SCHEDULE 14A INFORMATION
Proxy Statement
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Additional Materials
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Material Pursuant to §240.14a-12
Fonar Corporation
………………………………………………………………………………………………
(Name of Registrant
as Specified In Its Charter)
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Filing Proxy Statement if other than the Registrant)
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FONAR CORPORATION
110 Marcus Drive
Melville, New York 11747
(631) 694-2929
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
Monday, June 23, 2014
To 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 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’s auditors for the fiscal year
ending June 30, 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 28, 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/ Claudette J.V. Chan
Claudette J.V. Chan, Secretary
PROXY STATEMENT
FOR ANNUAL MEETING OF
STOCKHOLDERS TO BE HELD MONDAY, JUNE 23, 2014
This proxy statement, which is first being made
available to shareholders on or about May 9, 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 June 23, 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 proxies will be borne by the Company.
The stockholders will have several options as
to how to view the materials and vote their shares.
The 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 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
.
Stockholders may request a copy of the Proxy
Materials:
1. By internet – visit
www.proxy.com
2. By telephone – 1-800-579-1639
3. By e-mail –
sendmaterial@proxyvote.com
Only stockholders of record at the close of
business on April 28, 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 April 28, 2014, there were issued and outstanding 6,025,075 shares of Common Stock
held of record by approximately 1,825 stockholders, 146 shares of Class B Common Stock held of record by 11 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 approximately 1,807 stockholders at the close of business on April 28, 2014, are not entitled to vote. Except
for the shares of Class A non-voting Preferred Stock, there are no shares of Preferred Stock issued and outstanding.
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’S PROPOSALS. All
of management’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 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 the Company’s wholly-owned subsidiary, Health Management
Corporation of America (“HMCA”)
Claudette J.V. Chan (age 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 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 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. He founded The Beaver County Foundation, a Community Foundation, in 1992, and serves as its
President. Mr. O’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.
Ronald G.
Lehman (age 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
Regulatory Authority (FINRA) and the Securities Investor Protection Corporation (SIPC). Mr. Lehman directly manages all facets
of 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. Lehman 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 these assignments.
From May, 2008 to October, 2009, Mr. Lehman served as Senior Vice President of Acquisitions at Health Diagnostics, LLC, where
he managed 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 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, 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, 2013 the Board
of Directors unanimously consented to take action in lieu of a meeting on four 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, attends
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, in his capacity as Chairman of the
Audit Committee, effectively functions as such. The Company believes that the Company’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
a company’s board and necessitates a diversity of views and experiences. The combined Chairman/Chief Executive Officer 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,
is the Chairman of the Audit Committee. As such he plays a leading role in the engagement of auditors and the review of the Company’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’s
current needs, including:
Efficient communication between management and
the Board;
Clarity for the Company’s stockholders
on corporate leadership and accountability;
The Chairman of the Board possessing the best
knowledge of the Company’s strategy, operations and financial conditions; and
Continuity in the Company’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. 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’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’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’s membership
requirements and responsibilities. The audit committee oversees the Company’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 the Company’s independent public accountants. It also maintains direct responsibility
for the compensation, termination and oversight of the Company’s independent public accountants and evaluates the independent
public accountants’ qualifications, performance and independence.
Financial Expert on Audit Committee: The Board
has determined that Mr. Charles N. 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’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’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’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’s
Annual Report on Form 10-K for the fiscal year ended June 30, 2013.
The members of the audit committee are Messrs.
Charles N. O’Data, Robert J. Janoff and Ronald G. Lehman. Messrs. O’Data, Janoff and Lehman are independent directors,
as defined in the Securities and Exchange Commission Regulations and Nasdaq Market Place Rules.
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 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% + Stockholder
|
|
|
|
|
|
|
|
|
Common 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% + Stockholder
|
|
|
|
|
|
|
|
|
Common 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 Secretary
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
106
|
|
|
|
*
|
|
Class A Preferred
|
|
|
32
|
|
|
|
*
|
|
Robert J. Janoff Nominee for Director and Director
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
2,000
|
|
|
|
*
|
|
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
|
|
|
|
*
|
|
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 Relationships and
Related Transactions” of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2013 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 the Company’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’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. Damadian and Claudette J.V. Chan are
executive officers 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 the Company’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 2013 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, 2013 by the Company’s Principal Executive Officer and Principal Financial Officer.
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’s Principal Executive Officer and Principal Financial Officer during fiscal 2013.
Option/SAR Exercises and Year End Values
No options or stock appreciation rights were
exercised by the Company’s Chief Executive Officer during fiscal 2013. The Company’s Chief Executive Officer did not
hold any unexercised stock options or stock appreciation rights at the end of fiscal 2013.
DIRECTOR COMPENSATION
The following table shows the compensation paid
to the Directors for fiscal 2013:
Name
(a)
|
|
Fees earned or paid in cash ($)
(b)
|
|
Stock awards ($)
(c)
|
|
Option awards ($)
(d)
|
|
Non-equity incentive plan compensation ($)
(e)
|
|
Nonqualified deferred compensation earnings
($)
(f)
|
|
All other compensation ($)
(g)
|
|
Total
($)
(h)
|
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
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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, 2014. The stockholders will be asked to ratify this action
by the Board. Marcum LLP were the Company’s auditors for the fiscal years ended June 30, 2011, June 30, 2012 and June 30,
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’s annual financial statements for the fiscal year ended June 30, 2013 and the reviews of the financial
statements included in the Company’s Forms 10-Q for the fiscal year ended June 30, 2013 were $423,564.
The aggregate fees billed by Marcum LLP for
the audit of the Company’s annual financial statements for the fiscal year ended June 30, 2012, and the reviews of the financial
statements included in the Company’s Forms 10-Q for the fiscal year ended June 30, 2012 were $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, 2013 and June 30, 2012 for services related to the audit or review of our financial statements
that are not included under the caption “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, 2013 and June 30,
2012 were $104,301 and $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, 2013 and June 30, 2012 were $95,929 and $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, 2013 or June 30, 2012 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’s audit committee believes
that the provision by Marcum LLP of services in addition to audit services in fiscal 2013 and 2012 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’s annual meeting of stockholders must be received by the Company no later than February 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 9, 2014
A COPY OF THE COMPANY'S FORM 10-K REPORT
FOR FISCAL YEAR 2013 CONTAINING INFORMATION ON OPERATIONS, FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, IS AVAILABLE UPON
REQUEST. PLEASE WRITE
TO:
INVESTOR RELATIONS DEPARTMENT
FONAR CORPORATION
110 MARCUS DRIVE
MELVILLE, NEW YORK 11747
FONAR CORPORATION
Proxy - Annual Meeting of Stockholders for fiscal
year 2014 -
Monday, June 23, 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, 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 23, 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:
No. 1. Election of Directors
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WITHOLD ALL
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FOR ALL EXCEPT
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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 proposals 2, 3 and 4:
No. 2. On an advisory basis, to approve the
executive compensation.
No. 3. To ratify the selection of Marcum LLP
as the Company's independent auditors for the fiscal year ended June 30, 2014.
No. 4. In their discretion, the Proxies are
authorized to vote upon such other business as may properly come before the meeting.
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Signature
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Signature (Joint owners)
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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, please
sign in full corporate name, by an authorized officer. If a partnership, limited liability company or other entity, please sign
in the company’s name by an authorized person, indicating your capacity.
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 journal
Physiological 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 in
Physiol. 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] 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, 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 name of registrant as specified in its
charter)
DELAWARE
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11-2464137
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(State or other jurisdiction of
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(I.R.S. Employer
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Incorporation or organization)
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Identification No.)
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110 Marcus Drive Melville, New York
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11747
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(Address of principal executive offices)
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(Zip Code)
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(631) 694-2929
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(Registrant's telephone number, including area code)
|
____________________________________________________
Securities registered pursuant to Section 12(b)
of the Act:
Common Stock, par value $.0001 per share
Securities registered pursuant to Section 12(g)
of the Act:
None
________________________________________________________________
Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ____ No
__X__
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ____ No
__X__
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes ___X___ No _______
Indicate
by check mark whether the registrant (1) has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ___X____
No ______
Indicate by check mark if disclosure of
delinquent filers, pursuant to Item 405 of Regulation S-K, §229.405 of this Chapter, is not contained, and will not be contained,
to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part
III of this 10-K or any amendment to the Form 10-K. [X]
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of
“large accelerated filer”, “accelerated filer and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one): Large accelerated filer ____ Accelerated filer
____
Non-accelerated filer
____
Smaller
reporting company
X
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ____ No
__X_
The aggregate market value of the shares
of Common Stock held by non-affiliates as of December 31, 2012 based on the closing price of $4.33 per share on such date as reported
on the NASDAQ System, was approximately $25.2 million. The other outstanding classes do not have a readily determinable market
value.
As of September 5, 2013, 5,987,575 shares
of Common Stock, 146 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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FONAR CORPORATION AND SUBSIDIARIES
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PART I
ITEM 1. BUSINESS
GENERAL
Fonar Corporation, sometimes referred to as
the "Company" or "Fonar", is a Delaware corporation which was incorporated on July 17, 1978. Our address is
110 Marcus Drive, Melville, New York 11747 and our telephone number is 631-694-2929. Fonar also maintains a WEB site at www.fonar.com.
Fonar provides copies of its filings with the Securities and Exchange Commission on Forms 10-K, 10-Q and 8-K and amendments to
these reports to stockholders on request.
We conduct our business in two segments. 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 (“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’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 iron frame technology made Fonar
the originator of "open" MRI scanners. We introduced the first "open" MRI in 1980. Since that time we have
concentrated on further application of our “open” MRI, introducing most recently the Upright® Multi-Position™”
MRI scanner (also referred to as the “Upright®” or “Stand-Up®” MRI scanner) and the Fonar 360™
MRI scanner.
The product we are now most vigorously promoting
is our Upright® MRI. Our patented Upright® MRI is unique in the industry in that it allows patients to be scanned in fully
weight-bearing 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®” as an alternative to “Stand-UP®” because of the multiplicity of
positions in which the patient may be scanned where the patient is not standing.
See Note 17 to the Consolidated Financial Statements
for separate financial information regarding our medical equipment and physician and diagnostic management services segments.
FONAR CORPORATION AND SUBSIDIARIES
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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® MRI (also known as the “Stand-Up®
MRI”) and Fonar 360™.
The Upright® MRI permits, for the first
time, MRI diagnoses to be made in the weight-bearing state. The 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® MRI may also be
useful for MRI-guided interventional procedures.
An important application of the Fonar 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 Syndrome include the “drop attack,” where the erect patient unexpectedly
experiences an explosive rush or nervous discharge at the base of the brain which rushes down the body to the extremities, causing
the patient to collapse in a temporary neuromuscular paralysis which then subsides while the patient is lying in a horizontal position.
FONAR CORPORATION AND SUBSIDIARIES
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The Fonar Upright® MRI has demonstrated
its key value on two current patients with Chiari Syndrome showing that the conventional lie-down MRI scanners cannot make an adequate
evaluation where the patient’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.
In February 2011, FONAR sold an UPRIGHT®
MRI to a neuroscience 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 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) and not weight-bearing
systems. The buyers firmly believed that in order for them to be a “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® MRI
to another medical practice dedicated to being a “center of excellence for the spine.” Hoorman M. Melamed, MD, FAOOS,
a board-certified orthopaedic spine surgeon, and a principal at the Bakersfield UPRIGHT MRI Center, said, “Selection of the
FONAR UPRIGHT® Multi-Position™ MRI for our group was a very careful and deliberate decision. We recognize that the UPRIGHT®
MRI offers capabilities beyond that of a recumbent-only MRI. The 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’s pathology
thus enabling us to avoid underestimating a patient’s pathology and therefore obtaining a better diagnosis.”
Another
milestone in the utilization of the FONAR Upright® MRI was the publication in the medical journal "Brain Injury"
(July 2010) of a study of 1,200 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 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 emphasizing sales of the Upright®
MRI which we regard as our most promising scanner product. Nevertheless, because of uncertain economic conditions and the resulting
weakening demand, revenues recognized from the sale of Upright® MRI scanners decreased in fiscal 2013 by 49.2% from fiscal
2012 (approximately $6.3 million in fiscal 2012 compared to approximately $3.2 million in fiscal 2013). The following chart shows
the revenues attributable to our different model scanners for the fiscal years ended June 30, 2012 and June 30, 2013. Note that
we recognize revenue on a percentage of completion basis. Accordingly, revenue is recognized as each sub-assembly of a scanner
is manufactured. Consequently the revenues for a fiscal period do not necessarily relate to orders placed in that period or payments
received.
FONAR CORPORATION AND SUBSIDIARIES
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Model
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Revenues Recognized
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Fiscal 2012
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Fiscal 2013
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Upright®
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$
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6,335,198
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$
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3,217,929
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Fonar 360™
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$
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0
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$
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0
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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 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 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 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 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.
As a result of the Imperial and HDM transactions,
as of September 30, 2013, HMCA through Imperial and HDM, managed a total of 25 MRI scanning centers, 18 of which are located in
New York and 7 of which are located in Florida, and 23 of which have Upright MRI scanners.
