | $ | 33,615,468 | ||||||
| Capital expenditures | $ | 404,530 | $ | 822,842 | $ | 1,227,372 | ||||||
| 88 |
| FONAR CORPORATION AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIA LFINANCIAL STATEMENTS
JUNE 30, 2011
2013 and 2012
NOTE 2217 - SEGMENT AND RELATED INFORMATION (Continued)
Export Product Sales
--------------------
The Company'sCompany’s areas of operations are principally in the United States. The Company had export sales of medical equipment amounting to 28.0%3.8% and 32.4%17.0% of product sales revenues to third parties for the years ended June 30, 20112013 and 2010,2012, 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,
----------------------------
2011 2010
------ ------
Kuwait - % (0.5)%
Holland - 8.3
Germany 19.5 (0.4)
Greece 5.8 8.3
Canada - (0.1)
Australia .7 -
Puerto Rico .9 .4
Libya 1.1 16.4
------ ------
28.0% 32.4%
====== ======
| For the Years Ended June 30, | ||||||||||
| 2013 | 2012 | |||||||||
| Holland | 0.0 | % | 0.1 | % | ||||||
| England | 3.6 | 16.9 | ||||||||
| Germany | 0.1 | — | ||||||||
| Libya | 0.1 | — | ||||||||
| 3.80 | % | 17.0 | % | |||||||
Foreign Service and Repair Fees
-------------------------------
The Company'sCompany’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%8.2% and 7.8%9.9% of consolidated net service and repair fees for the years ended June 30, 20112013 and 2010,2012, 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,
-----------------------------
2011 2010
------ ------
Spain 1.1% 1.0 1.6%
Puerto Rico 0.5 0.3 1.1
Switzerland 1.7 (0.1)
Germany 1.3 0.4
England 0.9 2.0
Holland 0.3 1.3
Scotland 0.4 1.0
Canada 0.3 0.5
Australia ------ -
Libya 7.8% -
====== ------
7.8%
======
| For the Years Ended June 30, | ||||||||||
| 2013 | 2012 | |||||||||
| Spain | 0.9 | % | 0.8 | % | ||||||
| Puerto Rico | 1.0 | 0.9 | ||||||||
| Switzerland | 1.1 | 1.0 | ||||||||
| Germany | — | 0.3 | ||||||||
| England | 2.0 | 1.8 | ||||||||
| Holland | 2.2 | 2.6 | ||||||||
| Scotland | — | 0.7 | ||||||||
| Canada | — | 0.8 | ||||||||
| Australia | 1.0 | 0.4 | ||||||||
| Libya | — | 0.2 | ||||||||
| Greece | — | 0.4 | ||||||||
| 8.2 | % | 9.9 | % | |||||||
The Company does not have any material assets outside of the United States.
FONAR CORPORATION AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
2013 and 2012
NOTE 23 -18 – ALLOWANCE FOR DOUBTFUL ACCOUNTS
The following represents a summary of allowance for doubtful accounts for the years ended June 30, 20112013 and 2010,2012, respectively:
| Description | Balance June 30, 2012 | Additions | Deductions | Balance June 30, 2013 | |||||||||||||||
| Receivables from equipment sales and service contracts | $ | 1,852,987 | (1 | ) | $ | (92,454 | ) | $ | 1,503,171 | $ | 257,362 | ||||||||
| Management fee receivable | 7,458,345 | (1 | ) | 1,636,975 | — | 9,095,320 | |||||||||||||
| Management fee receivable from related medical practices | 403,047 | — | — | 403,047 | |||||||||||||||
| Medical receivables | — | (1 | ) | 2,584,669 | — | 2,584,669 | |||||||||||||
| Advance and notes to related parties | 239,791 | — | 37,412 | 202,379 | |||||||||||||||
| Notes receivable | 65,000 | — | 65,000 | — | |||||||||||||||
| Description | Balance June 30, 2011 | Additions | Deductions | Balance June 30, 2012 | |||||||||||||||
| Receivables from equipment sales and service contracts | $ | 1,777,794 | (1 | ) | $ | 100,442 | $ | 25,249 | $ | 1,852,987 | |||||||||
| Management fee receivable | 6,508,345 | (1 | ) | 950,000 | — | 7,458,345 | |||||||||||||
| Management fee receivable from related medical practices | 403,047 | — | — | 403,047 | |||||||||||||||
| Advance and notes to related parties | 264,791 | — | 25,000 | 239,791 | |||||||||||||||
| Notes receivable | 65,000 | — | — | 65,000 | |||||||||||||||
(1) Included in provision for bad debts.
