Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K/A
|_| Annual Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the Fiscal Year Ended June 30, 2001
or
___ Transition Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
Commission File Number: 0-10832
AFP Imaging Corporation
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(Exact name of registrant as specified in its charter)
New York 13-2956272
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
250 Clearbrook Road, Elmsford, NY 10523
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(Address of principal executive offices)
Registrant's telephone number: (914) 592-6100
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Securities registered pursuant Section 12 (b) of the Act: None
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Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value .01 per share
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(Title of Class)
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 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 No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. YES ( X ) NO ( )
The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant as of August 31, 2001 was approximately
$1,358,805. On such date, the average of the closing bid and asked prices of the
Common Stock, as quoted by the OTC Bulletin Board, was $.24.
The registrant had 9,271,054 shares of Common Stock outstanding as of September
30, 2001,
The information required by Part III of Form 10-K is incorporated by reference
to the registrant's Proxy Statement for the 2001 Annual Meeting of Shareholders
tentatively scheduled for December 14, 2001 to be filed with the Securities and
Exchange Commission on or prior to October 28, 2001.
Introductory Note - Forward Looking Statements
This Annual Report on Form 10-K contains certain forward-looking statements,
within the meaning of the Private Securities Reform Act of 1995. Forward-looking
statements involve known and unknown risks, uncertainties and other factors that
could cause actual results of AFP Imaging Corporation (collectively with its
subsidiaries, the "Company") or achievements expressed or implied by such
forward-looking statements to not occur, not be realized or differ materially
from that stated in such forward-looking statements. Forward-looking statements
may be identified by terminology such as "may", "will", "project", "expect",
"believe", "estimate", "anticipate", "intend", "continue", "potential",
"opportunity" or similar terms, variations of such terms, or the negative of
such terms or variations. Potential risks, uncertainties and factors include,
but are not limited to, adverse changes in general economic conditions, the
economic, political and social impact of the September 2001 terrorist attacks on
the United States and the resulting ability of the Company to transact its
business in a timely and efficient manner, the Company's ability to repay its
loans when due, changes in the markets for the Company's products and services,
the ability of the Company to successfully design, develop, manufacture and sell
new products, the Company's ability to successfully market its existing and new
products, adverse business conditions, increased competition, pricing pressures,
risk associated with foreign operations, the ability to attract and retain key
personnel, difficulties in obtaining adequate long-term financing to meet the
Company's obligations, changes in the nature or enforcement of laws and
regulations concerning the Company's products, services, suppliers, or its
customers, changes in currency exchange rates and regulations, and other factors
set forth in this Form 10-K.
Part I
Item 1. Business
a) General Development of Business
AFP Imaging Corporation was organized on September 20, 1978, under the laws of
the State of New York. Since such date, the Company has been engaged in the
business of designing, developing, manufacturing and distributing equipment for
producing medical and dental x-ray images by chemical processing photosensitive
materials as well as manufacturing other closely related electro/optical imaging
equipment. These products have been adapted to medical, industrial, dental and
graphic arts applications. The Company's products are distributed to worldwide
markets through a network of independent and unaffiliated dealers.
As of June 30, 2001, the Company wrote-off the balance of the goodwill
associated with the July 1995 acquisition of its medical diagnostic imager
product line, to reflect changing technology and market conditions, in
accordance with generally accepted accounting principles. This charge, of
$846,000, is included in special charges in the accompanying Consolidated
Financial Statements. The Company also recorded a charge of $200,000 to reduce
the carrying value of the associated inventory to reflect the recognized
impairment in the market value. This charge is included in cost of goods sold in
the accompanying Consolidated Financial Statements. See Note 8 to the
Consolidated Financial Statements and Management's Discussion and Analysis of
Financial Condition and Results of Operation for a further discussion.
On July 30, 2001, the Company sold its graphic arts business and selected
related assets to a third party for approximately $350,000, comprised of cash
and a note receivable. As of June 30, 2001, the Company incurred a charge of
approximately $110,000 due to the recognized impairment in the market value of
the inventory associated with the graphic arts business and associated costs for
the disposition of this product line. Approximately $50,000 of these costs
related to the carrying value of the inventory, and has been classified as cost
of sales in the accompanying Consolidated Statement of Operations. The remaining
$60,000 is included in special charges in the accompanying Consolidated
Statement of Operations.
On September 21, 2001, the Company established a new three-year, $3.5 million
senior secured revolving credit facility with a new senior secured lender. The
general terms, conditions, and covenants were modified from the previous credit
facility, with the Company's former secured lender. See Note 2 to the
Consolidated Financial Statements and Management's Discussion and Analysis of
Financial Condition and Results of Operation for a further discussion.
b) Financial Information about Industry Segments
The Company was engaged in two industry segments: medical/dental and graphic
arts, through July 2001. The Company is no longer engaged in the graphic arts
industry, since the business and associated inventory and other assets were sold
to a third party on July 30, 2001. The Company has agreed not to compete in this
same business line of graphic arts film and plate processing equipment for ten
years. The Company's business segments were based on differences in the nature
of their operations, including distribution channels and customers. The
composition of the segments is consistent with that used by the Company's
management in making strategic decisions. See Note 7 to the Consolidated
Financial Statements for further discussion of the Company's industry segments.
c) Narrative Description of Business
Principal Products and Services
Medical, Dental and Industrial X-Ray Processors & Accessories
The Company manufactures and distributes a line of freestanding and table top
medical, dental and industrial x-ray film processors. These machines are capable
of processing or developing films of various sizes. The exposed film is inserted
into equipment and returned to the operator developed, fixed, washed and dried.
The equipment can be located either in a dark room site or adapted to a daylight
loading system. These units are used for diagnostic x-ray imaging and
industrial, non-destructive testing applications. The Company's products are
distributed worldwide through an unaffiliated dealer network to doctors,
dentists, hospitals, medical clinics, the U.S. military, and other facilities.
Digital Dental Imaging Systems
The Company manufactures and distributes a filmless digital dental radiography
system, based on x-rays and electronic imaging technology. Such technology
generates and captures a patient's dental images with an intraoral sensor and
then displays the image on a computer screen that operates in a Windows-based
software environment.
The Company manufactures and distributes intraoral video dental cameras and
related software. These products allow users to capture up to four intraoral
dental images on a single computer screen and feature the mobility of the camera
between operatories by "docking" (plugging in) directly into another chairside
location. These products can be networked and are compatible with the Company's
digital dental radiography system. A proprietary, Windows-based software suite
provides for selection, transmission and manipulation of the desired images by
the dentist.
Diagnostic Imagers and Viewers
The Company manufactures a line of multiformat compact cameras to permanently
record and document the images produced during diagnostic examinations from
several different applications. These cameras can record from one to nine images
on a film that can be processed and developed in the Company's film processors.
X-Ray Systems
The Company has the worldwide distribution rights to a European-developed
intraoral dental x-ray machine. The Company also has the North American
distribution rights to a Japanese developed panoramic dental x-ray machine. The
x-ray film exposed by each of these units is then developed in the Company's
processors. These x-ray products also are compatible with the Company's digital
x-ray products and software.
Graphic Arts Processors
The Company previously distributed various sized graphic arts processors, which
developed different photosensitive materials such as rapid access film and
papers. These processors are intended for use with phototypesetting, graphics
and other pre-printing press applications. Newspapers, publishers and commercial
printers are primary customers for these products. This product line was sold on
July 30, 2001.