FONAR CORPORATION AND SUBSIDIARIES
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MEDICAL EQUIPMENT SEGMENT
PRODUCTS
Fonar’s principal product is the Upright®
MRI.
The Upright® MRI is a whole-body open MRI
system that enables positional MRI (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’s MRI-compatible, three-dimensional,
motorized patient handling system. Patients, lying horizontally, are placed into the magnet in the conventional manner. The system’s
lift and tilt functions then deliver the targeted anatomical region to the center of the magnet. The ceiling and floor are recessed
to accommodate the full vertical travel of the table. True image orientation is assured, regardless of the rotation angle, via
computer read-back of the table’s position. Spines and extremities can be scanned in weight-bearing states; brains can be
scanned with patients either standing or sitting.
This capability of the Fonar Upright® technology
has demonstrated its key value on patients with the Arnold-Chiari 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’s pathology is most visible and
the symptoms most acute when the patient is scanned in the upright weight-bearing position.
The 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® 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.
FONAR CORPORATION AND SUBSIDIARIES
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The 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’s point of view, the magnet’s front-open and top-open design provides an unprecedented
degree of comfort because the scanner allows the patient an unobstructed view of the scanner room from inside the magnet, and there
is nothing in front of one’s face or over one’s head. The only thing in front of the patient’s face during the
scan is a very large (42”) panoramic TV (included with the scanner) mounted on the wall. The bed is tilted back five degrees
to stabilize a standing patient. Special coil fixtures, a patient seat, Velcro straps, and transpolar stabilizing bars are available
to keep the patient comfortable and motionless throughout the scanning process.
Full-range-of-motion studies of the joints in
virtually any direction are possible, an especially promising feature for sports injuries. Full Range of Motion cines, or movies,
of the lumbar spine will be achieved under full body weight.
The Upright® 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™ is an enlarged room sized
magnet in which the floor, ceiling and walls of the scan room are part of the magnet frame. This is made possible by Fonar’s
patented Iron-Frame™ technology which allows our engineers to control, contour and direct the magnet’s lines of flux
in the patient gap where wanted and almost none outside of the steel of the magnet where not wanted. Consequently, this scanner
allows 360 degree access to the patient, and physicians and family members are able to enter the scanner and approach the patient.
The Fonar 360™ is presently marketed as
a diagnostic scanner and is sometimes referred to as the Open Sky™ MRI. In its Open Sky™ capacity, the Fonar 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™ 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™
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™ would permit full-fledged support teams to walk into the magnet and perform MRI guided interventions
on the patient inside the magnet. Most importantly, the exceptional quality of the MRI image and its exceptional capacity to exhibit
tissue detail on the image, by virtue of the nuclear resonance signal’s extraordinary capacity to create image contrast,
can then be obtained very near real time to guide the physician during the MRI guided intervention. Thus MRI compatible instruments,
needles, catheters, endoscopes and the like can be introduced directly into the human body and guided to the malignant lesion or
other pathology by means of the MRI image. Surgically inoperable lesions could be accessed through MRI guided catheters and needles
making it possible to deliver the treatment agent directly to the targeted tissue.
FONAR CORPORATION AND SUBSIDIARIES
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The first Fonar 360™ MRI scanner, installed
at the Oxford-Nuffield Orthopedic Center in Oxford, United Kingdom, is now carrying a full diagnostic imaging caseload. Fonar software
engineers have completed and installed their 2
nd
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™ treatment agents may be administrated directly to the malignant
tissue through small catheters or needles, thereby allowing much larger doses of chemotherapy, x-rays, laser ablation, microwave
and other anti-neoplastic agents to be applied directly and exclusively to the malignant tissue with more effective results. Since
the interventional procedure of introducing a treatment needle or catheter under image guidance will be minimally invasive, the
procedure can be readily repeated should metastases occur elsewhere, with minimum impact on the patient beyond a straightforward
needle injection. The presence of the MRI image during treatment would enable the operator to make assessments during treatment
whether the treatment is being effective.
In addition to the patient comfort and new applications,
such as MRI directed interventions, made possible by our scanners’ open design, the Upright® and Fonar 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’ design over their predecessors also include increased image-processing
speed and diagnostic flexibility.
MRI directed interventions are made possible
by the scanners’ ability to supply images to a monitor positioned next to the patient, enabling the operator to view in process
an interventional procedure from an unlimited number of angles. The openness of Fonar’s scanners would enable a physician
to perform a wide range of interventional procedures inside the magnet.
In the case of breast imaging the access by
a physician permits an image guided biopsy to be performed easily which is essential once suspicious lesions are spotted by any
diagnostic modality. In addition to being far superior to x-ray in detecting breast lesions because of the MRI’s ability
to create the soft tissue contrast needed to see them, where x-ray is deficient in its ability to generate the needed contrast
between cancer and normal tissue, there is not the painful compression of the breast characteristic of X-ray mammography.
The Upright® MRI and Fonar 360™ scanners
share much of the same fundamental technology and offer the same speed, precision and image quality. Fonar’s scanners initiated
the new market segment of high-field open MRI. High-field open MRIs operate at significantly higher magnetic field strengths and,
therefore, produce more of the MRI image-producing signal needed to make high-quality MRI images (measured by signal-to-noise ratios,
S/N).
FONAR CORPORATION AND SUBSIDIARIES
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The Upright® MRI and Fonar 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’s scanners, produces images of higher quality and clarity. Fonar’s 0.6 Tesla open scanner magnets are among
the highest field "open MRI" magnets in the industry.
The Upright® MRI and Fonar 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 the scanners’ design over their lower field predecessors also include increased image-processing
speed and diagnostic flexibility.
Several technological advances have been engineered
into the Upright® MRI and Fonar 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® MRI and Fonar 360™ scanners
operate squarely in the optimum C/N range.
The Upright® MRI and Fonar 360™ provide
various features allowing for versatile diagnostic capability. For example, 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™
(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.
During fiscal 2013, sales of our Upright®
MRI scanners accounted for approximately 6.5% of our total revenues and 21.6% of our medical equipment revenues, as compared to
16.1% of total revenues and 33.9% of medical equipment revenues in fiscal 2012. These results reflect the decrease in our sales
of scanners.
During fiscal 2013 and fiscal 2012, we had no
revenues attributable to sales of our Fonar 360™ scanner.
Our principal selling, marketing and advertising
efforts have been focused on the 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. We expect to continue our focus on the Upright® MRI in the immediate
future. We are optimistic that in the long run the Fonar 360™ and our other products and works in progress will also contribute
to product sales.
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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” instead of being able to “see” the breast cancer itself.
If microcalcifications are not present to provide the missing contrast, then the breast cancer goes undetected. They frequently
are not present. The maximum contrast available by x-ray with which to discriminate disease is 4%. Brain cancers differ from surrounding
healthy brain by only 1.6% while the contrast in the brain by MRI is 25 times greater at 40%. X-ray contrasts among the body’s
soft tissues are maximally 4%. Their contrast by MRI is 32.5 times greater (130%).
The soft tissue contrasts with which to distinguish
cancers on images by MRI are up to 180%. In the case of cancer these contrasts can be even more marked making cancers readily visible
and detectable anywhere in the body. This is because the nuclear resonance signals from the body's tissues differ so dramatically.
Liver cancer and healthy liver signals differ by 180% for example. Thus there is some urgency to bring to market an MRI based breast
scanner that can overcome the x-ray limitation and assure that mammograms do not miss serious lesions. The added benefit of MRI
mammography relative to x-ray mammography is the elimination of the need for the patient to disrobe and the painful compression
of the breast typical of the x-ray mammogram. The patient is scanned in her street clothes in MRI mammography. Moreover MRI mammogram
scans the entire chest wall including the axilla for the presence of nodes which the x-ray mammogram cannot reach.
We view our Upright® 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™ MRI scanner would also be ideal for breast examinations.
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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’s representatives for foreign markets. None of Fonar’s competitors
are entitled to make the Fonar Upright® MRI scanner.
Fonar’s Website includes interactive product
information for reaching customers.
Fonar has targeted orthopedic surgeons and neurosurgeons,
particularly spine surgeons, as important markets for the 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).
Recognition of the importance of Fonar
Upright® MRI continues to grow. Medserena, of Germany, announced in August, 2010 the purchase of its fourth Upright® Multi-Position™
MRI. CEO Matthais Schulz said, “The large number of requests coming from our physicians in Germany are arising because of
the special medical need for FONAR’s unique technology. This is in spite of an intensely active MRI market in Germany, where
there are already many conventional lie-down MRIs installed.” 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’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® MRI. He initially
considered purchasing a 3.0 Tesla lie-down MRI, but decided instead to buy the Fonar Upright® Multi-Position™ MRI when
he became aware of its many unique imaging capabilities.
Fonar’s advertising strategy has been
designed to reach key purchasing decision makers with information concerning our flagship product, the Upright® MRI. This has
led to many inquiries and to some sales of the Upright® MRI scanner and is intended to increase Fonar’s presence in the
medical market. Fonar’s advertising has been directed at four target audiences: neurosurgeons, orthopaedic surgeons, radiologists
and physicians in general.
1) Neurosurgeons and
Orthopaedic Surgeons: These are the surgeons who can most benefit from the superior diagnostic benefits of the Fonar Upright®
MRI with its 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’s are aware of the diagnostic advantages of the Fonar Upright® Multi-Position® MRI. Advertisements directed to
this audience have appeared in the Journal of the American Medical Association.
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This advertising has featured a series of compelling
messages. One advertisement pointed out that the AMA book, Guides to the Evaluation of Permanent Impairment, indicates that diagnosis
must be performed upright in flexion and extension. Another advertisement was educational and headlined, “Discover the power
of Upright Imaging”. Fonar realizes that peer-to-peer communications is the most powerful way to speak to physicians. Consequently,
testimonials from surgeons and radiologists have been used to promote our Upright® MRI scanner. The first such advertisement
featured five surgeons and two radiologists, explaining the Multi-Position® diagnostic benefits of the Fonar Upright® MRI
scanner to them. Another advertisement featured a leading radiologist, telling why he bought 12 Fonar 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®
scanning centers we manage by installing Websites for every location. These websites and advertising give prospective customers
of Upright® MRI scanners a view of operating Upright® MRI centers and the benefits of using an Upright® MRI scanner.
The success of HMCA-managed sites not only increases management fees to HMCA but encourages new sales for Fonar as well.
To meet the demand for high-field open MRI scanners,
Fonar plans to devote its principal efforts to marketing the Upright® MRI. The 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™ MRI scanners. Utilizing a 6000 gauss (0.6 Tesla field
strength) iron core electromagnet, the Upright® MRI and Fonar 360™ scanner magnets are among the highest field "Open
MRI" scanners in the industry.
The 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™ MRI scanner
is the only MRI scanner which allows the patient to stand during the exam. The Fonar 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® 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, 2013, 2.1% of the Company's revenues were generated by foreign sales, as compared
to 6.2% for fiscal 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
$11.0 million in fiscal 2013 and $11.8 million in fiscal 2012. Notwithstanding the decrease in service revenues in fiscal 2013,
we expect service revenues to be essentially stable under present circumstances as customers enter into service 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 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 Upright® Imaging technology.
New medical uses for MRI technology are constantly being discovered and are anticipated for the 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, 2013,
we incurred expenditures of $1,438,560, none of which was capitalized, on research and development, as compared to $1,242,646,
none of which was capitalized, during the fiscal year ended June 30, 2012.
Research and development activities have focused
principally on software improvements to the user interface of the MRI scanner. The Windows-based Sympulse™ platform controls
all of the functions of the UPRIGHT® scanner except those of the versatile, multi-position patient table. Separate, dedicated,
motion-control software is used to maneuver the UPRIGHT® bed, and development of this software is ongoing as well. The same
Sympulse™ platform running identical software underpins the operation of the FONAR 360™ unit.
In January 2013 FONAR completed and shipped
Release 8.1 to the enthusiastic reviews on the part of MRI 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. 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-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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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 and the scanning centers HMCA manages. In addition
to that collaboration, R&D staff have pursued a variety of novel and UPRIGHT® MRI-specific research projects. It is anticipated
that these will ultimately lead to new applications that are made available to existing customers as upgrade add-ons to their machines.
These range from studies of the effects of gravity on the velopharyngial structures in children to studies of the soft tissues
around the ischial tuberosity for the purpose of designing improved wheelchairs for patients who have suffered spinal cord injury.
A receiver coil and scanning protocols designed
for rapid, x-ray free MRI evaluation of patients with scoliosis has been 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
Slice 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®-neutral, Upright®-flexion, 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’s pathology changes from
position to position within the same anatomic slice. This multi-position weight-bearing imaging of the spine enables the patient’s
physician to see all of the patient’s symptom-generating pathology so they can be correctly addressed therapeutically or
surgically (if necessary).
BACKLOG
Our backlog of unfilled orders at September
26, 2013 was approximately $1.5 million, as compared to $7.4 million at September 14, 2012. It is expected that the existing backlog
of orders will be filled within the 2014 fiscal year.