NOTE 24 -19 – SUBSEQUENT EVENTS
The Company evaluates events that have occurred after the balance sheet date, but before the consolidated financial statements are issued.
During the period from July 1, 20112013 through September 16, 2011,30, 2013, the Company has issued 52,60015,000 shares of common stock for costs and expenses of $106,976.
On August 1, 2013, the Company opened a new diagnostic center in Nassau County, NY.
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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).9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rule 13(a) -– 15(e)) are controls and other procedures that are designed to ensure that information required to be disclosed by a public company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC'sSEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a public company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company'scompany’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Disclosure controls and procedures include many aspects of internal control over financial reporting.
Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at June 30, 2011.
2013.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting refers to a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer and effected by our Board, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, including those policies and procedures that:
pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of our
assets;
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally
accepted accounting principles, and that our receipts and expenditures are
being made only in accordance with authorizations of our management and
directors; and
provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have
a material effect on our consolidated financial statements.
| · | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; |
| · | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and |
| · | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our consolidated financial statements. |
It should be noted, however, that because of its inherent limitations, internal control over financial reporting cannot provide absolute assurance of the prevention or detection of misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management's
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| FONAR CORPORATION AND SUBSIDIARIES |
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Our management assessed the effectiveness of our internal controls over financial reporting as of June 30, 2011.2013. In making its assessment of the effectiveness of our internal controls over financial reporting, our management used the criteria set forthestablished in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO")(COSO) in Internal Control-Integrated Framework.1992. Based on these criteria, our management has concluded that, as of June 30, 2011,2013, our internal control over financial reporting is effective. This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to SEC rules applicable to smaller reporting companies.
There was no changes in our internal controls or in other factors that could significantly affect these controls, during our fourth quarter ended June 30, 2011,2013, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
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.
During fiscal 2011 and the beginning of fiscal 2012, a
A majority of our board of directors wasis composed of independent directors: Robert J. Janoff, Charles N. O'DataO’Data and Robert Djerejian. On August 21, 2011, Mr. Djerejian died, and the
Company is seeking a replacement independent director.Ronald G. Lehman. The outside directors also serve as the members of the audit committee, which is a standing committee of board of directors having a charter describing its responsibilities. Mr. O'DataO’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.
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The officers and directors of the Company are set forth below:
Raymond V. Damadian, M.D. 75 President, Treasurer,
Chairman of the Board
and a Director
Claudette J.V. Chan 73 Director and Secretary
Robert J. Janoff 84 Director
Charles N. O'Data 75 Director
Robert Djerejian 80 Director
Through 8/21/11
| Raymond V. Damadian, M.D. | 77 | President, Treasurer, Chairman of the Board and a Director |
| Claudette J.V. Chan | 75 | Director and Secretary |
| Robert J. Janoff | 86 | Director |
| Charles N. O'Data | 77 | Director |
| Ronald G. Lehman | 37 | 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 and a Manager of IMPERIAL.
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-IMPERIAL,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. InFrom approximately 1983 to 1989, Mrs. Chan formedwas President of 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.gifts. 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.
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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'snation’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 26 years, three as its Chair. Mr. O'DataO’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. He also serves as
Director of Philanthropic Advisors for McKinley Carter Wealth Management, a
regional wealth management firm in Pennsylvania, Ohio and West Virginia. 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'DataO’Data is a graduate of Geneva College, where he received a B.S. degree in Economics in 1958.