Patents and Trademarks
The Company presently holds many domestic and foreign utility patents, which,
the Company believes, are material to the technology used in its products. The
Company's intellectual property includes several patents acquired as part of
acquisitions in 1997. The Company is not aware of any patents held by others
that conflict with the Company's current product designs. The Company has agreed
to pay a nominal royalty on the domestic sales of its digital dental systems to
a third party under a license for the use of the third party's software format
in the operation of one of the Company's systems. Such royalty payments have not
been and are not anticipated to be material to the operations of the Company.
The principal technology applied to the construction of the Company's other
products is state-of-the-art and may be considered proprietary. Patent
applications have been filed where appropriate. The Company owns several
domestic and foreign trademarks, which it uses in connection with the marketing
of its products. The Company utilizes various domestic and international forms
of trademarks, including AFP Imaging, DENT-X, and Sens-A-Ray 2000, among others.
The Company believes that these utility patents and trademarks are important to
its operations and the loss or infringement by others of its rights to such
patents and trademarks could have a material adverse effect on the Company.
Research and Development
The amounts spent by the Company during each of the Company's last three fiscal
years on primary research activities relating to the development of new products
and the improvement of existing products, all of which was Company sponsored,
are as follows:
2001 2000 1999
$457,172 $476,679 $1,205,461
The Company conducts research and development activities internally as well as
contracts certain projects to qualified vendors and expert consultants. The
Company's research and development efforts and technologies have been enhanced
by business acquisitions completed in Fiscal Years 1997 and 1998. In each of
these transactions, the Company added new product lines, and gained proprietary
technologies and access to future research and development benefits. Commencing
in April 1997, the Company participated in the development of new video/x-ray
imaging sensors, including but not limited to Close Coupled Device ("CCD") and
Complimentary Metal Oxide Semiconductor ("CMOS") type sensors. Research and
development costs for Fiscal Years 1999 and 2000 do not include the European
Union ("EU") grants paid to the Company for the Company's participation in this
research and development project. All dental applications resulting from the
research under the project will be licensed exclusively to the Company. The EU
contract expired in May 2000. However, the Company is continuing its research
and development efforts previously conducted under the EU contract, with
internally generated funds.
The Company's level of research and development spending is discussed further in
Management's Discussion and Analysis of Financial Condition and Results of
Operation.
Raw Materials
The Company does not utilize any unique or difficult to obtain raw materials or
processes in the design and manufacture of its products. The Company anticipates
that an adequate commercial supply of all raw materials will remain available
from multiple sources. However, the Company owns proprietary designs and tooling
to produce CCD and CMOS digital x-ray sensors, which are in the physical
possession of a Company vendor.
Sales, Marketing and Distribution
All of the Company's products are manufactured and distributed domestically and
internationally in two basic forms. Certain products are custom engineered for
Original Equipment Manufacturer's ("OEM") customers and carry the respective
OEM's brand label. The OEM's are responsible for the installation and servicing
of OEM-labeled products. The balance of the Company's products are marketed
under the Company's own trade names and are distributed through an extensive
network of independent medical and dental dealers. These dealers install and
service such products. The Company conducts worldwide marketing and regional
sales management efforts to promote all of its products and brand names.
The Company advertises in domestic and international trade journals, provides
sales support and literature, prepares technical manuals and conducts customer
education and training programs in order to promote its products. In addition,
the Company participates in domestic and international trade and clinical shows.
Government Regulation
The United States Food and Drug Administration ("FDA") regulates the
distribution of all equipment used as medical devices. The Company believes it
has registered all of its applicable medical and dental products with the FDA.
The FDA has the right to disapprove the marketing of any medical device that
fails to comply with FDA regulations. The Company believes that its products and
procedures satisfy all the criteria necessary to comply with FDA regulations.
The Company's manufacturing facility is ISO (International Standards
Organization) 9001 certified. Where applicable, the Company's products are
Conformite' Europeenne ("CE") certified for sales in the European Union. Any
future changes in regulations, domestically or internationally, governing
devices such as the Company's medical and dental products could have a material
adverse effect on the Company.
Seasonal Nature
The Company believes its business is not seasonal.
Working Capital Practices
The Company believes its practices regarding inventories, receivables or other
items of working capital to be typical for the industries involved. In September
2001, the Company established a new three-year, senior secured credit facility
with a new lender. The general terms, conditions, and covenants were modified
from the previous agreement with the Company's former secured lender. See Note 2
to the Consolidated Financial Statements, and Management's Discussion and
Analysis of Financial Condition and Results of Operation for further discussion.
Customers
No customer accounted for 10% or more of net sales in Fiscal Years 2001, 2000 or
1999. Management does not believe the loss of any one customer would have a
materially adverse effect on the Company's consolidated business.
Backlog Orders
As of June 30, 2001, the Company's backlog of orders for its products was
approximately $1,789,000 (excluding graphic arts orders) as compared to
$5,394,000 as of June 30, 2000, which included graphic arts orders. The Fiscal
2000 backlog also included a government order of $1,354,000. All of the orders
included in the backlog at June 30, 2001 are scheduled for delivery on or before
June 30, 2002. OEM bulk purchase commitments are typically negotiated for
12-month periods and are not based on a calendar or fiscal year. Spare part
sales are not part of the Company's backlog calculations. In the opinion of the
Company, fluctuations in the backlog and its size at any given time are not
necessarily indicative of intermediate or long-term trends in the Company's
business. Much of the Company's backlog can be canceled or the delivery dates of
orders can be accelerated or extended without penalty. Delivery of capital
equipment is frequently subject to changing budget conditions of medical
institutions or end user clinical practitioners.
Government Contracts
The Company has two current contracts with the United States Government that are
material to the Company's consolidated business. One contract is with the
Department of the Air Force for the delivery of Deployable X-ray Film
Processors. The other contract, which is subject to a purchase option release
provision, is with the Department of the Army for the delivery of Hand Held
Dental X-ray Systems. The Company anticipates shipping these units during the
first quarter of Fiscal Year 2002. The Company's policy is to be responsive to
all governmental Requests for Quotations (RFQ), which can be fulfilled within
the scope of the Company's product lines.
Competition
The Company's products utilize mechanical, as well as analog and digital
electronic, technologies. The Company is subject to both foreign and domestic
competition. The competition is characterized by significant investment in
research and development of new technologies, products and services. Some
competitors are well established in the film processor manufacturing and
distribution businesses and may have greater financial, distribution resources
and facilities than the Company. The Company relies on internal research and
development personnel as well as subcontracted vendors. With respect to all of
its products, the Company competes on the basis of price, features, product
quality, applications, engineering, and promptness of delivery and customer
service. The Company also manufacturers and provides to OEM customers different
product versions which may compete with Company-supplied products to other OEM,
as well as Company-branded products. The Company purchases certain products from
others for resale on a non-exclusive basis, which may be subject to competition
from other independent distributors.
The Company also competes in the dental imaging market also on the basis of its
proprietary and patented technologies. Certain competitors have significant or
greater resources and revenues in electronic digital imaging technologies and
expertise in software development utilized in dental imaging products. See
"Research and Development" for further discussion.