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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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, 2013, 186 patents had been issued to Fonar, and approximately
17 patents were pending. A number of Fonar’s existing patents specifically relate to protecting Fonar’s position in
the high-field iron frame open MRI market. The patents further enhance Dr. Damadian's pioneer patent, the 1974 Patent, that initiated
the MRI industry and provided the original invention of MRI scanning. The terms of the patents in Fonar’s portfolio extend
to various times.
We also have patent cross-licensing agreements
with other MRI manufacturers.
PRODUCT COMPETITION
MRI SCANNERS
A majority of the MRI scanners in use in hospitals
and outpatient facilities and at mobile sites in the United States are based on high field air core magnet technology while the
balance are based on open iron frame magnet technology. Fonar’s open iron frame MRI scanners are competing principally with
high-field air core scanners. Fonar’s open MRI scanners, however, utilizing a 6,000 gauss or 0.6 Tesla field strength, iron
core electromagnet, were the first "open" MR scanners at high field strength.
Fonar believes that its MRI scanners have significant
advantages as compared to the high-field air core scanners of its competitors. These advantages include:
1. There is no expansive fringe magnetic field.
High field air core scanners require a more expensive shielded room than is required for the iron frame scanners. The shielded
room required for the iron frame scanners is intended to prevent interference from external radio frequencies.
2. They are more open and quiet.
3. They can scan the trauma victim, the cardiac
arrest patient, the respirator-supported patient, and premature and newborn babies. This is not possible with high- field air core
scanners because their magnetic field interferes with conventional life-support equipment.
The principal competitive disadvantage of our
products is that they are not “high field strength”, 1.0 Tesla +, magnets. As a general principle, the higher field
strength can produce a faster scan. In some parts of the body a faster scan can be traded for a clearer picture. Although we believe
that the benefits of “openness” provided by our scanners compensate for the lower field strength, certain customers
will still prefer the higher field strength.
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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’s original iron frame design, ultimately imitated by Fonar’s competitors to duplicate
Fonar’s origination of “Open” MRI magnets, gave rise to current patient protected Upright® 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™ 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.
Fonar expects to be the leader in 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® MRI technology
or the Fonar 360™’s 360° full access interventional technology.
OTHER IMAGING MODALITIES
Fonar’s MRI scanners also compete with
other diagnostic imaging systems, all of which are based upon the ability of energy waves to penetrate human tissue and to be detected
by either photographic film or electronic devices for presentation of an image on a television monitor. Three different kinds of
energy waves - X-ray, gamma and sound - are used in medical imaging techniques which compete with MRI medical scanning, the first
two of which involve exposing the patient to potentially harmful radiation. These other imaging modalities compete with MRI products
on the basis of specific applications.
X-rays are the most common energy source used
in imaging the body and are employed in three imaging modalities:
1. Conventional X-ray systems, the oldest method
of imaging, are typically used to image bones and teeth. The image resolution of adjacent structures that have high contrast, such
as bone adjacent to soft tissue, is excellent, while the discrimination between soft tissue organs is poor because of the nearly
equivalent penetration of x-rays.
2. Computerized Tomography, also referred to
as "CT", systems couple computers to x-ray instruments to produce cross-sectional images of particular large organs or
areas of the body. The CT scanner addresses the need for images, not available by conventional radiography, that display anatomic
relationships spatially. However, CT images are generally limited to the transverse plane and cannot readily be obtained in the
two other planes, sagittal and coronal. Improved picture resolution is available at the expense of increased exposure to x-rays
from multiple projections. Furthermore, the pictures obtained by this method are computer reconstructions of a series of projections
and, once diseased tissue has been detected, CT scanning cannot be focused for more detailed pictorial analysis or obtain a chemical
analysis.
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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’s MRI scanners. The regulations
can be classified as either pre-market or post-market. The pre-market requirements include obtaining marketing clearance, proper
device labeling, establishment registration and device listing. Once the products are on the market, Fonar must comply with post-market
surveillance controls. These requirements include the Quality Systems Regulation, or “QSR”, also known as Current Good
Manufacturing Practices or CGMPs, and Medical Device Reporting, also referred to as MDR regulations. The QSR is a quality assurance
requirement that covers the design, packaging, labeling and manufacturing of a medical device. The MDR regulation is an adverse
event-reporting program.
Classes of Products
Under the Medical Device Amendments of 1976
to the Federal Food, Drug and Cosmetic Act, all medical devices are classified by the FDA into one of three classes. A Class I
device is subject only to general controls, such as labeling requirements and manufacturing practices; a Class II device must comply
with certain performance standards established by the FDA; and a Class III device must obtain pre-market approval from the FDA
prior to commercial marketing. Fonar’s products are Class II devices. Class II devices are subject to "General Controls";
General Controls include:
1. Establishment registration of companies which
are required to register under 21 CFR Part 807.20, such as manufacturers, distributors, re-packagers and re-labelers.
2. Medical device listing with FDA of devices
to be marketed.
3. Manufacturing devices in accordance with
the Current Good Manufacturing Practices Quality System Regulation in 21 CFR Part 820.
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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.
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.
On March 16, 2000, Fonar received FDA clearance
to market the Fonar 360™ for diagnostic imaging, the Open Sky™ version, and on October 3, 2000 received FDA clearance
for the 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’s scanner products are Class II products, there are no pre-market data requirements
and the process is neither lengthy nor expensive.
An investigational device exemption, also referred
to as IDE, allows the investigational device to be used in a clinical study pending FDA clearance in order to collect safety and
effectiveness data required to support the Premarket Approval, also referred to as PMA, application or a Premarket Notification
pursuant to 510(k), submission to the FDA. Clinical studies are most often conducted to support a PMA.
For the most part, however, we have not found
it necessary to utilize IDE’s. The standard 90 day clearance for our new MRI scanner products classified as Class II products
makes the IDE unnecessary, particularly in view of the time and effort involved in compiling the information necessary to support
an IDE.
Quality System Regulation
The Quality Management System is applicable
to the design, manufacture, administration of installation and servicing of magnetic resonance imaging scanner systems. The FDA
has authority to conduct detailed inspections of manufacturing plants, to establish Good Manufacturing Practices which must be
followed in the manufacture of medical devices, to require periodic reporting of product defects and to prohibit the exportation
of medical devices that do not comply with the law.
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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:
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provide for timely and effective identification, communication and evaluation of adverse events;
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provide a standardized review process and procedures for determining whether or not an event is reportable; and
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provide procedures to insure the timely transmission of complete reports.
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These procedures also include documentation
and record keeping requirements for:
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information that was evaluated to determine if an event was reportable;
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all medical device reports and information submitted to the FDA;
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any information that was evaluated during preparation of annual certification reports; and
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systems that ensure access to information that facilitates timely follow up and inspection by FDA.
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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.
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, has some
essential requirements described in the EU’s Medical Device Directive, also referred to as MDD. In order to export to one
of these countries, we must meet the essential requirements of the MDD and any additional requirements of the importing country.
The essential requirements are similar to some of the requirements mandated by the FDA. In addition the MDD requires that we enlist
a Notified Body to examine and assess our documentation, a Technical Construction File, and verify that the product has been manufactured
in conformity with the documentation. The notified body must carry out or arrange for the inspections and tests necessary to verify
that the product complies with the essential requirements of the MDD, including safety performance and Electromagnetic Compatibility,
also referred to as EMC. Also required is a Quality System, ISO-9001, assessment by the Notified Body. We were approved for ISO
9001 certification for its Quality Management System in April, 1999.
We received clearances to sell the Fonar 360™
and 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’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, credentialing, accounting, billing and collection,
assistance with compliance matters and the development and implementation of practice growth and marketing strategies.
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, HMCA, Imperial and HDM are, unless otherwise indicated referred to as “HMCA” for all periods before
and after Imperial and HDM transactions.
In April 2003, HMCA sold the portion of its
business which managed primary care medical practices, and in July 2005, HMCA sold the portion of its business engaged in the management
of physical therapy and rehabilitation practices. This was the result of HMCA’s decision to focus on management of MRI facilities,
the business in which HMCA is most experienced. As of September 30, 2013, HMCA managed a total of 25 MRI centers. For the 2012
fiscal year, the revenues HMCA recognized from the MRI facilities increased to $20.7 million, and in fiscal 2013 the revenues recognized
from the MRI facilities further increased to $34.3 million.
HMCA GROWTH STRATEGY
HMCA’s growth strategy focuses on upgrading
and expanding the existing facilities it manages and expanding the number of facilities it manages for its clients. Our most important
effort in this regard has been to promote and facilitate the replacement of existing MRI scanners with new Fonar Upright® MRI
scanners. As a result, we presently have Upright® MRI scanners at all but two of the MRI facilities we manage.
In August 2013, HMCA added an additional Upright®
MRI facility that it manages in Nassau County, New York.
PHYSICIAN AND DIAGNOSTIC MANAGEMENT SERVICES
HMCA’s services to the facilities it manages
encompass substantially all of their business operations. Each facility is controlled, however, by the physician owner, not HMCA,
and all medical services are performed by the physicians and other medical personnel under the physician-owner’s supervision.
HMCA is the management company and performs services of a non-professional nature. These services include:
1. Offices and Equipment. HMCA identifies, negotiates
leases for and/or provides office space and equipment to its clients. This includes technologically sophisticated medical equipment.
HMCA also provides improvements to leaseholds, assistance in site selection and advice on improving, updating, expanding and adapting
to new technology.
2. Personnel. HMCA staffs all the non-medical
positions of its clients with its own employees, eliminating the client's need to interview, train and manage non-medical employees.
HMCA processes the necessary tax, insurance and other documentation relating to employees.
3. Administrative. HMCA assists in the scheduling
of patient appointments, purchasing of office and medical supplies and equipment and handling of reporting, accounting, processing
and filing systems. It prepares and files the physician portions of complex applications to enable its clients to participate in
managed care programs and to qualify for insurance reimbursement. HMCA 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 is responsible
for the billing and collection of revenues from third-party payors including those governed by No-Fault and Workers' Compensation
statutes. HMCA is presently using a third party to perform its billing and collection services for its clients’ No-Fault
and Workers’ Compensation scanning business.
5. Cost Saving Programs. Based on available
volume discounts, HMCA seeks to assist in obtaining favorable pricing for office and medical supplies, equipment, contrast agents,
such as gadolinuim, and other inventory for its clients.
6. Diagnostic Imaging and Ancillary Services.
HMCA can offer access to diagnostic imaging equipment through diagnostic imaging facilities it manages. The Company may expand
the ancillary services offered in its network to include CT-scans and x-rays, if it is determined that such additions may be useful
to its clients.
7. Marketing Strategies. HMCA is responsible
for developing and proposing marketing plans for its clients.
8. Expansion Plans. HMCA assists the clients
in developing expansion plans including the opening of new or replacement facilities where appropriate.
HMCA’s objective is to free physicians
from as many non-medical duties as is practicable. Practices can treat patients more efficiently if the physicians can spend less
time on business and administrative matters and more time practicing medicine.
HMCA provides its services pursuant to negotiated
contracts with its clients. While HMCA believes it can provide the greatest value to its clients by furnishing the full range of
services appropriate to that client, HMCA would also be willing to enter into contracts providing for a more limited spectrum of
management services. The 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. None of HMCA’s clients, however, 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.
The fees paid by the facilities to HMCA are
flat monthly fees. The fees in fiscal 2011 were flat monthly fees in the aggregate amount of $1,512,338 per month which increased
in fiscal 2012 to an aggregate amount of $1,708,739 per month. In fiscal 2013, the aggregate amount of management fees were the
same, at $1,708,739 per month up to March 5, 2013. As a result of the HDM acquisition and the addition of 14 MRI scanning centers,
the aggregate amount of management fees increased to $3,469,438 per month commencing March 5, 2013.
Fees under the management agreements are subject
to adjustment by mutual agreement on an annual basis.
Dr. Damadian owns three of the MRI facilities
in Florida managed by HMCA. The fees for these three sites in Florida owned by Dr. Damadian are flat monthly fees which are subject
to adjustment by mutual 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-Fault and Workers’ Compensation business.
The monthly fee was $85,000 in fiscal 2013. HMCA handles all of its clients’ other billings and collections.
HMCA MARKETING
HMCA's marketing strategy is to expand the business
and improve the facilities which it manages. HMCA will seek to increase the number of locations of those facilities where market
conditions are promising and to promote growth of its clients' patient volume and revenue.
DIAGNOSTIC IMAGING FACILITIES
Diagnostic imaging facilities managed by HMCA
provide diagnostic imaging services to patients referred by physicians who are either in private practice or affiliated with managed
care providers or other payor groups. The facilities are operated in a manner which eliminates the admission and other administrative
inconveniences of in-hospital diagnostic imaging services. Imaging services are performed in an outpatient setting by trained medical
technologists under the direction of physicians 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. Reports for the
New York facilities are transcribed by HMCA personnel and reports for the Florida facilities are outsourced to independent contractors.