Ronald G. Lehman, has been a Director of Fonar since April, 2012, when he was unanimously appointed by the remaining four Directors to fill the vacancy resulting from the death of former Director Robert DjerejianDjerejian. From October, 2009 to the present, Mr. Lehman has served as Managing Director of Investment Banking with Bruderman Brothers, Inc., a Director for Fonar from June 2002 until his death
on August 21, 2011. Since 1996 he served as a senior consultant for Haines,
Lundberg & Waehler International (HLW International), an architectural,
engineering, planning interior design firm,private New York-based broker-dealer registered with the Securities and Exchange Commission and 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 also consulted for private clientele in design management
in planning, design and construction services. Mr. Djerejian was 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 wasis a member of the American institute of ArchitectsFinancial Industry Regulatory Authority (FINRA) and the NY SocietySecurities Investor Protection Corporation (SIPC). Mr. Lehman directly manages all facets of Architects.the firm’s transaction processes, from deal origination, to sourcing capital, to negotiating deal structures, through documentation and closing. The firm provides buy and sell-side advisory, capital raising, and consulting services to lower middle-market companies. Mr. Djerejian
was a graduateLehman specializes in advising healthcare services companies and has recently completed several recapitalizations in the industry. He also participates in the firm’s merchant banking investments and oversees many of Pratt Institute Schoolthese assignments. From May, 2008 to October, 2009, Mr. Lehman served as Senior Vice President of Architecture,Acquisitions at Health Diagnostics, LLC, where he received hismanaged the company’s acquisition and corporate finance activities. From March, 2000 to May, 2008, Mr. Lehman worked for various Bruderman entities as a buy and sell-side advisor and as a principal in several private equity transactions. From September, 1998 to March, 2000, Mr. Lehman worked at Deutsche Bank Securities, Inc. and last held the position of Associate in their Global Custody Group. Mr. Lehman graduated from Columbia University with a B.A. in Architecture in 1955.
ITEM 11. EXECUTIVE COMPENSATION.
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.
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The Chief Executive Officer'sOfficer’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'sOfficer’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 until August 21, 2011,
Robert Djerejian.
Ronald G. Lehman.
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'employees’ compensation tend to be individualized, based on a combination of the employees'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 20112013 to our Principal Executive Officer, who also serves as our acting Principal Financial Officer. There is set forth in the following Outstanding Equity Awards Table and Director Compensation Table the required information.
I. SUMMARY COMPENSATION TABLE
--------------------------------------------------------------------------------
Name and All All Other Total
Other Principal Salary Bonus Compensation Compensation
Position Year ($) ($) ($) ($)
(a) (b) (c) (d) (i) (j)
--------------------------------------------------------------------------------
Raymond V. 2011 $35,934.29 - - $35,934.29
Damadian, 2010 $57,358.12 - - $57,358.12
PEO/ PFO 2009 $72,285.12 - - $72,285.12
--------------------------------------------------------------------------------
| Name and All Other Principal Position | Year | Salary ($) | Bonus ($) | All Other Compensation | Total Compensation | |||||||||||||||
| (a) | (b) | (c) | (d) | (e) | (f) | |||||||||||||||
| Raymond V. | 2013 | $ | 36,111.30 | — | — | $ | 36,111.30 | |||||||||||||
| Damadian, | 2012 | $ | 35,934.76 | — | — | $ | 35,934.76 | |||||||||||||
| PEO/PFO | 2011 | $ | 35,934.29 | — | — | $ | 35,934.29 |
II. OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
Name Number Option Option
Of Exercise Expiration
Securities Price Date
Underlying ($)
Unexercised
Options
(#)
Exercisable
(a) (b) (c)
---------- ----------- -------- ----------
Raymond V.
Damadian, 0 0 N/A
PEO/PFO
------------------------------------------------
| Name | Number Of Securities Underlying Unexercised Options (#) Exercisable (a) | Option Exercise Price (b) | Option Expiration Date (c) | |||||||
| Raymond V. | (a) | (b) | (c) | |||||||
| Raymond V. Damadian, PEO/PFO | 0 | 0 | N/A | |||||||
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| FONAR CORPORATION AND SUBSIDIARIES |
III. DIRECTOR COMPENSATION
Fees
Earned
or
Paid in
Cash Total
Name ($) ($)
------------------- ---------- ----------
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 $19,999.98
| Name | Fees Earned or Paid in Cash ($) | |||||||
| (a) | (b) | |||||||
| Raymond V. Damadian | 0 | |||||||
| Claudette J.V. Chan | $ | 19,999.98 | ||||||
| Robert J. Janoff | $ | 20,000.24 | ||||||
| Charles N. O’Data | $ | 20,000.24 | ||||||
| Ronald G. Lehman | $ | 19,999.98 | ||||||
EMPLOYEE COMPENSATION PLANS
Equity Compensation Plan Information as of June 30, 2011
(a) (b) (c)
Plan category Number of securities Weighted-average Number of securities
to be issued upon exercise price of remaining available
exercise of outstanding options, for future issuance
outstanding options, warrants and rights under equity
warrants and rights compensation plans
(excluding securities
reflected in column
(a)
Equity 22,537 $ 30.27 130,943
compensation
plans
approved by
security
holders
Equity - - -
compensation
plans not
approved by
security
holders
Total 22,537 $ 30.27 130,943
Fonar's 1997 Nonstatutory Stock Option Plan, adopted on May 9, 1997, terminated
on May 8, 2007. Of the options granted under this plan, 8,272 remain
outstanding.