Environmental
The Company believes it is in compliance with the laws and regulations governing
the protection of the environment and that continued compliance would not have a
material adverse effect on the Company or require any material capital
expenditures. The Company believes it does not use any controlled or regulated
materials or processes in its operation. Compliance with local codes for the
installation and operation of the Company's products is the responsibility of
the end user, or the dealer who independently provides installation services.
See Item 3, Legal Proceedings, for further discussion on environmental claims.
Employees
As of June 30, 2001, the Company employed 106 persons worldwide on a full-time
basis. The Company has no collective bargaining agreements and considers its
relationship with its employees to be satisfactory.
d) Financial Information about Foreign and Domestic Operations and Export Sales
With respect to the Company's last three fiscal years, domestic sales were
$18,819,770 (2001), $18,586,087 (2000) and $20,736,264 (1999) representing 78%,
73% and 71%, respectively, of the Company's sales during such periods. Domestic
operating loss was $1,260,835, $256,302 and $1,413,688 for the years ended June
30, 2001, 2000 and 1999, respectively. Export and foreign sales during such
periods were $5,231,530 (2001), $6,780,911 (2000) and $8,634,074 (1999) or 22%,
27% and 29% of total Company sales for each period, respectively. The Company's
Swedish subsidiary, Regam, incurred net losses of $24,950, $151,580, and
$268,200 for fiscal 2001, 2000, and 1999. The Company's Swedish operation is
currently inactive.
Assets used in the manufacture of export sales are integrated with the other
assets of the Company.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation
The following should be read in conjunction with the Company's Consolidated
Financial Statements and notes thereto included elsewhere herein.
Capital Resources and Liquidity
The Company's working capital decreased approximately $1,157,000 between Fiscal
Year 2001 and Fiscal Year 2000. The decrease mainly is due to a $590,000
decrease in inventory, and a $568,000 decrease in accounts receivable. These
funds were used to repay the revolving debt.
As of September 21, 2001, the Company established a new senior secured credit
facility, (the "Revolving Credit Loan") consisting of a $3.5 million revolving
line of credit, to replace its then current senior secured credit facility,
which would have expired on October 31, 2001. The Company's former senior
secured lender filed for Chapter 11 under the Bankruptcy Code and indicated to
the Company that it did not intend to renew the credit facility in October 2001.
The Revolving Credit Loan is secured by all of the Company's inventory, accounts
receivable, equipment, life insurance policies and proceeds thereof, trademarks,
licenses, patents and general intangibles. The Revolving Credit Loan requires
that certain financial ratios and net worth amounts be maintained. The Revolving
Credit Loan also provides for a decrease in the maximum amount of loan available
under the revolving line of credit, an interest rate increase to 1-3/4% over the
prime rate, the formula to calculate available funds based on eligible accounts
receivable and inventory is stricter, and there are more reporting requirements
to the senior secured lender, than under the Company's former credit facility.
This Revolving Credit Loan provides for decreases in the interest rate charged
on monies outstanding, currently at 7-1/4% per year, under specified
circumstances. The Company is dependent upon the Revolving Credit Loan to
finance its overall operations. At September 28, 2001, the Company had available
$530,600 of unused credit under the Revolving Credit Loan.
As of June 30, 2001, the Company was not in compliance with the terms and
conditions of its former senior secured lender, as it did not meet the net worth
covenant, or the debt service covenants.
The Company's historical operating cash flows have been positive; however, the
Company is dependent upon its credit facilities to finance its ongoing
operations. The Company expects its need for working capital will continue to be
financed by operations and from borrowings on its Revolving Credit Loan. The
Company presently is unaware of any other trends, demands, commitments or
contingencies which are reasonably likely to result in a material increase or
decrease in its liquidity or capital resources in the foreseeable future, except
for any ongoing losses from its operations and the final outcome of any pending
litigation. No assurances can be given that the Company will have sufficient
cash flow in the near or long term.
Capital expenditures for Fiscal Year 2001 of approximately $203,000 consisted of
a new computer network system, individual computer workstation upgrades, and
production tooling costs to upgrade and enhance the Company's dental product
lines, leasehold improvement costs, and other appropriate replacements in the
normal course of operations. The Company expects to finance any future capital
requirements principally from internally generated funds. The total amount of
capital expenditures is limited under the Revolving Credit Loan.
Results of Operations - Fiscal 2001 vs. Fiscal 2000
In March 2001, the Company implemented a re-organizational and re-structuring
plan to better match the Company's resources with the then-current projected
sales forecast. Termination notices were given to 11% of its workforce,
including both production and support employees. Cost reductions were
implemented which included the elimination of attendance at an international
show, reduced travel and communication expenses, and a continuation of a
Company-wide cost savings program. Additionally, certain low margin products
were discontinued. The Company expects to begin to realize the associated
benefits beginning with the first quarter of Fiscal Year 2002, and did not incur
any associated special charges during Fiscal Year 2001.
Sales decreased by approximately $1,315,000 or 5.2 % between the two fiscal
years. Sales by the Company's graphic arts business decreased $750,000 from the
prior fiscal year. Due to the continuing decline in graphic arts sales, the
Company decided to dispose of this business segment, and completed the
disposition in July 2001. The Company's medical diagnostic imagers experienced a
significant decrease in sales volume, of $1.5 million between the two fiscal
years. This decrease is attributable to evolving technology and changing
customer demands, changing market conditions, and expiration of purchase
agreements by large OEM customers. Sales of dental product increased $900,000
between the two fiscal years. Included in the first quarter of Fiscal 2001, was
a sale to the military of approximately $1.3 million. Additionally, the Company
had a full year of sales of its intraoral x-ray unit in Fiscal 2001, whereas
this product was first marketed and sold beginning in the fourth quarter of
Fiscal 2000. The analog medical and dental sales remained fairly current between
the two periods.
Gross profit as a percent of sales increased slightly, approximately 1.0
percentage points. Included in cost of sales in Fiscal 2001 is a charge of
$200,000 to reflect the lower realizable value of the medical diagnostic imager
inventory, and $50,000 to reflect the actual impairment in the graphic arts
inventory which was sold in July 2001. Included in cost of sales for Fiscal 2000
is a charge of $400,000 to recognize the impairment (at that time) in the fair
market value of the graphic arts inventory, based on a signed letter of intent
(June 2000) to sell the inventory. Excluding these distinct charges, gross
profit, as a percent of sales, would have increased slightly, approximately .4
percentage points. This improvement can be attributable to a reduction in
overhead costs, changes in the product mix, and the stronger US dollar in Fiscal
2001.
Selling, general, and administrative costs decreased approximately $199,000 or
2.6% between Fiscal Year 2001 and Fiscal Year 2000. This decrease is due to
management's efforts throughout the year to reduce expenses and eliminate
redundant charges. The Company reduced attendance at several industry trade
shows, and associated travel costs, based on current projected sales. As noted
above, the Company anticipates further reductions in these costs in Fiscal 2002,
based on projected sales levels.
Research and development costs decreased slightly, approximately $19,000 or 4%
between the two fiscal years. The Company continues to invest in sustaining
engineering and related costs for its analog products. Where applicable, the
Company is acting as a master import distributor for products developed by
others. The Company continues to focus on the refinement of its digital products
in order to reduce costs and maintain market share.