HMCA develops marketing programs in an effort
to establish and maintain profitable referring physician relationships and to maximize reimbursement yields. HMCA 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 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’s clients receive reimbursements
for their services 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’s prospective payment system
for hospital outpatient services, or OPPS, a hospital is paid for outpatient services on a rate per service basis that varies according
to the ambulatory payment classification group, or APC, to which the service is assigned rather than on a hospital’s costs.
Each year the Centers for Medicare and Medicaid Services, or CMS, publishes new APC rates that are determined in accordance with
the promulgated methodology.
Services provided in non-hospital based freestanding
facilities are paid under the Medicare Physician Fee Schedule, or MPFS. All of HMCA’s clients are presently in this 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 services performed
by our clients for Medicare beneficiaries. Other changes in reimbursement for services rendered by Medicare Advantage plans may
also reduce the revenues 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’ 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.
These adjustments have been phased in over a four year period. For our fiscal year ended June 30, 2013, Medicare revenues
represented approximately 7.6% of the revenues for HMCA’s clients as compared to 8.3% for the fiscal year ended June 30,
2012.
Many of PPACA’s provisions will not take
effect for months or several years, while others are effective immediately. Many provisions also will require the federal government
and individual state governments to interpret and implement the new requirements. In addition, PPACA remains the subject of significant
debate, and proposals to repeal, block or amend the law have been introduced in Congress and many state legislatures. Finally,
a number of state attorneys general have filed legal challenges to PPACA seeking to block its implementation on constitutional
grounds. Because of the many variables involved, we are unable to predict how many of the legislative mandates contained in PPACA
will be implemented or in what form, whether any additional or similar changes to statutes or regulations (including interpretations),
will occur in the future, or what effect any future legislation or regulation would have on our business.
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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-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 2013, approximately 0.5% of the revenues of HMCA’s
clients were attributable to Medicaid, as compared to 1.1% in fiscal 2012.
Managed Care and Private Insurance.
Health Maintenance Organizations, or HMO’s,
Preferred Provider Organizations, or PPOs, and other managed care organizations attempt to control the cost of healthcare services
by a variety of measures, including imposing lower payment rates, preauthorization requirements, limiting services and mandating
less costly treatment alternatives. Managed care contracting is competitive and reimbursement schedules are at or below Medicare
reimbursement levels. Some managed care organizations have reduced or otherwise limited, and other managed care organizations may
reduce or otherwise limit, reimbursement in response to reductions in government reimbursement. These reductions could have an
adverse impact on our financial condition and results of operations. These reductions have been, and any future reductions may
be, similar to the reimbursement reductions proposed by CMS, Congress and the current federal government administration. The development
and expansion of HMOs, PPOs and other managed care organizations within our core markets could have a negative impact on utilization
of our services in certain markets and/or affect the revenues per procedure we can collect, since such organizations will exert
greater control over patients’ access to diagnostic imaging services, the selection of the provider of such services and
the reimbursement thereof.
HMCA COMPETITION
The physician and diagnostic management services
field is highly competitive. A number of large hospitals have acquired medical practices and this trend may continue. HMCA expects
that more competition will develop. Many competitors have greater financial and other resources than HMCA.
With respect to the diagnostic imaging facilities
managed by HMCA, the outpatient diagnostic imaging industry is highly competitive. Competition focuses primarily on attracting
physician referrals at the local market level and increasing referrals through relationships with managed care organizations, 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 believes that it will be able to effectively meet the competition in the outpatient diagnostic imaging industry with
the new Fonar Upright® MRI scanners at its facilities.
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GOVERNMENT REGULATION APPLICABLE TO HMCA
FEDERAL REGULATION
The healthcare industry is highly regulated
and changes in laws and regulations can be significant. Changes in the law or new interpretation of existing laws can have a material
effect on our permissible activities, the relative costs associated with doing business and the amount of reimbursement by government
and other third-party payors.
Federal False Claims Act
The federal False Claims Act and, in particular,
the False Claims Act’s “qui tam” or “whistleblower” provisions allow a private individual to bring
actions in the name of the government alleging that a defendant has made false claims for payment from federal funds. After the
individual has initiated the lawsuit the government must decide whether to intervene in the lawsuit and to become the primary prosecutor.
If the government declines to join the lawsuit, the individual may choose to pursue the case alone, although the government must
be kept apprised of the progress of the lawsuit, and may intervene later. Whether or not the federal government intervenes in the
case, it will receive the majority of any recovery.
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
for each separate false claim and the government’s attorneys’ fees. Liability arises when an entity knowingly submits,
or causes someone else to submit, a false claim for reimbursement to the federal government. The False Claims Act defines the term
“knowingly” broadly, though simple negligence will not give rise to liability under the False Claims Act. Examples
of the other actions which may lead to liability under the False Claims Act:
Failure to comply with the many
technical billing requirements applicable to our Medicare and Medicaid business.
Failure to comply with the prohibition
against billing for services ordered or supervised by a physician who is excluded from any federal healthcare program, or the prohibition
against employing or contracting with any person or entity excluded from any federal healthcare program.
Failure to comply with the Medicare physician
supervision requirements for the services we provide, or the Medicare documentation requirements concerning physician supervision.
The Fraud Enforcement and Recovery Act of 2009
expanded the scope of the False Claims Act by, among other things, broadening protections for whistleblowers and creating liability
for knowingly retaining a government overpayment, acting in deliberate ignorance of a government overpayment or acting in reckless
disregard of a government overpayment. The recently enacted healthcare reform bills in the form of the Patient Protection and Affordable
Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, “PPACA”) expanded on
changes made by the 2009 Fraud Enforcement and Recovery Act with regard to such “reverse false claims.” Under PPACA,
the knowing failure to report and return an overpayment within 60 days of identifying the overpayment or by the date a corresponding
cost report is due, whichever is later, constitutes a violation of the False Claims Act. HMCA and its clients have never been sued
under the False Claims Act and believe they are in compliance with the law.
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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
believes that it and its clients are in compliance with these laws.
Anti-kickback Regulation
We are subject to federal and state laws which
govern financial and other arrangements between healthcare providers. These include the federal anti-kickback statute which, among
other things, prohibits the knowing and willful solicitation, offer, payment or receipt of any remuneration, direct or indirect,
in cash or in kind, in return for or to induce the referral of patients for items or services covered by Medicare, Medicaid and
certain other governmental health programs. Under PPACA, knowledge of the anti-kickback statute or the specific intent to violate
the law is not required. Violation of the anti-kickback statute may result in civil or criminal penalties and exclusion from the
Medicare, Medicaid and other federal healthcare programs, and according to PPACA, now provides a basis for liability under the
False Claims Act. In addition, it is possible that private parties may file “qui tam” actions based on claims resulting
from relationships that violate the anti-kickback statute, seeking significant financial rewards. Many states have enacted similar
statutes, which are not limited to items and services paid for under Medicare or a federally funded healthcare program.
Neither HMCA nor its clients engage in this
practice.
In fiscal 2013, approximately 7.6% of the revenues
of HMCA’s clients were attributable to Medicare and 0.5% were attributable to Medicaid. In fiscal 2012, approximately 8.3%
of the revenues of HMCA’s clients were attributable to Medicare and 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 2012, however, we were able
to counter this effect by increasing our 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 requires the full 50% reduction to be implemented. We
believe that the impact of this final 25% reduction will not materially affect our 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’
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”).
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”), signed
into law on February 17, 2009, dramatically expanded, among other things, (1) the scope of HIPAA to now apply directly to “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,” care collaboration and shared financial risk in a way that will accelerate industry adoption and change. There
are also many provisions addressing cost containment, reductions of Medicare and other payments and heightened compliance requirements
and additional penalties, which will create further challenges for providers. We are unable to predict the full impact of PPACA
at this time due to the law’s complexity and current lack of implementing regulations or interpretive guidance. Moving forward,
we believe that the federal government will likely have greater involvement in the healthcare industry than in prior years.
State Regulation
FONAR CORPORATION AND SUBSIDIARIES
|
In addition to the federal self-referral law
and federal Anti-kickback statute, many States, including those in which HMCA and its clients operate, have their own versions
of self-referral and anti-kickback laws. These laws are not limited in their applicability, as are the federal laws, to specific
programs. HMCA believes that it and its clients are in compliance with these laws.
Various States prohibit business corporations
from practicing medicine. Various States, including New York, also prohibit the sharing of professional fees or fee splitting.
Consequently, in 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. Under Florida law a business entity can bill patients and third party payors directly,
and at three of the six facilities in Florida, 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, 2013 approximately 37.0% of
our clients’ receipts were from patients covered by no-fault insurance and approximately 3.8% of our client’s receipts
were from patients covered by workers’ compensation programs. For the fiscal year ended June 30, 2012, approximately 33.8%
of HMCA’s clients’ receipts were from patients covered by no-fault insurance and approximately 3.7% of HMCA’s
clients’ receipts were from patients covered by workers’ compensation programs. In the event that changes in these
laws alter the fee structures or methods of providing service, or impose additional or different requirements, HMCA could be required
to modify its business practices and services in ways that could be more costly to HMCA or in ways that decrease the revenues which
HMCA receives from its clients.
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 believes that it and its clients are in
compliance with applicable Federal, State and local laws. HMCA does not believe that such laws will have any adverse material effect
on its business.
EMPLOYEES
As of July 1, 2013, we employed approximately
411 persons on a full-time or part-time basis. Such employees included 53 persons in marketing and sales, 9 in research and development,
15 in production, 29 in customer support services, 5 in information technology, 32 in billing and collection and 24 performing
transcription services for the facilities managed or directly operated by HMCA. Of our 411 employees, 222 were stationed at the
facilities managed or operated by HMCA.
FONAR CORPORATION AND SUBSIDIARIES
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ITEM 2. PROPERTIES
Fonar leases approximately 117,000 square feet
of office and plant space at its principal offices in Melville, New York and at one other location in Melville, New York at a current
aggregate annual rental rate of $1,292,757, 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. Management believes that the
premises will be adequate for its current needs. HMCA already has consolidated its headquarters with those of Fonar as part of
Fonar’s cost cutting program. HMCA maintains leased office premises for its clients at the clients’ sites having an
aggregate annual rental rate of approximately $2,742,217 under leases having various terms.
ITEM 3. LEGAL PROCEEDINGS
On or about June 30, 2010, one of Fonar’s
customers, Golden Triangle Company, commenced an action against Fonar and certain individual defendants employed or formerly employed
by Fonar, in the United States District Court for the Eastern District of New York based on the alleged wrongful failure of Fonar
to deliver a scanner in Kuwait. The claim alleged 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 scanner 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 made a motion to
dismiss the complaint, the outcome of which left plaintiff with
only a cause of action for breach of contract. The claims
against the individual officers and employees 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 State of 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 case has been settled for $323,000 payable in installments, subject to Fonar obtaining a sale and the customer paying
the installments of the purchase price.
FONAR CORPORATION AND SUBSIDIARIES
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Matt Malek Madison v. Fonar Corporation,
United States District Court, Northern District of California, 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 9
th
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), 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, Health
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 for the Eastern District Court of New York, alleging that Fonar’s
Upright® MRI scanners infringe plaintiff’s patent which relates to the moving 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 specified in the complaint. The patent has expired and as a result,
only past damages are at issue.
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 parties have been negotiating to settle the case in conjunction with the settlement of the
Bonutti
case.
ITEM 4. MINE SAFETY DISCLOSURES. Not Applicable
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Our Common Stock is traded in the Nasdaq SmallCap
market under the National Association of Securities Dealers Automated Quotation System, also referred to as "NASDAQ",
symbol FONR. The following table sets forth the high and low trades reported in NASDAQ System for the periods shown.
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 5, 2013, we had approximately 2,099
stockholders of record of our Common Stock, 11 stockholders of record of our Class B Common Stock, 3 stockholders of record of
our Class C Common Stock and 1,473 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 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 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®/Upright®
MRI and Fonar 360™ MRI scanners. The Stand-Up® MRI allows patients to be scanned for the first time under weight-bearing
conditions. The Stand-Up® MRI is the only MRI capable of producing images in the weight-bearing state.
FONAR CORPORATION AND SUBSIDIARIES
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At 0.6 Tesla field strength, the Upright®
MRI and Fonar 360™ magnets are among the highest field open MRI scanners in the industry, offering non-claustrophobic MRI
together with high-field image quality. Fonar’s open MRI scanners were the first high field strength open MRI scanners in
the industry.
HMCA commenced operations in July, 1997 and
generates revenues from providing comprehensive management services, including development, administration, accounting, billing
and collection services, together with office space, medical equipment, supplies and non-medical personnel to its clients. Revenues
are in the form of fees which are earned under contracts with HMCA’s clients 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, 2013 and
June 30, 2012, 23.0% and 32.2%, respectively, of HMCA’s revenues were derived from contracts with facilities owned by Dr.
Raymond V. Damadian, the President of Fonar and HMCA, and principal stockholder of Fonar. The agreements with these MRI facilities
are for one-year terms which renew automatically on an annual basis, unless terminated. The fees for these sites, which are located
in Florida, are flat monthly fees.
Industry Updates
For services for which Medicare is billed directly,
the 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.
Many private payors use the Medicare Physician
Fee Schedule to determine their own reimbursement rates.