Fonar's2013
| (a) | (b) | (c) | ||||||||||
| Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) | |||||||||
| Equity compensation plans approved by security holders | 6,610 | $ | 29.00 | 191,690 | ||||||||
| Equity compensation plans not approved by security holders | — | N/A | — | |||||||||
| Total | 6,610 | $ | 29.00 | 191,690 | ||||||||
Fonar’s 2002 Incentive Stock Option Plan, adopted on July 1, 2002, iswas 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 permitspermitted 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 iswas 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
terminateterminated on June 30, 2012. As of June 30, 2011, 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, 14,2656,610 remain outstanding.
Fonar's
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| FONAR CORPORATION AND SUBSIDIARIES |
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, 2011,2013, 80,000 shares of common stock of Fonar were available for future grant under this plan.
Fonar adopted its 2010 Stock Bonus Plan, on June 28, 2010. This Plan permits Fonar to issue an aggregate of 2,000,000 shares of common stock of Fonar as bonus or compensation. As of June 30, 2011, 1,349,2792013, 1,005,075 shares were available for issuance.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
MANAGEMENT
The following table sets forth the number and percentage of shares of Fonar'sFonar’s securities held by each director, by each person known by us to own in excess of five percent of Fonar'sFonar’s voting securities and by all officers and directors as a group as of September 8, 2011.
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 2.12%
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 3,000 *
Class A Preferred 79 *
Charles N. O'Data
Director
Common Stock 28 *
Robert Djerejian
Director until August 21, 2011
Common Stock 0 *
All Officers and Directors
as a Group (5 persons)
Common Stock 123,406 2.17%
Class C Stock 382,447 99.98%
Class A Preferred 19,204 6.13%
___________________________
* Less than one percent
5, 2013.
| Name and Address of Beneficial Owner (1) | Shares Beneficially Owned | Percent of Class | ||
| Raymond V. Damadian, M.D. | ||||
| c/o Fonar Corporation Melville, New York Director, President, Treasurer CEO, 5% + Stockholder | ||||
| Common Stock | 116,302 | 1.94% | ||
| 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 | 3,000 | * | ||
| Class A Preferred | 79 | * | ||
| Charles N. O'Data | ||||
| Director | ||||
| Common Stock | 528 | * | ||
| Ronald G. Lehman | ||||
| Director | ||||
| Common Stock | 0 | * | ||
| All Officers and Directors as a Group (5 persons) | ||||
| Common Stock | 119,936 | 2.00% | ||
| Class C Stock | 382,447 | 99.98% | ||
| Class A Preferred | 19,204 | 6.13% | ||
| * Less than one percent |
1. Address provided for each beneficial owner owning more than Fivefive percent of the voting securities of Fonar.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
TRANSACTIONS
Background.
Between 1990 and 1996, Raymond V. Damadian, M.D. MRI Scanning Centers Management Company, also referred to as "RVDC"“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'sFonar’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'sFonar’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-IMPERIAL
Effective July 1, 1997, new
OTHER AGREEMENTS.
Pursuant to HMCA’s management agreements were entered into bywith the Centers, and HMCA-IMPERIAL. 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-IMPERIAL.