Special charges for Fiscal 2001 include approximately $846,000 to completely
write-off the goodwill associated with the medical diagnostic imager product
line. This line was acquired in July 1995, and due to changing technology and
market conditions, the Company believes that there has been an impairment in the
carrying value of this long-lived asset. Special charges also include a charge
of $60,000 to accrue the closing costs including severance, lease obligations
and legal expenses associated with the sale of the graphic arts product line on
July 30, 2001. See Results of Operations Fiscal 2000 vs. Fiscal 1999 for a
further description of special charges in Fiscal 2000.
Interest expense, net decreased approximately $35,000 or 7% between Fiscal 2001
and Fiscal 2000. Fiscal 2001 included $33,000 of interest costs associated with
a subordinated note, restructured in August 1999, and a higher interest rate
(3/4%) on the credit facility after it was renewed in October 2000. The Company
reduced its debt by $1,055,000 during the year, which reduced interest expense
by approximately $40,000, and there were several decreases in the
prime-borrowing rate during the last two quarters of the current fiscal year. As
noted above, In September 2001, the Company established a new credit facility
with a new lender. The interest rate under the new facility is slightly higher
than the interest rate under the prior credit facility.
The income tax provision primarily reflects nominal state taxes due. The Company
did not recognize a tax benefit for the net loss in Fiscal 2001, as the Company
does not meet the criteria described in statement of Financial Accounting
Standard No. 109, "Accounting for Income Taxes" for recording such benefit.
Results of Operations - Fiscal 2000 vs. Fiscal 1999
Sales decreased by approximately $4,003,300 or 13.6% between the two fiscal
years. The Company's product lines experienced a general decrease in sales
volume, with the graphic arts business the most significant, due to continually
evolving printing technology methods and changing customer demands. The dental
lines were adversely affected during the year by an import restriction by the
FDA on the manufacturer of the Company's intraoral x-ray unit. The Company
selected a new unit for distribution, which became available to customers during
the fourth quarter fiscal 2000. The Company maintained its level of dental sales
during Fiscal 2000 by adding products for redistribution, aggressive marketing,
and repositioning certain of its products in the market place.
Gross profit as a percent of sales increased 1.45 percentage points. Included in
cost of sales for Fiscal 2000 is a charge of $400,000 to recognize the
impairment (at that time) in the fair market value of the graphic arts
inventory, based on a signed letter of intent to sell the inventory. Included in
cost of sales for Fiscal 1999 is a charge of $350,000 to reduce the inventory
related to the dental product line acquired in December 1999 to its net
realizable value. Excluding these distinct charges, gross profit, as a percent
of sales, would have increased approximately 1.84 percentage points. This
improvement can be attributable to reduced manufacturing overheads and labor as
more distributor goods were sold, and management's efforts to reduce and
eliminate redundancies in all operations. Material costs stayed relatively
constant between the periods.
Selling, general, and administrative costs decreased $921,300 or 11% between the
two fiscal years. Management has continued its financial restructuring plan to
eliminate all non-essential expenses.
Research and development costs decreased by approximately $729,000 or 60%. The
Company closed its engineering office in Vancouver, Washington, effective June
30, 1999, and relocated the operations to the Elmsford, New York facility. The
Company has continued to focus on the refinement of its digital products in
order to reduce costs and maintain market share. Additionally, the Company
continues to invest in sustaining engineering and related costs for its analog
products. Where applicable, the Company is acting as a master import distributor
for products developed by others.
Special charges for Fiscal 2000 include a credit of $100,000 to reflect the
restructuring and reduction in the principal amount of a Subordinated Promissory
Note issued in 1997. See Note 8, Notes to Consolidated Financial Statements, for
a further description of special charges in Fiscal 1999.
Interest expense, net, decreased by approximately $184,000 or 28% between the
two fiscal years. Corporate debt was reduced approximately $1.3 million since
June 30, 1999. Additionally, two subordinated notes payable were reduced and
restructured as of June 30, 1999, which further reduced interest expense.
The income tax provision primarily reflects nominal state and foreign capital
taxes due. The Company did not recognize a tax benefit for the net loss in
Fiscal 2000, as the Company does not meet the criteria described in statement of
Financial Accounting Standard No. 109, "Accounting for Income Taxes" for
recording such benefit.
Item 8. Financial Statements and Supplementary Data
AFP IMAGING CORPORATION AND SUBSIDIARIES
FINANCIAL STATEMENTS
AS OF JUNE 30, 2001 AND 2000
TOGETHER WITH REPORT OF
INDEPENDENT PUBLIC ACCOUNTANTS
AFP IMAGING CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accountants F-1
Consolidated Balance Sheets - June 30, 2001 and 2000 F-2
Consolidated Statements of Operations for the Years Ended
June 30, 2001, 2000 and 1999 F-3
Consolidated Statements of Shareholders' Equity and Comprehensive
Loss for the Years Ended June 30, 2001, 2000 and 1999 F-4
Consolidated Statements of Cash Flows for the Years Ended
June 30, 2001, 2000 and 1999 F-5 to F-6
Notes to Consolidated Financial Statements F-7 to F-17
Schedule II - Valuation and Qualifying Accounts for the
Years Ended June 30, 2001, 2000 and 1999 F-18
Report of Independent Public Accountants
To the Shareholders of
AFP Imaging Corporation:
We have audited the accompanying consolidated balance sheets of AFP Imaging
Corporation (a New York Corporation) and subsidiaries as of June 30, 2001 and
2000, and the related consolidated statements of operations, shareholders'
equity and comprehensive loss and cash flows for each of the three years in the
period ended June 30, 2001. These financial statements and the schedule referred
to below are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the 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. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes 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 financial statements referred to above present fairly, in
all material respects, the financial position of AFP Imaging Corporation and
subsidiaries as of June 30, 2001 and 2000 and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
2001 in conformity with accounting principles generally accepted in the United
States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II, Valuation and Qualifying
Accounts, is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not a required part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic financial statements and, in our opinion, is fairly
stated, in all material respects, in relation to the basic financial statements
taken as a whole.