While Congress has repeatedly intervened to
mitigate the negative reimbursement impact associated with the formula, there is no guarantee that Congress will continue to do
so in the future. Moreover, the existing methodology may result in significant yearly fluctuations in the Medicare Physician Fee
Schedule amounts, which may be unrelated to changes in the actual costs of providing physician services.
The 2013 Medicare Physician Fee Schedule expanded
a reduction in reimbursement for multiple images on contiguous body parts to new services, namely diagnostic cardiovascular services
and ophthalmology services. Medicare has a longstanding policy to reduce payment by 50% for the second and subsequent procedures
furnished to the same beneficiary by a single physician or physicians in the same group practice on the same day.
Critical Accounting Policies
Our discussion and analysis of financial condition
and results of operations are based on our consolidated financial statements that were prepared in accordance with U.S. generally
accepted accounting principles, or 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
|
FONAR CORPORATION AND SUBSIDIARIES
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|
·
|
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 notes
to our consolidated financial statements, we discuss our 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 evaluate 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 our 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, 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.
FONAR CORPORATION AND SUBSIDIARIES
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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 2013 COMPARED
TO FISCAL 2012
In fiscal 2013, we recognized net income of
$10.3 million on revenues of $49.1 million, as compared to net income of $6.9 million on revenues of $39.4 million for fiscal 2012.
This represents an increase in revenues of 24.6%. Increased management fees were the principal factor accounting for the increased
revenues of the Company. Unrelated party management fees increased by 41.6%. Total costs and expenses increased by 29.1%. Our consolidated
operating results improved by $300,000 to an operating income of $7.5 million for fiscal 2013 as compared to an operating income
of $7.2 million for fiscal 2012.
Discussion of Operating Results of Medical
Equipment Segment
Fiscal 2013 Compared to Fiscal 2012
Revenues attributable to our medical equipment
segment decreased by 20.4% to $14.9 million in fiscal 2013 from $18.7 million in fiscal 2012, with product sales revenues decreasing
by 43.1% from $6.9 million in fiscal 2012 to $3.9 million in fiscal 2013. Service revenue decreased from $11.8 million in fiscal
2012 to $11.0 million in fiscal 2013.
The 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.
Product sales to unrelated parties decreased
by 43.1% in fiscal 2013 from $6.9 million in fiscal 2012 to $3.9 million in fiscal 2013. There were no product sales to related
parties in fiscal 2013 or 2012.
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® MRI.
The operating results for the medical equipment
segment decreased from income of $2.7 million in fiscal 2012 to income of $140,000 in fiscal 2013. This decrease is attributable
most significantly to a decrease in our product sales.
We recognized revenues of $3.2 million from
the sale of our Upright® MRI scanners in fiscal 2013, while in fiscal 2012, we recognized revenues of $6.3 million from the
sale of Upright® MRI scanners.
Research and development expenses, net of capitalized
costs, increased by 15.8% to $1.4 million in fiscal 2013 as compared to $1.2 million in fiscal 2012. Our expenses for fiscal 2013
represented continued research and development of Fonar’s scanners, Fonar’s new hardware and software product, Sympulse®
and new surface coils to be used with the Upright® MRI scanner.
Discussion of Operating Results of Physician
and Diagnostic Services Management Segment.
Fiscal 2013 Compared to Fiscal 2012
Revenues attributable to the Company's physician
and diagnostic services management segment, HMCA, increased by 65.2% to $34.3 million in fiscal 2013 from $20.7 million in fiscal
2012. The increase in revenues was primarily due to the 14 additional scanning facilities acquired in the HDM transaction, which
resulted in the recognition of $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 facilities in Florida.
Cost of revenues as a percentage of the related
revenues for our physician and diagnostic services management segment increased from $12.3 million or 59.4% of related revenues
for the year ended June 30, 2012 to $19.2 million, or 56.1% of related revenue for the year ended June 30, 2013.
Operating results of this segment increased
from operating income of $4.5 million in fiscal 2012 to operating income of $7.4 million in fiscal 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 2013 Compared to Fiscal 2012
Interest and investment income decreased in
2013 compared to 2012. We recognized interest income of $217,598 in 2013 as compared to $243,254 in fiscal 2012, representing a
decrease of 10.5%.
FONAR CORPORATION AND SUBSIDIARIES
|
Interest expense of $500,362 was recognized
in fiscal 2013, as compared to $478,663 in fiscal 2012, representing a increase of 4.5%.
While revenue increased by 24.6%, selling,
general and administrative expenses increased by 42.9% to $12.5 million in fiscal 2013 from $8.7 million in fiscal 2012.
The compensatory element of stock issuances
increased from approximately $180,000 in fiscal 2012 to $415,021 in fiscal 2013, reflecting an increase in Fonar’s use of
its stock bonus plans to pay employees and others.
The higher provision for bad debts of
$1.5 million in fiscal 2013 as compared to $1.1 million in fiscal 2012, reflected an increase in reserves for certain indebtedness
in fiscal 2013 by our physician and diagnostic services management segment. In addition, in fiscal 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 jointly and severally guaranteed the payment of their management
fees to HMCA, further securing HMCA’s management fee receivables.
Revenue from service and repair fees decreased
from $11.8 million in fiscal 2012 to $11.0 million in fiscal 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 2013 we continued our investment in the development of our new MRI scanners, together with software
and upgrades, with an investment of $1,438,560 in research and development, none of which was capitalized, as compared to $1,242,656,
none of which was capitalized, in fiscal 2012. The research and development expenditures were approximately 9.7% of revenues attributable
to our medical equipment segment and 2.9% of total revenues in 2013, and 6.6% of medical equipment segment revenues and 3.2% of
total revenues in fiscal 2012. This represented a 15.7% increase in research and development expenditures in fiscal 2013 as compared
to fiscal 2012.
The physician and diagnostic services
management segment, HMCA, revenues increased, from $20.7 in fiscal 2012 to $34.3 million in fiscal 2013. This is primarily attributable
to increased revenue resulting from the HDM acquisition.
We have been taking steps to improve HMCA
revenues by our marketing efforts, which focus on the unique capability of our 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.
Our management fees are dependent on collection
by our clients of fees from reimbursements from Medicare, Medicaid, private insurance, no fault and workers’ compensation
carriers, self–pay and other third-party payors. The health care industry is experiencing the effects of the federal and
state governments’ trend toward cost containment, as governments and other third-party payors seek to impose lower reimbursement
and utilization rates and negotiate reduced payment schedules with providers. The cost-containment measures, consolidated with
the increasing influence of managed-care payors and competition for patients, have resulted in reduced rates of reimbursement for
services provided by our clients from time to time. Our future revenues and results of operations may be adversely impacted by
future reductions in reimbursement rates.
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’s clients provide. To the extent reimbursement from third-party payors is reduced,
it will likely have an adverse impact on the rates they pay us, as they would need to reduce the management fees they pay HMCA
to offset such decreased reimbursement rates. Furthermore, many commercial health care insurance arrangements are changing, so
that individuals bear greater financial responsibility through high deductible plans, co-insurance and higher co-payments, which
may result in patients delaying or foregoing medical procedures. We expect that any further changes to the rates or methods of
reimbursement for services, which reduce the reimbursement per scan of our clients may partially offset the increases in scan volume
we are working to achieve for our clients, and indirectly will result in a decline in our revenues.
On March 23, 2010, President Obama signed
into law healthcare reform legislation in the form of the Patient Protection and Affordable Care Act, or PPACA. The implementation
of this law will likely have a profound impact on the healthcare industry, most of which will go into effect in fiscal 2014 and
thereafter. Healthcare cost containment, reductions of Medicare and other payments, and increased regulation will present additional
challenges for healthcare providers. We are unable to predict the full impact of PPACA at this time, but anticipate the possibility
that it may reduce the profitability of both our medical equipment segment and physician and diagnostic services management segment.
In addition there are also political uncertainties which may result in the 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’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.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and marketable securities
decreased by 34.6% from $12.0 million at June 30, 2012 to $7.9 million at June 30, 2013.
Cash provided by operating activities for fiscal
2013 approximated $7.5 million. Cash provided by operating activities was attributable to the net income of $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
2013 approximated $41.0 million. The use of cash from investing activities was the cost of the HDM acquisition of $40.0 million,
purchases of property and equipment of $1.1 million, and costs of patents of $160,000.
FONAR CORPORATION AND SUBSIDIARIES
|
Cash provided by financing activities for fiscal
2013 approximated $29.6 million. The principal sources of cash in financing activities consisted 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 loans and capital
lease obligations of $1.8 million, distributions to non-controlling interests of $1.8 million and a redemption of non-controlling
interests of $1.4 million.
Total liabilities increased by 56.9% during
fiscal 2013, from approximately $22.5 million at June 30, 2012 to approximately $35.4 million at June 30, 2013.
As at June 30, 2013, our obligations included
approximately $5.2 million in various state sales taxes, inclusive of penalties and interest. The Company will attempt to obtain
a reduction of penalties in negotiating final settlements.
At June 30, 2013, we had working capital of
approximately $16.7 million as compared to working capital of $4.8 million at June 30, 2012, and stockholders’ equity of
$37.8 million at June 30, 2013 as compared to stockholders’ equity of $11.1 million at June 30, 2012. For the year ended
June 30, 2013, we realized a net income of $10.3 million.
Our principal sources of liquidity has been
derived from investments, revenues and the proceeds of loans obtained in connection with the HDM acquisition.
Our business plan includes an program for manufacturing
and selling our Upright® MRI scanners. In addition, we are enhancing our revenue by participating in the physician and diagnostic
services management business through our subsidiary, HMCA and have upgraded the facilities which it manages, most significantly
by the replacement of the original MRI scanners with new Upright® MRI scanners. Presently, 23 of the 25 MRI facilities managed
by HMCA, are equipped with Upright® MRI scanners. We have also intensified our marketing activities through the hiring of additional
marketers for HMCA’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 $11.8 million for the year ended June 30, 2012 and $11.0 million for the year ended June 30, 2013.
In order to reduce our net losses and demands
on our cash and other liquid reserves, we have an aggressive program of cost cutting. These measures included consolidating HMCA’s
office space with Fonar’s office space, reductions in the size of our workforce, compensation and benefits, as well as across
the board reduction of expenses. The cost reductions were intended to enable us to withstand periods of low volumes of MRI scanner
sales, by keeping expenditures at levels which, if necessary, can be supported by service revenues and HMCA revenues. We are also
seeking equity and debt financing and have been engaged in discussions with several possible sources.
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’s
capital resources will continue to improve if Fonar’s products gain wider market recognition and acceptance resulting in
both increased product sales by Fonar and increased scan volumes at sites managed by HMCA. If we are not successful with our marketing
efforts, we will experience a shortfall in cash, and it will be necessary to reduce operating expenses or obtain funds through
equity or debt financing in sufficient amounts to avoid the need to curtail our operations subsequent to June 30, 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 2014.
Capital expenditures for fiscal 2013 approximated
$1.3 million. Capitalized patent costs were approximately $160,000. Purchases of property and equipment were approximately $1.1
million.
Fonar has not committed to making capital expenditures
in the 2014 fiscal year except for a new diagnostic center which opened in Nassau County, New York in August 2013.
The Company believes that its business plan
has been responsible for the past two consecutive fiscal years of profitability (fiscal 2013 and fiscal 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 also experienced losses and periods of working capital deficits. The future effects on our business of healthcare reform
legislation, the Deficit 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 these
causes.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES
ABOUT MARKET
RISK
The Company does not have any investments in
marketable securities, foreign currencies, mutual funds, certificates of deposit or other fixed rate instruments. All of our funds
are in cash accounts or money market accounts which are liquid.
All of our revenue, expense and capital purchasing
activities are transacted in United States dollars.
See Note 10 to the consolidated Financial Statements
for information on long-term debt.
FONAR CORPORATION AND SUBSIDIARIES
|
ITEM
8.
FINANCIAL STATEMENT
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS
.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Audit Committee of the
Board of Directors and Shareholders
of FONAR Corporation and Subsidiaries
We
have audited the accompanying consolidated balance sheets of
FONAR Corporation and Subsidiaries
(the “Company”) as of June 30, 2013 and 2012, and the related consolidated statements of income, stockholders’
equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of 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’s internal control over
financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion,
the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position
of
FONAR Corporation and Subsidiaries
, as of June 30, 2013 and 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.
/s/ Marcum LLP
Marcum LLP
New York, New York
October 15, 2013
FONAR CORPORATION AND SUBSIDIARIES
|
CONSOLIDATED BALANCE SHEETS
ASSETS
|
|
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
|
CONSOLIDATED BALANCE SHEETS
LIABILITIES
|
|
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
|
CONSOLIDATED BALANCE SHEETS
STOCKHOLDERS' EQUITY
|
|
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
|
CONSOLIDATED STATEMENTS OF INCOME
|
|
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
|
CONSOLIDATED STATEMENTS OF INCOME (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
|
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 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
|
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 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
|
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 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
|
CONSOLIDATED STATEMENTS OF 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.