PursuantHMCA provides to the management agreements, HMCA-IMPERIAL is providingCenters comprehensive management and administrative services, and office facilities, including billing and collection of accounts, payroll and accounts payable processing, office facilities, supplies and utilities to the Centers.utilities. Under the management agreements, HMCA-IMPERIALHMCA provides service through Fonar for the scanners at the Centers.Centers through Fonar. In total, 10as of September 30, 2013, 25 MRI Centers havehad management agreements with HMCA-IMPERIAL.
At the end of fiscal 2007, Dr. Damadian sold all of his stock in the MRI Centers
located in New York State. The new owner is one of the radiologists who has been
reading and interpreting scans performed at those facilities, Dr. Robert A.
Diamond. In connection with the sale, HMCA-IMPERIAL entered into new management
agreements with the MRI Centers under which HMCA-IMPERIAL performs essentially
the same services for the MRI Centers as prior to the sale. HMCA.
The fees charged however,to the Centers under the management agreements are flat fees charged on a monthly basis. These fees ranged from $35,000 to $241,266 per month in fiscal 2013.
Dr. Damadian remainsowns three of the owner of three MRI Centers in Florida. The MRI Centers owned by Dr. Damadian in Florida pay flat rate monthly fees ranging from $137,444$194,050 to $206,686$241,266 to HMCA-IMPERIALHMCA per month. These fees are renegotiable on an annual basis.
During the fiscal years ended June 30, 20112013 and June 30, 20102012 the net revenues received by HMCA-IMPERIALHMCA from the MRI Centers owned by Dr. Damadian were approximately $5.2$7.9 million and $3.8$6.7 million respectively.
During April 2009, Fair Haven Services, Inc. lent HMCA-IMPERIAL $258,000. The
loan bears interest at a rate of 10% per annum and is payable in 36 installments
with the final payment due April 30, 2012. Dr Damadian is the President of Fair
Haven Services, Inc.
In June 2009, Tallahassee Scanning Services, P.A. an entity owned by Dr
Damadian, sold its Upright MRI scanning system to HMCA-IMPERIAL for $550,000
payable in 35 monthly installments beginning on October 18, 2009 with interest
at the rate of 10.41% per annum.
On October 1, 2010, HMCA-IMPERIALHMCA purchased 100% of the stock of Fair Haven Services, Inc., an entity wholly owned by Dr. Damadian, for $10. Fair Haven is in the business of leasing medical equipment to various unrelated PCs.
equipment.
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On May 2, 2011, Dr. Damadian participated in the private placement of equity in Imperial by investing $100,000 in Imperial'sImperial’s Class A membership interests. On March 5, 2013, Dr. Damadian invested $100,000 to acquire a membership interest in HDM.
Timothy Damadian, the son of Dr. Damadian and a Manager of HDM, is one of the owners of Tritech Healthcare Management, which performs billing and collection services with respect to No-Fault and Workers’ Compensation claims of HMCA’s clients. The monthly fee charged to HMCA is $85,000.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
SERVICES
Audit Fees
The aggregate fees billed by Marcum LLP for the audit of our annual consolidated financial statements for the fiscal year ended June 30, 20112013 and the reviews of the financial statements included in our Forms 10-Q for the fiscal year ended June 30, 20112013 were $417,480.
$423,564.
The aggregate fees billed by Marcum LLP for the audit of our annual financial statements for the fiscal year ended June 30, 20102012 and the reviews of the financial statements included in our Forms 10-Q for the fiscal year ended June 30, 20102012 were $465,006.
$404,866.
Audit Related Fees
No fees were billed by Marcum LLP for the fiscal years ended June 30, 20112013 or June 30, 20102012 for services related to the auditAudit or review of our financial statements that are not included under the caption "Audit Fees"“Audit Fees”.
No fees were billed by Marcum LLP for the fiscal years ended June 30, 20112013 or June 30, 20102012 for designing, operating, supervising or implementing any of our financial information systems or any hardware or software systems for our financial information.
Tax Fees
The aggregate fees billed by Marcum LLP for tax compliance, tax advice and tax planning in the fiscal year ended June 30, 20112013 were $82,438.
$104,301.
The aggregate fees billed by Marcum LLP for tax compliance, tax advice and tax planning in the fiscal year ended June 30, 20102012 were $116,439.
$122,675.