Arthur Andersen LLP
Stamford, Connecticut
March 11, 2002
F-1
AFP IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 AND 2000
2001 2000
----------- ------------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 198,276 $ 433,620
Accounts receivable, less allowance for doubtful accounts and sales
returns of $110,000 and $163,000, respectively 2,676,546 3,244,213
Inventories 3,488,217 4,078,073
Prepaid expenses and other current assets 130,720 128,015
------------ ------------
Total current assets 6,493,759 7,883,921
PROPERTY, PLANT AND EQUIPMENT, at cost:
Leasehold improvements 324,968 312,052
Machinery and equipment 3,034,236 7,753,216
------------ ------------
3,359,204 8,065,268
Less - Accumulated depreciation (2,748,726) (7,173,162)
------------ ------------
610,478 892,106
GOODWILL, net of accumulated amortization of $1,488,706 and
$1,129,709, respectively 1,441,069 2,563,706
OTHER ASSETS 89,908 268,172
------------ ------------
$ 8,635,214 $ 11,607,905
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 141,667 $ 194,556
Accounts payable 982,825 1,165,012
Accrued expenses 489,960 520,500
Accrued payroll expenses 430,558 397,893
------------ ------------
Total current liabilities 2,045,010 2,277,961
LONG-TERM DEBT 3,872,981 4,875,005
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY:
Common Stock, $.01 par value, 30,000,000 shares authorized and
9,271,054 shares issued and outstanding at June 30, 2001 and 2000 92,710 92,710
Paid-in capital in excess of par 11,545,883 11,545,883
Accumulated deficit (8,907,059) (7,168,713)
Cumulative translation adjustment (14,311) (14,941)
------------ ------------
Total shareholders' equity 2,717,223 4,454,939
------------ ------------
$ 8,635,214 $ 11,607,905
============ ============
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-2
AFP IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999
2001 2000 1999
------------ ------------ ------------
NET SALES $ 24,051,300 $ 25,366,998 $ 29,370,338
COST OF SALES 16,460,554 17,606,138 20,812,789
------------ ------------ ------------
Gross profit 7,590,746 7,760,860 8,557,549
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 7,513,359 7,712,733 8,633,976
RESEARCH AND DEVELOPMENT EXPENSES 457,172 476,679 1,205,461
SPECIAL CHARGES (CREDITS) 906,000 (100,000) 400,000
------------ ------------ ------------
Operating loss (1,285,785) (328,552) (1,681,888)
INTEREST EXPENSE, net 439,249 474,414 658,421
------------ ------------ ------------
Loss before income taxes (1,725,034) (802,966) (2,340,309)
PROVISION (BENEFIT) FOR INCOME TAXES 13,312 4,916 (133,367)
------------ ------------ ------------
NET LOSS $ (1,738,346) $ (807,882) $ (2,206,942)
============ ============ ============
NET LOSS PER COMMON SHARE
Basic $ (.19) $ (.09) $ (.24)
Diluted $ (.19) $ (.09) $ (.24)
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-3
AFP IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE LOSS
FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999
Paid-in Foreign
Capital Currency
Comprehensive Common In Excess Accumulated Translation
Loss Stock of Par Deficit Adjustment Total
-------------- ----------- ------------ ------------ -------------- ------------
Balance June 30, 1998 $ - $ 97,679 $11,858,704 $ (4,153,889) $ (8,509) $ 7,793,985
Retirement of 496,895 shares of
common stock at $.75 per share - (4,969) (367,703) - - (372,672)
Foreign currency translation adjustment (6,072) - - - (6,072) (6,072)
Net loss (2,206,942) - - (2,206,942) - (2,206,942)
------------
Comprehensive loss $ (2,213,014) - - - - -
============ ----------- ----------- ------------ ---------- ------------
Balance June 30, 1999 92,710 11,491,001 (6,360,831) (14,581) 5,208,299
Issuance of 580,000 employee stock
options at $.31 per share $ - - 54,882 - - 54,882
Foreign currency translation
adjustment (360) - - - (360) (360)
Net loss (807,882) - - (807,882) - (807,882)
------------
Comprehensive loss $ (808,242) - - - - -
============ ----------- ----------- ------------ ------------ ------------
Balance June 30, 2000 92,710 11,545,883 (7,168,713) (14,941) 4,454,939
Foreign currency translation
adjustment $ 630 - - - 630 630
Net loss (1,738,346) - - (1,738,346) - (1,738,346)
------------
Comprehensive loss $ (1,737,716) - - - - -
============ ----------- ----------- ------------ ------------ ------------
Balance June 30, 2001 $ 92,710 $11,545,883 $ (8,907,059) $ (14,311) $ 2,717,223
=========== =========== ============ ============ ============
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-4
AFP IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999
2001 2000 1999
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,738,346) $ (807,882) $(2,206,942)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities-
Non-cash special charges 846,000 (100,000) 400,000
Accretion of imputed interest on note payable - - 154,927
Gain on sale of equipment - - (60,037)
Depreciation and amortization 761,233 713,612 707,635
Provision for losses on accounts receivable 99,356 87,049 260,506
Change in assets and liabilities:
Decrease in accounts receivable 468,311 592,252 491,573
Decrease in inventories 589,856 1,471,637 1,014,573
(Increase) decrease in prepaid expenses and other (2,705) (38,057) 204,031
Decrease (increase) in other assets 178,264 (70,239) 183,157
(Decrease) increase in accounts payable (182,187) 199,067 (300,182)
Decrease in accrued expenses (30,540) (180,649) (718,866)
Increase (decrease) in accrued payroll expenses 32,665 (310,624) 192,178
----------- ----------- -----------
Total adjustments 2,760,253 2,364,048 2,529,495
----------- ----------- -----------
Net cash provided by operating activities 1,021,907 1,556,166 322,553
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (202,968) (138,626) (169,357)
----------- ----------- -----------
Net cash used in investing activities (202,968) (138,626) (169,357)
----------- ----------- -----------
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-5
AFP IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999
2001 2000 1999
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing of debt - - 77,284
Repayments of debt (1,054,913) (1,232,613) (197,675)
Retirement of common stock - - (372,672)
----------- ----------- -----------
Net cash used in financing activities (1,054,913) (1,232,613) (493,063)
EXCHANGE RATE EFFECTS ON CASH AND CASH EQUIVALENTS 630 (360) (6,072)
----------- ----------- -----------
Net (decrease) increase in cash and cash
equivalents (235,344) 184,567 (345,939)
CASH AND CASH EQUIVALENTS, at beginning of year 433,620 249,053 594,992
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, at end of year $ 198,276 $ 33,620 $ 249,053
----------- ----------- -----------
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid during the year for-
Interest $ 444,912 $ 489,218 $ 659,935
Income taxes $ 19,713 $ 28,469 $ 3,467
SUPPLEMENTAL NON-CASH INVESTING AND FINANCIAL ACTIVITIES DISCLOSURES:
In Fiscal 1998, notes payable of $2.5 million were issued in lieu of cash
payments made for the acquisition of a dental product line. Approximately $1.4
million of these notes were forgiven in Fiscal 1999 (see Note 8).
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-6
AFP IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 AND 2000
1. ACCOUNTING POLICIES
The Company
AFP Imaging Corporation, together with its subsidiaries, (the "Company") was
organized on September 20, 1978, under the laws of the State of New York. Since
its inception, the Company has been engaged in the business of designing,
developing, manufacturing and distributing equipment for generating, capturing
or producing medical and dental images by chemical processing photosensitive
materials as well as manufacturing other electro/optical imaging equipment.
These products have been adapted to medical industrial, dental and graphic arts
applications. The Company's products are distributed to worldwide markets
through a network of independent dealers and original equipment manufacturers.
The Company disposed of its graphic arts product line on July 30, 2001 (see Note
8).
Principles of Consolidation
The consolidated financial statements include AFP Imaging Corporation and its
wholly owned subsidiaries. All significant intercompany transactions have been
eliminated in consolidation.
Revenue Recognition
Revenue is recognized by the Company when products are shipped and title passes
to the customer.
Use of Estimates
The preparation of 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
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include deposits with original maturities of three
months or less.