FONAR CORPORATION AND SUBSIDIARIES
|
CONSOLIDATED
STATEMENTS OF 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
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013 and 2012
NOTE 1 - DESCRIPTION OF BUSINESS, LIQUIDITY
AND CAPITAL RESOURCES
Description of Business
FONAR Corporation (the “Company”
or “FONAR”) is a Delaware corporation, which was incorporated on July 17, 1978. FONAR is engaged in the research, development,
production and marketing of medical scanning equipment, which uses principles of Magnetic Resonance Imaging ("MRI") for
the detection and diagnosis of human diseases. In addition to deriving revenues from the direct sale of MRI equipment, revenue
is also generated from our installed-base of customers through our 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.
On March 5, 2013, the Company acquired a majority
interest in a newly formed limited liability company, Health Diagnostics Management LLC (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 $40 million. HDM has a 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 Management Services, LLC (“Imperial”),
which has a perpetual existence. As of June 30, 2013, Imperial manages 11 diagnostic imaging facilities located in states of New
York and Florida.
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.
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 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.
FONAR CORPORATION AND SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013 and 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-out
method, or market.
Property and Equipment
Property and equipment procured in
the normal course of business is stated at cost. Property and equipment purchased in connection with an acquisition is stated at
its estimated fair value, generally based on an appraisal. Property and equipment is being depreciated for financial accounting
purposes using the straight-line method over their estimated useful 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 $598,000 and $371,000 for the years ended June 30, 2013 and 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’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.
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 bears 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.
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.
FONAR CORPORATION AND SUBSIDIARIES
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013 and 2012
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Revenue Recognition
Revenue on sales contracts for scanners,
included in “product sales” in the accompanying consolidated statements of operations, is recognized under the percentage-of-completion
method in accordance with FASB ASC 605-35, “Revenue Recognition – Construction-Type and Production-Type 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, 2013, the Company has twenty management agreements of which
three are with PC’s owned by Raymond V. Damadian, M.D., President and Chairman of the Board of FONAR (“the Related
medical practices”) and seventeen are with PC’s, which are all located in the state of New York (“the New York
PC’s”), owned by two unrelated radiologists. The contractual fees for services rendered to the PCs consists of fixed
monthly fees per diagnostic imaging facility ranging from approximately $35,000 to $241,000. All fees are re-negotiable at the
anniversary of the agreements and each year thereafter. Revenue under lease contracts is recognized based upon contractual agreements
for the leasing of medical equipment primarily under long term contracts to various unrelated PC’s. The lease fees for the
medical equipment consist of fixed monthly fees ranging from $2,000 to $19,000. All fees are re-negotiable at the anniversary of
the agreements and each year thereafter.
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.
FONAR CORPORATION AND SUBSIDIARIES
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 $835,000 and $715,000 for the years ended June 30, 2013 and 2012, respectively.
Shipping Costs
The Company’s shipping and handling costs
are included in revenue from product sales and the related expense included in costs related to product sales is $5,838 and $26,425
for the years ended June 30, 2013 and 2012, respectively.
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
Per Share
Basic
earnings per share (“EPS”) is computed based upon the weighted average number of shares of common stock and stock
equivalents outstanding, net of common stock. In accordance with ASC topic 260-10, “Participating Securities and the Two-Class
Method”, 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 for the years ended June 30, 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. For both the year ended June 30, 2013 and June 30, 2012,
diluted EPS for common shareholders includes 127,504 shares upon conversion of Class C Common.
FONAR CORPORATION AND SUBSIDIARIES
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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
|
|
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 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, 2013, the
Company had cash on deposit of approximately $6,030,000 in excess of federally insured limits of $250,000.
Related Parties: Net revenues from related parties
accounted for approximately 15% and 17% of the consolidated net revenues for the years ended June 30, 2013 and 2012, respectively.
Net management fee receivables from the related medical practices accounted for approximately 9% and 13% of the consolidated accounts
receivable for the years ended June 30, 2013 and 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, 2013 and 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.
Receivable and accounts payable: The carrying
amounts approximate fair value because of the short maturity of those instruments.
Notes receivable: The carrying amount approximates
fair value because the discounted present value of the cash flow generated by the parties approximates the carrying value of the
amounts due to the Company.
Long-term debt, notes payable and accounts payable:
The carrying amounts of debt and notes payable approximate fair value due to the length of the maturities, the interest rates being
tied to market indices and/or due to the interest rates not being significantly different from the current market rates available
to the Company.
All of the Company's financial instruments are
held for purposes other than trading.
FONAR CORPORATION AND SUBSIDIARIES
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013 and 2012
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Recent Accounting Pronouncements
In July 2012, the FASB issued ASU No. 2012-02,
Intangibles-Goodwill and Other (Topic 350) Testing Indefinite-Lived Intangible Assets for Impairment. 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 qualitative factors to determine whether it is more likely than
not that the fair value of an indefinite-lived intangible asset is less than its carrying value. For assets in which this assessment
concludes it is more likely than not that the 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 interim impairment tests performed for fiscal years beginning after September 15, 2012, early adoption is permitted.
The adoption of this standard is not expected to have a material impact on the Company’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, 2013 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 2013 or 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 for any periods
presented.
NOTE 3 – ACCOUNTS RECEIVABLE, MEDICAL
RECEIVABLE AND MANAGEMENT AND OTHER FEES RECEIVABLE
The Company’s customers are concentrated
in the healthcare industry.
Accounts
Receivable
Credit risk with respect to the Company’s
accounts receivable related to product sales and service and repair fees is limited due to the customer advances received prior
to the commencement of work performed and the billing of amounts to customers as sub-assemblies are completed. Service and repair
fees are billed on a monthly or quarterly basis and the Company does not continue providing these services if accounts receivable
become past due. The Company controls credit risk with respect to accounts receivable from service and repair fees through its
credit evaluation process, credit limits, monitoring procedures and reasonably short collection terms. The Company performs ongoing
credit authorizations before a product sales contract is entered into or service and repair fees are provided.
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)
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.
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, 2013 and 2012 is as follows:
|
|
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,
|
|
|
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,
|
|
|
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
|
|
FONAR CORPORATION AND SUBSIDIARIES
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013 and 2012
NOTE 5 – INVENTORIES
Inventories included
in the accompanying consolidated balance sheets consist of:
|
|
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 6 - PROPERTY AND EQUIPMENT
Property and equipment, at cost, less accumulated
depreciation and amortization, at June 30, 2013 and 2012, is comprised of:
|
|
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, 2013 and 2012 was $1,554,458 and $1,677,186, respectively.
Depreciation and amortization of diagnostic
equipment under capital leases for the years ended June 30, 2013 and 2012 was $248,123 and $646,620, respectively. Accumulated
depreciation and amortization of diagnostic equipment under capital leases for the years ended June 30, 2013 and 2012 was $525,281
and $1,074,152, respectively.
FONAR CORPORATION AND SUBSIDIARIES
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013
and 2012
NOTE 7 - OTHER INTANGIBLE ASSETS
Other intangible assets, net of accumulated
amortization, at June 30, 2013 and 2012 are comprised of:
|
|
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, 2013 and 2012 is as follows:
|
|
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, 2013 and 2012 amounted to $168,631 and $156,310, respectively.
Amortization of capitalized software development
costs for the years ended June 30, 2013 and 2012 was $335,350 and $360,087, respectively.
Amortization of management agreement for the
years ended June 30, 2013 and 2012 amounted to $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.
FONAR CORPORATION AND SUBSIDIARIES
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013 and 2012
NOTE 7 - OTHER INTANGIBLE ASSETS (Continued)
The estimated amortization of other intangible
assets for the five years ending June 30, 2018 and thereafter is as follows:
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 11.2 years and they have no expected residual value.
NOTE 8 - CAPITAL STOCK
Common Stock
Cash dividends payable on the common stock shall,
in all cases, be on a per share basis, one hundred twenty percent (120%) of the cash dividend payable on shares of Class B common
stock and three hundred sixty percent (360%) of the cash dividend payable on a share of Class C common stock.
Class B Common Stock
Class B common stock is convertible into shares
of common stock on a one-for-one basis. Class B common stock has 10 votes per share. There were 146 and 158 of such shares outstanding
at June 30, 2013 and 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.
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.
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 2002 Incentive Stock Option Plan
(the “FONAR 2002 Plan”), adopted on July 1, 2002, is intended to qualify as an incentive stock option plan under Section
422A of the Internal Revenue Code of 1954, as amended. The FONAR 2002 Plan permits the issuance of stock options covering an aggregate
of 100,000 shares of common stock of FONAR. The options have an exercise price equal to the fair market value of the underlying
stock on the date the option is granted, are nontransferable, are exercisable for a period not exceeding ten years and expire upon
the voluntary termination of employment. The FONAR 2002 Plan terminated on June 30, 2012. During the year ended June 30, 2013,
7,412 options were expired, therefore 6,610 options remain outstanding.
FONAR CORPORATION AND SUBSIDIARIES
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013 and 2012
NOTE 8 - CAPITAL STOCK (Continued)
Options
(Continued)
FONAR’s 2005 Incentive Stock Option Plan
(the “FONAR 2005 Plan”), adopted on February 16, 2005,is intended to qualify as an incentive stock option plan under
Section 422A of the Internal Revenue Code of 1954, as amended. The FONAR 2005 Plan permits the issuance of stock options covering
an aggregate of 80,000 shares of common stock of FONAR. The options have an exercise price equal to the fair 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, 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, 2013 and 2012 were as follows:
|
|
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
|
|
|
|
|
|
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 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.
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, 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.
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, 2013 was$14,834,143 and $1,958,714,
respectively.
Amount of each class of members’ equity as of June 30,
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”). The Class B membership interests
in Imperial, all of which were retained by the Company’s subsidiary, HMCA, initially 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. 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. 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.
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 January 1, 2011, the Company consolidates the activity of this entity. On June 1, 2013, the 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 provides management services to a diagnostic center in the New York Metropolitan
area. The center began operations during January 2012. The noncontrolling interest as of June 30, 2013 and 2012 aggregated $559,221
and $561,167, respectively.
FONAR CORPORATION AND SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013 and 2012
NOTE 10 - LONG-TERM DEBT, NOTES PAYABLE AND
CAPITAL LEASES
Long-term debt, notes payable and capital leases
consist of the following:
|
|
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
|
|
FONAR CORPORATION AND SUBSIDIARIES
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013 and 2012
NOTE 10 - LONG-TERM DEBT, NOTES PAYABLE AND
CAPITAL LEASES (Continued)
|
|
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
|
|
FONAR CORPORATION AND SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013 and 2012
NOTE 10 - 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,
|
|
|
|
|
|
|
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 11 - INCOME TAXES
Effective January 1, 2007, the Company adopted
the provisions of ASC topic 740 (formerly FASB Interpretation No. 48/FASB Statement No. 109, “Accounting for Uncertainty
in Income Taxes”). ASC topic 740 prescribes a recognition threshold and a measurement attribute for the financial statement
recognition and measurement of tax positions taken or expected to be taken in a corporate tax return. For those benefits to be
recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. Differences between
tax positions taken or expected to be taken in a tax return and the benefit recognized and measured pursuant to the interpretation
are referred to as “unrecognized benefits”. A liability is recognized (or amount of net operating loss carryforward
or amount of tax refundable is reduced) for an unrecognized tax benefit because it represents an enterprise’s potential future
obligation to the taxing authority for a tax position that was not recognized as a result of applying the provisions of ASC topic
740.
In accordance with ASC topic 740, interest costs
related to unrecognized tax benefits are required to be calculated (if applicable) and would be classified as “Interest expense,
net”. Penalties if incurred would be recognized as a component of “Selling, general and administrative” expenses.
The Company files corporate income tax returns
in the United States (federal) and in various state and local jurisdictions. In most instances, the Company is no longer subject
to federal, state and local income tax examinations by tax authorities for years prior to 2008.
The Company netted a deferred tax asset of $2,935,750
and a deferred tax liability of $461,858 as of June 30, 2013, primarily relating to net operating loss carryforwards of approximately
$142,788,000 available to offset future taxable income through 2030. The net operating losses begin to expire in 2019 for federal
tax purposes and in 2013 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 have a sufficient history of income and anticipates profitability in the coming years and has concluded that it is more-likely-than-not
that the Company will be able to realize a portion of its tax benefits in the near future and therefore a valuation allowance was
established for the partial value of the deferred tax asset.
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 continue
to remain profitable in future periods with supportable trends, the valuation allowance will be reversed accordingly.
Components of the current benefit
(provision) for income taxes are as follows:
|
|
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,
|
|
|
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, 2013, the Company has
net operating loss (“NOL”) carryforwards of approximately $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 $4,298,000, 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 $1,139,000, which are accounted for under the
flow-through method. The tax credit carryforwards expire during the years ending June 30, 2013 to June 30, 2028.
FONAR CORPORATION AND SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013 and 2012
NOTE 11 - INCOME TAXES (Continued)
Significant components of the Company's
deferred tax assets and liabilities at June 30, 2013 and 2012 are as follows:
|
|
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 valuation allowance for deferred
tax assets decreased by approximately $5,206,000 during the year ended June 30, 2013 and decreased by approximately $2,714,000
during the year ended June 30, 2012.