All Other Fees
The aggregate fees billed by Marcum LLP for all other services rendered by them during the fiscal years ended June 30, 20112013 and June 30, 20102012 were $63,138$95,929 and $59,294,$7,597, respectively, which included services in connection with the registration of securities, employee benefit plan audits and reviews and procedures that we requested Marcum LLP to undertake to provide assurances on matters not required by laws or regulations.
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Since January 1, 2003, the audit committee has adopted policies and procedures for pre-approving all non-audit work performed by the auditors. Specifically, the committee must pre-approve the use of the auditors for all such services. The audit committee has pre-approved all non-audit work since that time and in making its determination has considered whether the provision of such services was compatible with the independence of the auditors.
Our audit committee believes that the provision by Marcum LLP of services in addition to audit services in fiscal 20112013 and 20102012 were compatible with maintaining their independence.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
8-K
a) FINANCIAL STATEMENTS AND SCHEDULES
The following consolidated financial statements are included in Part II, Item 8.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as at June 30, 2011 and 2010.
Consolidated Statements of Operations/Income for the Years Ended June 30,
2011 and 2010.
Consolidated Statements of Stockholders' Equity(Deficiency)and
Comprehensive Income(Loss)for the Years Ended June 30, 2011 and 2010.
Consolidated Statements of Cash Flows for the Years Ended June 30, 2011 and
2010.
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.
| · | Report of Independent Registered Public Accounting Firm |
| · | Consolidated Balance Sheets as at June 30, 2013 and 2012. |
| · | Consolidated Statements of Income for the Years Ended June 30, 2013 and 2012. |
| · | Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 2013 and 2012. |
| · | Consolidated Statements of Cash Flows for the Years Ended June 30, 2013 and 2012. |
| · | Notes to Consolidated Financial Statements. |
| · | Information required by schedules called for under Regulation S-X is either not applicable or is included in the consolidated financial statements or notes to the financial statements. |
b) REPORTS ON FORM 8-K
Registrant's Report on Form 8-K containing the Company's Earnings Report
for the first nine months of Fiscal 2011. May 10, 2011, Commission File No.
0-10248.
| · | Registrant’s Report on Form 8-K containing the |
| · | Company’s Earnings Report for the first nine months of Fiscal 2013. May 15, 2013. Commission File No. 0-10248. |
| · | Registrant’s Report on Form 8-K/A containing financial information concerning the purchase by Health Diagnostics Management, LLC of certain assets and subsidiaries from Health Diagnostics, LLC et al. May 20, 2013. Commission File No. 0-10248 |
| · | Registrant’s Report on Form 8-K reporting the results of the election of directors and selection of auditors at the annual meeting of stockholders. June 26, 2013. Commission File No. 0-10248. |
c) EXHIBITS
3.1 Certificate of Incorporation, as amended, of the Registrant incorporated by reference to Exhibit 3.1 to the Registrant's registration statement on Form S-1,Commission File No. 33-13365.
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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'sRegistrant’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'sRegistrant’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'sRegistrant’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'sRegistrant’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'sRegistrant’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'sRegistrant’s registration statement on Form S- 3,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'sRegistrant’s registration statement on Form S-3, Commission File No. 333- 116908.
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.
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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.
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.
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.
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.
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.
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.
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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.
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,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'sRegistrant’s registration Statement on Form S-8, Commission File No.: 333-
66760.
333-66760.
10.22 2002 Stock Bonus Plan incorporated by reference to Exhibit 99.1 to the Registrant'sRegistrant’s registration statement on Form S-8, Commission File No.: 333-
89578.
333-89578.
10.23 2002 Incentive Stock Option Plan incorporated by reference to Exhibit 99.1 to the Registrant'sRegistrant’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'sRegistrant’s registration statement on Form S-8, Commission File No: 333-
106626.
333-106626.
10.25 2003 Supplemental Stock Bonus Plan incorporated by reference to Exhibit 99.1 to the Registrant'sRegistrant’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'sRegistrant’s registration statement on Form S-8, Commission File No. 333-
112577.
333-112577.
10.27 2005 Stock Bonus Plan incorporated by reference to Exhibit 99.1 to the Registrant'sRegistrant’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'sRegistrant’s registration statement on Form S- 8,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'sRegistrant’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'sRegistrant’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'sRegistrant’s registration statement on Form S-3, Commission File No. 333-116908.