Inventories
Inventories, which include material, labor and manufacturing overhead, are
stated at the lower of cost (first-in, first-out) or market (net realizable
value). At June 30, 2001 and 2000, inventories consist of the following:
2001 2000
---------- ----------
Raw materials and sub-component parts $2,147,813 $3,367,576
Work-in-process and finished goods 1,340,404 710,497
---------- ----------
$3,488,217 $4,078,073
========== ==========
F-7
AFP IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 AND 2000
Depreciation
Machinery and equipment are depreciated using straight-line and accelerated
methods over estimated useful lives ranging from three to ten years. Leasehold
improvements are depreciated on a straight-line basis over the shorter of 15
years or their estimated useful lives.
In connection with the Company's reduction and restructuring of its leased
premises during Fiscal 2001, the Company retired approximately $4.8 million of
fully depreciated assets.
Research and Development Costs
Research and development costs are charged to expense as incurred. These costs
have been incurred in connection with the design and development of the
Company's products.
Goodwill
Goodwill is amortized on a straight-line basis, over a 15 year period.
The Company periodically reviews the carrying value of its goodwill and other
long-lived assets to determine whether an impairment may exist. The Company
considers relevant cash flow, estimated future operating results, trends and
other available information in assessing whether the carrying value of the asset
can be recovered. During Fiscal 2001 and 1999, the Company determined that the
value of certain of its goodwill was impaired (see Note 8). As of June 30, 2001,
the Company believes that no impairment of any other long-lived assets exists.
Foreign Currency Translation
Assets and liabilities of the Company's foreign operations have been translated
into United States dollars at the applicable rates of exchange in effect at the
end of the period reported. Revenues and expenses have been translated at the
applicable weighted average rates of exchange in effect during the period
reported. Translation adjustments are reflected as a separate component of
shareholders' equity. Any transaction gains and losses are included in net
income.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
F-8
AFP IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 AND 2000
Basic and Diluted Loss Per Common Share
The computation of net earnings per common share is based upon the weighted
average number of common shares outstanding during the period plus, in periods
in which they have a dilutive effect, the effect of common shares contingently
issuable. Basic and diluted earnings per common share for the fiscal years ended
2001, 2000 and 1999 are presented below:
2001 2000 1999
----------- ----------- -----------
Net Loss Available for Common
Shareholders $(1,738,346) $ (807,882) $(2,206,942)
Weighted Average Common Stock
Outstanding 9,271,054 9,271,054 9,271,054
----------- ----------- -----------
Basic Loss Per Share $ (.19) $ (.09) $ (.24)
----------- ----------- -----------
Net Loss Available for Common
Shareholders $(1,738,346) $ (807,882) $(2,206,942)
Weighted Average Common Stock
Outstanding 9,271,054 9,271,054 9,271,054
----------- ----------- -----------
Diluted Loss Per Share $ (.19) $ (.09) $ (.24)
----------- ----------- -----------
The diluted weighted average number of shares outstanding does not include the
potential exercise of 1,288,500, 1,675,500 and 1,147,620 stock options in Fiscal
2001, 2000 and 1999, respectively, as such amounts are antidilutive when there
is a loss.
Adoption of New Financial Standards
In June 2000, the Financial Accounting Standards Board (FASB) issued statement
of Financial Accounting Standards (SFAS) No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," which amends SFAS No.
133. SFAS No. 133 and SFAS No. 138 established accounting and reporting
standards for derivative financial instruments. These standards did not have any
effect on the Company's financial statements, as it presently does not have any
derivative financial instruments.
In June 2001, the FASB issued SFAS No. 141 ("SFAS No. 141"), "Business
Combinations" and SFAS No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible
Assets." SFAS No. 141 requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001, and prohibits the
use of the pooling-of-interests method after that date. SFAS No. 142 changes the
accounting for goodwill from an amortization method to an impairment only
approach. The amortization of goodwill from past business combinations will
cease upon adoption of this statement on January 1, 2002. Goodwill and
intangible assets acquired in business combinations completed after June 30,
2001 must comply with the provisions of this statement. Companies will also be
required to evaluate all existing goodwill for impairment within six months of
adoption by comparing the fair value of each reporting unit to its carrying
value at the date of adoption. Any transitional impairment losses will be
recognized in the first interim period in the year of adoption and will be
recognized as the effect of a change in accounting principle. The Company is
evaluating the potential impact of adopting these pronouncements on the results
of operations and financial position.
F-9
AFP IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 AND 2000
2. DEBT
During Fiscal 2001, the Company had a senior credit facility consisting of a
$4.5 million revolver and term loan facility. This facility was due to expire on
October 31, 2001. This facility required that certain financial ratios and net
worth amounts be maintained. At June 30, 2001, the Company was in compliance
with all of its covenants and terms, with the exception of the debt service
coverage ratio and net worth covenant.
On September 21, 2001, the Company entered into a secured revolving credit
facility with a new lender for $3.5 million to replace the expiring revolver.
The interest rate on revolving advances under this facility will be equal to the
Prime Rate plus 1.75%. This facility is due to expire on September 21, 2004.
This new facility is sufficient to finance the Company's ongoing working capital
requirements assuming that its losses from operations do not continue for a
material period of time. The new facility is secured by the Company's inventory,
accounts receivable, equipment, life insurance policies and proceeds thereof,
trademarks, licenses, patents and general intangibles. In connection with this
facility, the Company issued a 5-year warrant to the lender for the purchase of
100,000 shares of the Company's stock at $0.32 per share, subject to an
adjustment for all subsequent issuances of stock.
Upon execution of the new facility, the Company utilized the new facility to
repay the former revolver balance of $1,801,000. At September 21, 2001, after
repayment of the former revolver balance, the Company had available $700,200 of
unused lines of credit for short-term financing under the facility. As a result
of the new financing agreement, the former revolver and term loan were
classified as long-term as of June 30, 2001 in the accompanying balance sheet.
As of June 30, 2001 and 2000, debt consisted of the following:
2001 2000
Revolver $1,513,948 $2,392,127
Term Loan (a) 796,078 972,812
Nystrom Subordinated Note Payable (b) 800,000 800,000
Dental Product Line Subordinated Note Payable (c) 850,000 850,000
Other 54,622 54,622
---------- ----------
4,014,648 5,069,561
Less - Current Portion (141,667) (194,556)
---------- ----------
Total long-term debt $3,872,981 $4,875,005
========== ==========
(a) For the period through and including June 2001, the term loan was paid in
monthly payments of $16,213, representing the principal. During July 2001,
the lender consolidated the term loan balance with the revolver, which was
repaid in September 2001 with proceeds from the new facility discussed
above.
(b) This note payable consists of a $800,000 promissory note to ACG
Nystromgruppen AB ("Nystrom"), the former parent of a Swedish dental
company. Under the terms of this note, as amended (see Note 8) interest
only will be paid quarterly for the first three years, followed by
thirty-six equal monthly installments of $22,222 plus interest on the
unpaid balance, beginning in May 2003. The Nystrom promissory note bears
interest at a rate of LIBOR plus 2% (6.71% at June 30, 2001).
F-10
AFP IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 AND 2000
(c) This note represents a promissory note payable to the former owner of a
dental product line, which the Company acquired in December 1997. Under
the terms of this note, as amended (see Note 8), $150,000 was due and paid
on August 10, 1999, and the residual balance of $850,000 will be paid in
36 equal installments beginning in January 2002. The note bears interest
at a fixed rate of 7.75%.
The fair market value of all of the Company's debt approximates its carrying
value.