NOTE 12 - OTHER CURRENT LIABILITIES
Included in other current liabilities
are the following:
|
|
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
|
|
FONAR CORPORATION AND SUBSIDIARIES
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013 and 2012
NOTE 13 - COMMITMENTS AND CONTINGENCIES
Leases
The Company rents its operating facilities
and certain equipment, pursuant to operating lease agreements expiring at various dates through 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, 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 $4,035,000, including a payment of approximately $690,000 to terminate a lease early and $2,253,000 for the years
ended June 30, 2013 and 2012, respectively.
Employee Benefit Plans
The Company has a non-contributory
401(k) Plan (the “401(k) Plan”). The 401(k) Plan covers all non-union employees who are at least 21 years of age with
no minimum service requirements. There were no employer contributions to the Plan for the years ended June 30, 2013 and 2012. (see
Other Matters below)
The stockholders of the Company approved
the 2000 Employee Stock Purchase Plan (“ESPP”) at the Company’s annual stockholders’ meeting in April 2000.
The ESPP provides for eligible employees to acquire common stock of the Company at a discount, not to exceed 15%. This plan has
not been put into effect as of June 30, 2013.
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
Fonar’s customers, Golden Triangle Company, commenced an action against Fonar and certain individual defendants employed
or formerly employed by Fonar, in the United States District Court for the Eastern District of New York based on the alleged wrongful
failure of Fonar to deliver a scanner in Kuwait. The claim alleged 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 contracted
with Fonar to purchase a scanner, and paid $1,455,500 in advance. 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. Fonar
made a motion to dismiss the complaint, the outcome of which left Plaintiff with only a cause of action for breach of contract.
The claims against the individual officers and employees 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.
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 State of 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 case has been settled for $323,000 payable in installments, subject to Fonar obtaining a sale
and the customer paying the installments of the purchase price.
Matt Malek Madison v. Fonar Corporation,
United States District Court, Northern District of California, 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 9
th
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), 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, Health
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 for the Eastern District Court of New York, alleging that Fonar’s
Upright® MRI scanners infringe plaintiff’s patent which relates to the moving 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 specified in the complaint. The patent has expired and
as a result, only past damages are at issue.
FONAR CORPORATION AND SUBSIDIARIES
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013 and 2012
NOTE 13 - COMMITMENTS AND CONTINGENCIES
(Continued)
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 parties have been negotiating to settle the case in conjunction with the settlement of the
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 $2,648,000 plus interest and penalties of approximately $2,322,000. The Company is in the process of determining its regulatory
requirements in order to become compliant.
The Company has determined they may
not be in compliance with the Department of Labor and Internal Revenue Service regulations concerning the requirements to file
Form 5500 to report activity of its 401K Employee Benefit Plan. The filings do not require the Company to pay tax, however they
may be subject to penalty for non-compliance. The Company has recorded provisions for any potential penalties totaling $250,000.
The amount was the Company’s best estimate of potential penalties. Management is unable to determine the outcome of this
uncertainty. The Company has engaged outside counsel to handle such matters to determine the necessary requirements to ensure compliance.
On August 31, 2011, the Company submitted with the Internal Revenue Service a request for a compliance statement and a determination
letter for our 401K plan. On December 9, 2011, the Internal Revenue Service issued a favorable determination letter on our 401K
plan. The Company is still working with outside counsel to complete and file forms with the US Department of Labor.
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
|
|
|
FONAR CORPORATION AND SUBSIDIARIES
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013 and 2012
NOTE 15 - SUPPLEMENTAL CASH FLOW INFORMATION
During the years ended June 30, 2013
and 2012, the Company paid $389,907 and $168,062 for interest, respectively.
During the years ended June 30, 2013
and 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 16 – DUE TO RELATED MEDICAL
PRACTICES
In June 2009, an entity owned by the
Company’s Chairman of the Board, Tallahassee Scanning Services PA, sold its Upright MRI scanning system to the Company for
$550,000 in exchange for 35 monthly payments of $18,769 to be made over a three year period, commencing October 18, 2009 including
interest at a rate of 10.41% per annum. The Company used this scanning system to fulfill a sales order with an unrelated customer.
The unpaid balance of as of June 30, 2013 and 2012 was $134,880.
FONAR CORPORATION AND SUBSIDIARIES
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013 and 2012
NOTE 17 - SEGMENT AND RELATED INFORMATION
The Company provides segment data
in accordance with the provisions of ASC topic 280, “Disclosures about Segments of an Enterprise and Related Information”.
The Company operates in two industry
segments - manufacturing and the servicing of medical equipment and management of diagnostic imaging 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. The
Company evaluates performance based on income or loss from operations.
Summarized financial information concerning
the Company’s reportable segments is shown in the following table:
|
|
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
|
|
FONAR CORPORATION AND SUBSIDIARIES
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013 and 2012
NOTE 17 - SEGMENT AND RELATED INFORMATION (Continued)
Export Product Sales
The Company’s areas of operations
are principally in the United States. The Company had export sales of medical equipment amounting to 3.8% and 17.0% of product
sales revenues to third parties for the years ended June 30, 2013 and 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,
|
|
|
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’s areas of service
and repair are principally in the United States. The Company had foreign revenues of service and repair of medical equipment amounting
to 8.2% and 9.9% of consolidated net service and repair fees for the years ended June 30, 2013 and 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,
|
|
|
|
|
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
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013 and 2012
NOTE 18 – ALLOWANCE FOR DOUBTFUL
ACCOUNTS
The following represents a summary
of allowance for doubtful accounts for the years ended June 30, 2013 and 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 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, 2013
through September 30, 2013, the Company has issued 15,000 shares of common stock for costs and expenses of $109,950 and 3,443 shares
of common stock to employees and consultants as compensation valued at $19,315 under a stock bonus plan.
On August 1, 2013, the Company opened
a new diagnostic center in Nassau County, NY.
FONAR CORPORATION AND SUBSIDIARIES
|
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON
ACCOUNTING AND FINANCIAL
DISCLOSURE.
There have been no disagreements with our independent
registered public accounting firm or other matters requiring disclosure under Regulation S-K, Item 304(b).
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Disclosure controls and procedures (as defined
in Rule 13(a) – 15(e)) are controls and other procedures that are designed to ensure that information required to be disclosed
by a public company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be disclosed by a public company in the reports that it
files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal
executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding
required disclosure. Disclosure controls and procedures include many aspects of internal control over financial reporting.
Based on their evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at June 30, 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.
|
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.
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, 2013. In making its assessment of the effectiveness of our internal controls
over financial reporting, our management used the criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 1992.
Based on these criteria, our management has concluded that, as of June 30, 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, 2013, that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF
THE REGISTRANT
Directors serve from the date of their election
until the next annual meeting of stockholders and until their successors are elected and qualify. With the exception of Dr. Raymond
V. Damadian, who does not receive any fees for serving as a director, each director receives $20,000 per annum for his or her service
as a director. Officers serve at the discretion of the Board of Directors.
A majority of our board of directors is composed
of independent directors: Robert J. Janoff, Charles N. O’Data and 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’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.
FONAR CORPORATION AND SUBSIDIARIES
|
The officers and directors of the Company are
set forth below:
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, 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. From approximately 1983 to 1989, Mrs. Chan was President of the Claudette Penot
Collection, a retail mail-order business specializing in women's apparel and 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.
FONAR CORPORATION AND SUBSIDIARIES
|
Charles N. O'Data has been a Director of Fonar
since February 1998. From 1968 to 1997, Mr. O'Data was the Vice President for Development for Geneva College, a liberal arts college
located in western Pennsylvania. In that capacity, he acted as the College's chief investment officer. His responsibilities included
management of the College's endowment fund and fund raising. In July 1997, Mr. O'Data retired from Geneva College after 36 years
of service to assume a position of National Sales Executive for SC Johnson Company's Professional Markets Group, a unit of SC Johnson
Wax, and specialized in healthcare and education sales, a position he held until the spring of 1999. In his capacity with SC Johnson
he was responsible for sales to the nation’s three largest Group Purchasing Organizations which included some 4,000 hospitals.
Mr. O'Data presently acts as an independent financial consultant to various entities. Mr. O'Data served on the board of The Medical
Center, Beaver, Pennsylvania, now a part of Heritage Valley Health System, a 500 bed acute care facility, for 26 years, three as
its Chair. Mr. O’Data also served on the board of the Hospital Council of Western Pennsylvania, a shared-services and group
purchasing organization covering seven states. He founded The Beaver County Foundation, a Community Foundation, in 1992, and serves
as its President. Mr. O'Data is listed as a finance associate in the Middle States Association, Commission on Higher Education.
The commission is the formal accrediting body for higher education in the eastern region of the country. In this capacity he evaluates
the financial aspects of educational organizations. Mr. O’Data is a graduate of Geneva College, where he received a B.S.
degree in Economics in 1958.
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 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 Regulatory Authority (FINRA) and the Securities Investor Protection Corporation
(SIPC). Mr. Lehman directly manages all facets of 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. Lehman 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 these assignments. From May, 2008 to October, 2009, Mr. Lehman served as Senior Vice President of Acquisitions
at Health Diagnostics, LLC, where he managed 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 1998.
ITEM 11. EXECUTIVE COMPENSATION
With the exception of the Chief Executive Officer,
the compensation of the Company's executive officers is based on a combination of salary and bonuses based on performance. The
Chief Executive Officer's compensation consists of a salary.
FONAR CORPORATION AND SUBSIDIARIES
|
The Chief Executive Officer’s salary varies
only slightly and is by his own decision relatively low. It is not expected to increase materially in the near future. At such
time as we become consistently and sufficiently profitable or there is a reconsideration of our compensation policy, the compensation
payable to the Chief Executive Officer may be reconsidered. As presently existing, the Chief Executive Officer’s compensation
package includes no understandings with respect to bonuses, options or other incentives; as such, it is not subject to our general
policy later discussed.
The Board of Directors does not have a compensation
Committee. Dr. Raymond V. Damadian, President, Chief Executive Officer and Chairman of the Board, controls over 50% of the voting
power of our capital stock. Dr. Damadian is the only executive officer who is a member of the Board of Directors. Dr. Damadian
participates in the determination of executive compensation for our officers.
The Board of Directors has established an audit
committee. The members of the committee are Robert J. Janoff, Charles N. O'Data and 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’ compensation tend to be individualized,
based on a combination of the employees’ performance, responsibilities and position, our assessment of how best to motivate
a person in such a position and the needs and preferences of the particular employees, as negotiated between employees and their
supervisors or management.
There is set forth in the following Summary
Compensation Table the compensation provided by us during fiscal 2013 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 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 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
|
|
|
|
|
|
|
|
|
|
|
|
FONAR CORPORATION AND SUBSIDIARIES
|
III. DIRECTOR COMPENSATION
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, 2013
|
|
(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, was 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 permitted 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 was 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 terminated on June 30, 2012. Of the options granted under this plan, 6,610
remain outstanding.
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, 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, 2013, 1,005,075 shares were available for issuance.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number and
percentage of shares of Fonar’s securities held by each director, by each person known by us to own in excess of five percent
of Fonar’s voting securities and by all officers and directors as a group as of September 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
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6.13%
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* Less than one percent
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|
|
|
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1. Address provided for each beneficial owner
owning more than five percent of the voting securities of Fonar.
FONAR CORPORATION AND SUBSIDIARIES
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Background.
Between 1990 and 1996, Raymond V. Damadian,
M.D. MRI Scanning Centers Management Company, also referred to as “RVDC”, a Delaware corporation of which Dr. Damadian
was the sole stockholder, director and President, purchased and leased scanners from Fonar to establish a network of professional
corporations operating MRI scanning centers, also referred to as the "Centers", in New York, Florida, Georgia and other
locations. Dr. Raymond V. Damadian is the Chairman, President and principal stockholder of Fonar and was also the owner, director
and President of each of these professional corporations. RVDC provided the necessary management and the scanners to the Centers,
although in certain situations, a Center would acquire the scanner directly from Fonar.
ACQUISITION OF RVDC.
Effective June 30, 1997, Fonar’s wholly-owned
subsidiary, Health Management Corporation of America, also referred to as "HMCA", formerly known as U.S. Health Management
Corporation, acquired RVDC by purchasing all of the issued and outstanding shares of RVDC from Dr. Damadian for 400 shares of the
Common Stock of Fonar. The transactions can be rescinded by Dr. Damadian, however, in the event of a change of control in Fonar
or the bankruptcy of Fonar. There is no time limit on the right to rescind. In connection with the transaction, Fonar granted RVDC
a nonexclusive royalty free license to Fonar’s patents and software. These licenses may be terminated by Fonar in the event
of the bankruptcy of RVDC or a change in control of RVDC.
OTHER AGREEMENTS.
Pursuant to HMCA’s management agreements
with the Centers, HMCA provides to the Centers comprehensive management and administrative services, including billing and collection
of accounts, payroll and accounts payable processing, office facilities, supplies and utilities. Under the management agreements,
HMCA provides service for the scanners at the Centers through Fonar. In total, as of September 30, 2013, 25 MRI Centers had management
agreements with HMCA.