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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'sRegistrant’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'sRegistrant’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, pDynamic Healthcare Management, Inc. and Fonar Corporation, incorporated by reference to Exhibit 2 to the Registrant'sRegistrant’s Form 8-K, August 2, 2005, Commission File No. 0-
10248.
10.35 Partnership Interest Purchase Agreement dated September 29, 2008 by
and between Diagnostic Management, LLC and Raymond V. Damadian, M.D. MR Scanning
Centers Management Company, incorporated by reference to Exhibit 10.35 to Form
10-K for the fiscal year ended June 30, 2008. Commission File No. 0- 10248.
0-10248.
| 10.35 | Partnership Interest Purchase Agreement dated September 29, 2008 by and between Diagnostic Management, LLC and Raymond V. Damadian, M.D. MR Scanning Centers Management Company, incorporated by reference to Exhibit 10.35 to Form 10-K for the fiscal year ended June 30, 2008. Commission File No. 0-10248. |
10.36 2010 Stock Bonus Plan, incorporated by reference to Exhibit 99.1 to the Registrant'sRegistrant’s registration statement on Form S-8, Commission File No. 333-
168771.
333-168771.
10.37 Operating Agreement for Imperial Management Services, LLC, incorporated by reference to Exhibit 10.37 to Form 10-K for the fiscal year ended June 30, 2011. Commission File No. 0-10248.
10.38 Operating Agreement for Health Diagnostics Management, LLC. See Exhibits.
10.39 Modification to Operating Agreement for Health Diagnostics Management, LLC. See Exhibits.
10.40 Purchase Agreement dated March 5, 2013 among Health Diagnostics Management, LLC, Health Diagnostics, LLC and others. Incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K filed March 11, 2013. Commission File No. 0-10248.
14.1 Code of Ethics, incorporated by reference to Exhibit 14.1 of registrant'sRegistrant’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'sFirm’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.
| 31.1 | Section 302 Certification. See Exhibits. |
| 32.1 | Section 906 Certification. See Exhibits. |
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Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this amended report to be signed on its behalf by the undersigned, thereunto duly authorized.
FONAR CORPORATION
Dated: September 30, 2011
October 15, 2013
By:/s/Raymond V. Damadian
Raymond V. Damadian, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
amended report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/Raymond V. Damadian Chairman of the September 30, 2011
Raymond V. Damadian Board of Directors,
President, Director
Principal Executive
Officer and Acting
Principal Financial
Officer)
/s/Claudette J.V. Chan Secretary September 30, 2011
Claudette J.V. Chan Director
/s/ Robert J. Janoff Director September 30, 2011
Robert J. Janoff
/s/ Charles N. O'Data Director September 30, 2011
Charles N. O'Data
| Signature | Title | Date | ||
| /s/Raymond V. Damadian Raymond V. Damadian | Chairman of the Board of Directors, President, Director, Principal Executive Officer and Acting Principal Financial Officer) | October 15, 2013 | ||
| /s/Claudette J.V. Chan | Director | October 15, 2013 | ||
| Claudette J.V. Chan | ||||
| /s/ Robert J. Janoff | Director | October 15, 2013 | ||
| Robert J. Janoff | ||||
| /s/ Charles N. O'Data | Director | October 15, 2013 | ||
| Charles N. O'Data | ||||
| /s/Ronald G. Lehman | Director | October 15, 2013 | ||
| Ronald G. Lehman |
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CORPORATE INFORMATION
Corporate Headquarters
110 Marcus Drive
Melville, NY 11747
(631) 694-2929
Investor Relations
FONAR Corporation
110 Marcus Drive
Melville, NY 11747
(631) 694-2929
Stock Transfer Agency
Computershare Trust Company, Inc.
144 Fernwood Avenue
Edison, New Jersey 08837
Auditors
Marcum LLP
New York, New York
Board of Directors
Raymond V. Damadian, M.D.
Chairman of the Board
Claudette Chan, Director
Robert Janoff, Director
Charles O'Data, Director
Ronald G. Lehman, Director
Officers
Raymond V. Damadian, M.D.
President, Chief Executive Officer and Treasurer
Claudette J.V. Chan
Secretary