Maturities of debt by fiscal year ended June 30 are as follows:
2002 $ 141,667
2003 382,399
2004 550,000
2005 2,718,360
2006 222,222
3. COMMON STOCK OPTIONS AND STOCK PURCHASE PLAN
The Company has three employee incentive stock option plans, under which
approximately 2,000,000 shares of Common Stock are authorized and available for
issuance. Under the terms of the plans, options to purchase common stock of the
Company may be granted at not less than 100% of the fair market value of the
stock on the date of grant, or 110% of the fair market value if granted to
persons owning more than 10% of the outstanding stock of the Company.
Transactions under the plan for Fiscal 2001, 2000 and 1999 are as follows:
Weighted Weighted Weighted
Average Average Average
--------- Price --------- Price -------- Price
2001 2000 1999
--------- -------- ---------- -------- --------- ---------
Options outstanding, beginning
of fiscal year 1,675,500 $0.64 1,147,620 $0.82 974,120 $1.10
Granted 520,500 0.41 673,000 0.34 426,000 0.82
Exercised - -
---------- ------- ---------- --------
Cancelled (907,500) 0.71 (145,120) 0.66 (252,500) 1.91
---------- ------- ---------- ------- ---------- --------
Options outstanding, end of
fiscal year 1,288,500 0.49 1,675,500 0.64 1,147,620 0.82
---------- ------- ---------- ------- ---------- --------
Options exercisable at June 30 1,288,500 1,675,500 1,147,620
========== ========== ===========
Weighted average fair value of
options granted during years
ended June 30 $0.29 $0.24 $0.62
===== ===== =====
F-11
AFP IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 AND 2000
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model and the following assumptions for grants in
Fiscal 2001, 2000 and 1999: dividend yield of 0%; expected volatility ranging
from 103% to 145%; expected life of five years and risk-free interest rate
ranging from 4.38% to 6.78%.
At June 30, 2001, outstanding options had exercise prices ranging from $.25 to
$2.00 with a weighted - average remaining contractual life of six years.
The Company accounts for these plans pursuant to Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," under which no
compensation cost has been recognized. Had compensation cost for these plans
been determined based on the fair value at the grant dates consistent with SFAS
No. 123, "Accounting for Stock-Based Compensation", the Company's net income and
earnings per share would have been reduced to the following pro forma amounts:
2001 2000 1999
----------- --------- -----------
Net loss As reported $(1,738,346) $(807,882) $(2,206,942)
Pro forma (1,887,190) (968,268) (2,471,869)
Basic earning per share As reported (.19) (.09) (.24)
Pro forma (.20) (.10) (.27)
Diluted earnings per share As reported (.19) (.09) (.24)
Pro forma (.20) (.10) (.27)
The Company has a restricted stock purchase plan under which 400,000 shares have
been reserved for issuance. No shares of restricted stock have been issued as of
June 30, 2001.
4. INCOME TAXES
The loss before provision for income taxes is comprised of the following:
2001 2000 1999
----------- --------- -----------
United States $(1,700,084) $(651,376) $(2,072,069)
Foreign (24,950) (151,590) (268,240)
----------- --------- -----------
Total $(1,725,034) $(802,966) $(2,340,309)
=========== ========= ===========
The provision (benefit) for income taxes is comprised of the following:
2001 2000 1999
------- ------ ----------
Current:
State $13,312 $4,916 $(133,367)
Foreign - - -
------- ------ ----------
$13,312 $4,916 $(133,367)
------- ------ ----------
F-12
AFP IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 AND 2000
The difference between the (benefit) provision for income taxes at the effective
federal statutory rates and the amounts provided in the financial statements is
summarized as follows:
2001 2000 1999
--------- --------- ----------
Tax benefit at Federal statutory rates $(586,512) $(274,680) $(750,360)
Increase (decrease) in tax provision (benefit)
resulting from:
State income tax provision (benefit), net
of federal benefit 13,312 4,916 (33,367)
Foreign losses not benefited 9,980 60,636 107,296
Amortization in excess of tax basis 624 3,206 3,206
U.S. losses not benefited 566,540 199,296 628,779
Resolution of previous contingencies - - (100,000)
Other 9,368 11,542 11,079
---------- --------- ----------
Provision (benefit) for income taxes $ 13,312 $ 4,916 $(133,367)
========== ========= ==========
The items which comprise the deferred tax balance are as follows:
2001 2000
---------- ----------
Depreciation and amortization $1,524,270 $1,349,692
Accrued liabilities and reserves not currently deductible 145,850 335,329
Inventory 86,663 207,971
Net operating loss carryforwards 3,294,893 2,459,552
---------- ----------
5,051,676 4,352,544
Deferred tax asset valuation reserve (5,051,676) (4,352,544)
---------- ----------
Tax asset recognized on balance sheets $ - $ -
---------- ----------
Net operating loss carryforwards ("NOLs") will expire beginning in 2009. The
NOLs are subject to review by the Internal Revenue Service. Future changes in
ownership of the Company, as defined by section 382 of the Internal Revenue
Code, could limit the amount of NOLs available for use in any one year. The
Company recorded the above valuation reserve, based on management's conclusion
that it is more likely than not that future operations will not generate
sufficient taxable income to realize the deferred tax assets during the
carryforward period for these tax attributes.
5. PROFIT SHARING PLAN
The Company maintains a defined contribution profit sharing plan and trust
pursuant to which participants receive certain benefits upon retirement, death,
disability and, to a limited extent, upon termination of employment for other
reasons. Allocation among participants' interests, including officers and
directors who are employees, is in accordance with Internal Revenue Service
regulations.
F-13
AFP IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 AND 2000
The aggregate amount contributed to the plan by the Company each fiscal year is
determined by the Board of Directors following a review of the profits of such
fiscal year. The plan requires no minimum contribution by the Company. The
Company has not made any contributions related to profit sharing for the years
ended June 30, 2001, 2000 and 1999.
6. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries are defendants (together with other third
parties) in a legal claim alleging that the Company violated bulk sales laws
upon the acquisition of a medical product line in July 1995. The Company's
motion for summary dismissal of the amended claim was filed in July 2000. On
September 27, 2000, the Court ruled on the Company's motion and granted summary
judgment in favor of the Company on three of the six claims by the plaintiff.
The amended complaint seeks damages in the sum of $443,500 for unpaid material
invoices and $19.9 million in consequential damages, treble damages, interest
and attorney fees. There will be a final pretrial conference on October 19,
2001, and a trial will be scheduled to begin in 2002. The Company continues to
deny there are any merits to the plaintiff's action and will vigorously defend
the remaining three claims, by pursuing due process under law. At this time, the
Company believes that the final outcome of this matter has the potential to have
a material adverse effect on the Company, should there be a decision against the
Company. Furthermore, the Company has filed a cross claim against the seller
under an indemnification clause contained in the asset purchase agreement
between the two parties.
The Company is also a party to claims and litigation arising in the ordinary
course of business. The Company intends to vigorously defend all such claims and
does not expect the outcome of these matters individually or in the aggregate to
have a material adverse effect on the Company's financial position or results of
operations. The Company's insurance policies cover certain claims and
allegations and the underwriter is assisting in the Company's defense.