The fees charged 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 owns three of the Centers in Florida.
The Centers owned by Dr. Damadian in Florida pay flat rate monthly fees ranging from $194,050 to $241,266 to HMCA per month. These
fees are renegotiable on an annual basis.
During the fiscal years ended June 30, 2013
and June 30, 2012 the net revenues received by HMCA from the MRI Centers owned by Dr. Damadian were approximately $7.9 million
and $6.7 million respectively.
On October 1, 2010, HMCA 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.
FONAR CORPORATION AND SUBSIDIARIES
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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’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
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, 2013 and the reviews of the financial
statements included in our Forms 10-Q for the fiscal year ended June 30, 2013 were $423,564.
The aggregate fees billed by Marcum LLP for
the audit of our annual financial statements for the fiscal year ended June 30, 2012 and the reviews of the financial statements
included in our Forms 10-Q for the fiscal year ended June 30, 2012 were $404,866.
Audit Related Fees
No fees were billed by Marcum LLP for the fiscal
years ended June 30, 2013 or June 30, 2012 for services related to the Audit or review of our financial statements that are not
included under the caption “Audit Fees”.
No fees were billed by Marcum LLP for the fiscal
years ended June 30, 2013 or June 30, 2012 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, 2013 were $104,301.
The aggregate fees billed by Marcum LLP for
tax compliance, tax advice and tax planning in the fiscal year ended June 30, 2012 were $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, 2013 and June 30, 2012 were $95,929 and $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.
FONAR CORPORATION AND SUBSIDIARIES
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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 2013 and 2012 were compatible with maintaining their independence.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
a) FINANCIAL STATEMENTS AND SCHEDULES
The following consolidated financial statements
are included in Part II, Item 8.
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·
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Report of Independent Registered Public Accounting Firm
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·
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Consolidated Balance Sheets as at June 30, 2013 and 2012.
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·
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Consolidated Statements of Income for the Years Ended June 30, 2013 and 2012.
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·
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Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 2013 and 2012.
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·
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Consolidated Statements of Cash Flows for the Years Ended June 30, 2013 and 2012.
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·
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Notes to Consolidated Financial Statements.
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·
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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.
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b) REPORTS ON FORM 8-K
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·
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Registrant’s Report on Form 8-K containing the
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·
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Company’s Earnings Report for the first nine months of Fiscal 2013. May 15, 2013. Commission File No. 0-10248.
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·
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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
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·
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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.
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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.
FONAR CORPORATION AND SUBSIDIARIES
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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’s registration statement on Form S-3, Commission File No. 333-63782.
3.4 Section
A of Article Fourth of the Certificate of Incorporation, as amended, of the Registrant incorporated by reference to Exhibit 3.3
of the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 2003, Commission File No. 0-10248.
3.5 By-Laws,
as amended, of the Registrant incorporated by reference to Exhibit 3.2 to the Registrant's registration statement on Form S-1,
Commission File No. 33-13365.
4.1 Specimen
Common Stock Certificate incorporated by reference to Exhibit 4.1 to the Registrant's registration statement on Form S-1, Commission
File No. 33-13365.
4.2 Specimen
Class B Common Stock Certificate incorporated by reference to Exhibit 4.2 to the Registrant's registration statement on Form S-1,
Commission File No. 33-13365.
4.3 Form of
4% Convertible Debentures due June 30, 2002 incorporated by reference to Exhibit 4.1 of the Registrant’s current report on
Form 8-K filed on June 11, 2001. Commission File No. 0-10248.
4.4 Form of
Purchase Warrants incorporated by reference to Exhibit 4.2 of the Registrant’s current report on Form 8-K filed on June 11,
2001. Commission File No. 0-10248.
4.5 Form of
Callable Warrants incorporated by reference to Exhibit 4.3 of the Registrant’s current report on Form 8-K filed on June 11,
2001. Commission File No. 0-10248.
4.6 Form of
Replacement Callable Warrants incorporated by reference to Exhibit 4.7 of the Registrant’s registration statement on Form
S-3, Commission File No. 333-10677.
4.7 Form of
Amended and Restated Purchase Warrant for The Tail Wind Fund, Ltd. incorporated by reference to Exhibit 4.7 of the Registrants
registration statement on Form S-3, Commission File No. 333-116908.
4.8 Form of
Amended and Restated Purchase Warrant for Placement Agent and Designees incorporated by reference to Exhibit 4.8 of the Registrant’s
registration statement on Form S-3, Commission File No. 333-116908.
10.1 License
Agreement between the Registrant and Raymond V. Damadian incorporated by reference to Exhibit 10 (e) to Form 10-K for the fiscal
year ended June 30, 1983, Commission File No. 0-10248.
10.2 1983 Nonstatutory
Stock Option Plan incorporated by reference to Exhibit 10 (a) to Form 10-K for the fiscal year ended June 30, 1983, Commission
File No. 0-10248, and amendments thereto dated as of March 7, 1984 and dated August 22, 1984, incorporated by referenced to Exhibit
28 (a) to Form 10-K for the year ended June 30, 1984, Commission File No. 0-10248.
FONAR CORPORATION AND SUBSIDIARIES
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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.
10.4 1986 Nonstatutory
Stock Option Plan incorporated by reference to Exhibit 10.7 to Form 10-K for the fiscal year ended June 30, 1986, Commission File
No. 0-10248.
10.5 1986 Stock
Bonus Plan incorporated by reference to Exhibit 10.8 to Form 10-K for the fiscal year ended June 30, 1986, Commission File No.
0-10248.
10.6 1986 Incentive
Stock Option Plan incorporated by reference to Exhibit 10.9 to Form 10-K for the fiscal year ended June 30, 1986, Commission File
No. 0-10248.
10.7 Lease
Agreement, dated as of August 18, 1987, between the Registrant and Reckson Associates incorporated by reference to Exhibit 10.26
to Form 10-K for the fiscal year ended June 30, 1987, Commission File No. 0-10248.
10.8 1993 Incentive
Stock Option Plan incorporated by reference to Exhibit 28.1 to the Registrant's registration statement on Form S-8, Commission
File No. 33-60154.
10.9 1993 Non-Statutory
Stock Option Plan incorporated by reference to Exhibit 28.2 to the Registrant's registration statement on Form S-8, Commission
File No. 33-60154.
10.10 1993
Stock Bonus Plan incorporated by reference to Exhibit 28.3 to the Registrant's registration statement on Form S-8, Commission File
No. 33-60154.
10.11 1994
Non-Statutory Stock Option Plan incorporated by reference to Exhibit 28.1 to the Registrant's registration statement on Form S-8,
Commission File No. 33-81638.
10.12 1994
Stock Bonus Plan incorporated by reference to Exhibit 28.2 to the Registrant's registration statement on Form S-8, Commission File
No. 33-81638.
10.13 1995
Non-Statutory Stock Option Plan incorporated by reference to Exhibit 28.1 to the Registrant's registration statement on Form S-8,
Commission File No. 33-62099.
10.14 1995
Stock Bonus Plan incorporated by reference to Exhibit 28.2 to the Registrant's registration statement on Form S-8, Commission File
No. 33-62099.
10.15 1997
Non-Statutory Stock Option Plan incorporated by reference to Exhibit 28.1 to the Registrant's registration statement on Form S-8,
Commission File No.: 333-27411.
10.16 1997
Stock Bonus Plan incorporated by reference to Exhibit 28.2 to the Registrant's registration statement on Form S-8, Commission File
No: 333-27411.
10.17 Stock
Purchase Agreement, dated July 31, 1997, by and between U.S. Health Management Corporation, Raymond V. Damadian, M.D. MR Scanning
Centers Management Company and Raymond V. Damadian, incorporated by reference to Exhibit 2.1 to the Registrant's Form 8-K, July
31, 1997, commission File No: 0-10248.
FONAR CORPORATION AND SUBSIDIARIES
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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.
10.19 Stock
Purchase Agreement dated March 20, 1998 by and among Health Management Corporation of America, Fonar Corporation, Giovanni Marciano,
Glenn Muraca et al., incorporated by reference to Exhibit 2.1 to the Registrant's 8-K, March 20, 1998, Commission File No: 0-10248.
10.20 Stock
Purchase Agreement dated August 20, 1998 by and among Health Management Corporation of America, Fonar Corporation, Stuart Blumberg
and Steven Jonas, incorporated by reference to Exhibit 2 to the Registrant's 8-K, September 3, 1998, Commission File No. 0-10248.
10.21 2000
Stock Bonus Plan incorporated by reference to Exhibit 99.1 to the Registrant’s registration Statement on Form S-8, Commission
File No.: 333-66760.
10.22 2002
Stock Bonus Plan incorporated by reference to Exhibit 99.1 to the Registrant’s registration statement on Form S-8, Commission
File No.: 333-89578.
10.23 2002
Incentive Stock Option Plan incorporated by reference to Exhibit 99.1 to the Registrant’s registration statement on Form
S-8, Commission File No.: 333-96557.
10.24 2003
Stock Bonus Plan incorporated by reference to Exhibit 99.1 to the Registrant’s registration statement on Form S-8, Commission
File No: 333-106626.
10.25 2003
Supplemental Stock Bonus Plan incorporated by reference to Exhibit 99.1 to the Registrant’s registration statement on Form
S-8, Commission File No: 333-106626.
10.26 2004
Stock Bonus Plan incorporated by reference to Exhibit 99.1 to the Registrant’s registration statement on Form S-8, Commission
File No. 333-112577.
10.27 2005
Stock Bonus Plan incorporated by reference to Exhibit 99.1 to the Registrant’s registration statement on Form S-8, Commission
File No. 333-122859.
10.28 2005
Supplemental Stock Bonus Plan incorporated by reference to Exhibit 99.1 to the Registrant’s registration statement on Form
S-8, Commission File No. 333-126658.
10.29 Purchase
Agreement dated May 24, 2001 by and between the Registrant and The Tail Wind Fund Ltd. incorporated by reference to Exhibit 10.1
to the Registrant’s current report on Form 8-K filed June 11, 2001. Commission File No. 0-10248.
10.30 Registration
Rights Agreement dated May 24, 2001 by and among the Registrant, The Tail Wind Fund Ltd. and Roan Meyers, Inc. incorporated herein
by reference to Exhibit 10.2 to the Registrant’s current report on Form 8-K filed June 11, 2001. Commission File No. 0-10248.
10.31 Amendment
to Callable Warrant dated April 28, 2004 by and between The Tail Wind Fund, Ltd. and the Registrant incorporated by reference to
Exhibit 10.17 to the Registrant’s registration statement on Form S-3, Commission File No. 333-116908.
FONAR CORPORATION AND SUBSIDIARIES
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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’s registration statement on Form S-3, Commission File No. 333-116908.
10.33 Form
of First Amendment to Purchase Warrant dated June 1, 2004 by and between each of Roan/Meyers Associates, L.P. and its designees
and the Registrant, incorporated by reference to Exhibit 10.19 to the Registrant’s registration statement on Form S-3, Commission
File No. 333-116908.
10.34 Asset
Purchase Agreement dated July 28, 2005 among Health Plus Management Services, L.L.C., Health Management Corporation of America,
Dynamic Healthcare Management, Inc. and Fonar Corporation, incorporated by reference to Exhibit 2 to the Registrant’s Form
8-K, August 2, 2005, Commission File No. 0-10248.
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10.35
|
Partnership Interest Purchase Agreement dated September 29, 2008 by and between Diagnostic Management, LLC and Raymond V. Damadian, M.D. MR Scanning Centers Management Company, incorporated by reference to Exhibit 10.35 to Form 10-K for the fiscal year ended June 30, 2008. Commission File No. 0-10248.
|
10.36 2010
Stock Bonus Plan, incorporated by reference to Exhibit 99.1 to the Registrant’s registration statement on Form S-8, Commission
File No. 333-168771.
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’s Form 10-K for the fiscal year ended June 30, 2004, Commission
File No.: 0-10248.
21.1 Subsidiaries
of the Registrant. See Exhibits.
23.1 Independent
Registered Public Accounting Firm’s Report
See Exhibits.
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31.1
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Section 302 Certification. See Exhibits.
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32.1
|
Section 906 Certification. See Exhibits.
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FONAR CORPORATION AND SUBSIDIARIES
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SIGNATURES
Pursuant to the requirements of Section 13 or
15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FONAR CORPORATION
Dated: October 15, 2013
By:/s/ Raymond V.
Damadian
Raymond V. Damadian, President
Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
Signature
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Title
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Date
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/s/Raymond V. Damadian Raymond V. Damadian
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Chairman of the Board of Directors, President, Director, Principal Executive Officer and Acting Principal Financial Officer)
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October 15, 2013
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/s/Claudette J.V. Chan
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Director
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October 15, 2013
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Claudette J.V. Chan
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/s/ Robert J. Janoff
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Director
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October 15, 2013
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Robert J. Janoff
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/s/ Charles N. O'Data
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Director
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October 15, 2013
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Charles N. O'Data
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/s/Ronald G. Lehman
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Director
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October 15, 2013
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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
Fonar (NASDAQ:FONR)
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