The Company has leases for office and manufacturing facilities for periods
expiring through fiscal year 2008. Approximate minimum annual rental payments
under these leases as of the fiscal year ended June 30 are as follows:
2002 $477,000
2003 477,000
2004 501,000
2005 525,000
2006 and thereafter 1,838,000
Rent expense was approximately $592,000, $582,000 and $708,000 for the years
ended June 30, 2001, 2000 and 1999, respectively.
7. SEGMENT INFORMATION
The Company operates in two distinct industry segments: medical/dental and
graphic arts. The Company's business segments are based on differences in the
nature of their operations, including distribution channels and customers. The
composition of the segments and measure of segment profit is consistent with
that used in making strategic decisions.
Medical/dental segment operations are conducted under the Dent-X and AFP
tradenames and consists of the design, development, manufacturing and marketing
of medical and dental image systems and all related accessories. The graphic
arts segment operates under the LogE tradename and includes products such as
paper and film developers (see Note 8).
F-14
AFP IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 AND 2000
The segment information for Fiscal 2001, 2000 and 1999 is shown below. Segment
information related to operating loss includes costs directly attributable to
each segment's operations.
Depreciation Net
Operating & Capital Interest
Net Sales Loss Assets Amortization Expenditures Expense
----------- ----------- ------------ ------------ ------------ -----------
2001
Medical/Dental $21,386,150 $(1,216,075) $8,132,734 $761,233 $202,968 $359,249
Graphic Arts 2,665,150 (69,710) 502,480 - - 80,000
----------- ----------- ---------- --------- -------- --------
Consolidated $24,051,300 $(1,285,785) $8,635,214 $761,233 $202,968 $439,249
----------- ----------- ---------- --------- -------- --------
2000
Medical/Dental $21,976,524 $ (241,217) $10,592,512 $707,439 $138,626 $354,414
Graphic Arts 3,390,474 (87,335) 1,015,393 6,173 - 120,000
----------- ----------- ---------- --------- -------- --------
Consolidated $25,366,998 $ (328,552) $11,607,905 $713,612 $138,626 $474,414
----------- ----------- ---------- --------- -------- --------
1999
Medical/Dental $24,767,670 $(1,526,766) $12,282,372 $699,469 $166,117 $525,524
Graphic Arts 4,602,668 (155,122) 1,703,712 8,166 3,240 132,897
----------- ----------- ----------- --------- -------- --------
Consolidated $29,370,338 $(1,681,888) $13,986,084 $707,635 $169,357 $658,421
----------- ----------- ---------- --------- -------- --------
Geographic financial information for the years ended June 30, 2001, 2000 and
1999 are as follows:
2001 2000 1999
----------- ----------- -----------
Sales
United States $ 18,819,770 $18,586,087 $20,736,264
Europe - - -
Domestic export sales 5,231,530 6,780,911 8,634,074
------------ ----------- -----------
Total $ 24,051,300 $25,366,998 $29,370,338
Net Loss
United States $(1,713,396) $ (656,282) $(1,938,742)
Europe (24,950) (151,600) (268,200)
------------ ----------- ------------
Total $(1,738,346) $ (807,882) $(2,206,942)
Identifiable Assets
United States $8,617,654 $11,589,425 $13,926,364
Europe 17,560 18,480 59,720
------------ ----------- -----------
Total $8,635,214 $11,607,905 $13,986,084
------------ ----------- -----------
There were no sales to any one customer in excess of 10% of net sales in Fiscal
2001, 2000 and 1999.
F-15
AFP IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 AND 2000
8. SPECIAL CHARGES
During 2001, the Company recorded a special charge of approximately $846,000 to
write-off the balance of goodwill associated with the July 1995 acquisition of
its medical diagnostic imager product line, due to impairment of this product
line caused by changing technology and market conditions. Also in July 2001, the
Company completed the sale of its LogE graphic arts product line at a loss of
approximately $110,000. Approximately $60,000 is included in special charges for
severance and other closing costs, the balance of $50,000 is included in cost of
sales to reduce the inventory to fair market value.
Special charges in Fiscal 2000 is a credit of $100,000 to reflect the
restructuring and reduction of a Subordinated Promissory Note issued in 1997 as
part of the financing of an acquisition. On August 11, 1999, the Company and ACG
Nystromgruppen AB ("Nystrom") of Sweden, agreed to an immediate reduction and
restructuring of the Nystrom Subordinated Note Payable. The Company paid
$100,000 to Nystrom plus accrued interest from April 17, 1999 to August 10,
1999, and the principal amount of the amended Nystrom Subordinated Note Payable
was reduced by $100,000 (See Note 2) to $800,000 in total, to be paid over a six
year period. A royalty payment, contingent on sales, as per the original Stock
Purchase Agreement was due Nystrom and paid on April 17, 2000. There are no
other contingent payments or further amendments to the Stock Purchase Agreement.
On January 4, 1999, $500,000 became due under the Company's $2.5 million
promissory note issued to the former owner of a dental product line. The Company
did not make payment on that note, as the Company believed that the former owner
breached the terms of the Asset Purchase Agreement dated December 24, 1997
related to the acquisition of the dental product line. During Fiscal 1999, the
Company and the former owner reached a commercial settlement whereby the $2.5
million note would be extinguished and replaced with an $850,000 note and a
payment of $150,000, the terms of which are discussed in Note 2. At the time the
settlement was reached, the carrying value of the $2.5 million note was
approximately $2.3 million, net of unamortized discount. The resulting $1.3
million reduction in the carrying value of the debt was recorded as a component
of the special charges in 1999.
During Fiscal 1999, the Company recorded special charges of approximately $1.7
million related to the operations of the dental product line acquired in 1997,
due to the recognized impairment in the value of this product line. The
components of these charges were as follows:
o Approximately $1.3 million write down of goodwill, reducing the carrying
amount of this asset to $0,
o Approximately $140,000 reduction in the carrying value of other acquired
long-lived assets, principally equipment, to fair market value,
o Approximately $180,000 to establish an accrual related to acquired accounts
receivable, the value of which not having yet been realized through
collection or sale, and
o Approximately $75,000 to establish a liability for the discontinuation of
the former owner's consulting agreement with the Company, pursuant to the
settlement arrangement.
These special charges, which were recorded during the fiscal third and fourth
quarters of Fiscal 1999, were based on revised sales forecasts, historical
operating results and the progression of the Company's dispute in regard to the
note payment due to the prior owner. The amount of the charge related to the
impairment of goodwill and long-lived assets was calculated using the
anticipated future discounted cash flows, as a proxy for fair value, of this
product line. The Company also reduced the related inventory of the dental
product line by approximately $350,000 in the fourth quarter of Fiscal 1999.
This reduction is reflected in cost of sales in the accompanying Consolidated
Statement of Operations.
F-16
AFP IMAGING CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999
Balance at Charged to Charged Balance at
Beginning Costs and to Other End of
Description of Period Expenses Accounts Deductions Period
- --------------------------------- --------- ---------- -------- ---------- ----------
June 30, 2001
Allowance for doubtful accounts
and sales returns $ 163,000 $ 99,356 $- $(152,348) $ 110,000
June 30, 2000
Allowance for doubtful accounts
and sales returns $ 427,000 $ 87,049 $- $(351,049) $ 163,000
June 30, 1999
Allowance for doubtful accounts
and sales returns $ 422,203 $ 260,805 $- $(256,008) $ 427,000