United States
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. For the fiscal year ended June 30, 2004
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
-------------------------
(Exact name of registrant as specified in its charter)
New York 13-2956272
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
250 Clearbrook Road, Elmsford, NY 10523
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 592-6100
--------------
Securities registered pursuant Section 12 (b) of the Act: None
----
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value .01 per share
(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.
X
---- -----
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 ( ).
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES ( ) NO ( X ).
The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant as of December 31, 2003 was approximately
$3,831,533. On such date, the average of the closing bid and asked prices of the
Registrant's Common Stock, as reported by the OTC Bulletin Board, was $0.65.
The registrant had 9,399,617 shares of Common Stock outstanding as of September
15, 2004.
2
The information required by Part III of Form 10-K is incorporated by reference
to the registrant's Proxy Statement for the 2004 Annual Meeting of Shareholders
tentatively scheduled for December 10, 2004 to be filed with the Securities and
Exchange Commission on or prior to October 28, 2004.
3
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," "would," "could," "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 Company's ability to repay its debts 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,
-- changing industry and competitive conditions,
-- maintaining operating efficiencies,
-- pricing pressures,
-- risk associated with foreign operations,
-- the Company's ability to attract and retain key personnel,
-- difficulties in maintaining 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 the
Company's customers,
-- determinations in various outstanding legal matters,
-- changes in currency exchange rates and regulations, and
-- other factors set forth in this Form 10-K and from time to time in the
Company's other filings with the Securities and Exchange Commission.
Readers are urged to carefully review and consider the various disclosures made
by the Company in this Annual Report on Form 10-K for the year ended June 30,
2004, and the Company's other filings with the SEC. These reports attempt to
advise interested parties of the risks and factors that may affect the Company's
business, financial condition and results of operations and prospects. The
forward - looking statements made in this Annual Report on Form 10-K speak only
as of the date hereof and the Company disclaims any obligation to provide
updates, revisions or amendments to any forward - looking statements to reflect
changes in the Company's expectations or future events.
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
generating, capturing or producing medical and dental images through digital
technology as well as the chemical processing of photosensitive materials.
Medical, dental, veterinary, and industrial professionals use these products.
The Company's products are distributed to worldwide markets, under various brand
names, through a network of independent and unaffiliated dealers.
In September 2003, the Company completely dissolved two of its wholly-owned
subsidiaries: LogEtronics Corporation and Regam Medical Systems AB. The Company
sold selected assets of its graphic arts business in July 2001, which had been
distributed through LogEtronics Corporation. Upon completion of the transfer of
the manufacturing operations to the United States, the Company, in accordance
with Swedish Law, dissolved Regam Medical Systems AB.
4
b) Financial Information about Industry Segments
The Company is engaged in one industry segment, the manufacture and distribution
of medical/dental x-ray equipment and accessories. Prior to July 2001, when the
Company sold the assets related to its graphic arts subsidiary, the Company had
been engaged in two industry segments, the manufacture and distribution of
medical/dental x-ray equipment and accessories, and graphic arts processing
equipment. The Company has agreed not to compete in this same business line of
graphic arts film and plate processing equipment for ten years, to expire in
July 2011. The Company's business segments were based on significant differences
in the nature of their operations, including distribution channels and
customers. The composition of the current industry segment is consistent with
that used by the Company's management in making strategic decisions. See Note 10
to the Consolidated Financial Statements for further discussion of the Company's
industry segments.
c) Narrative Description of Business
All of the Company's products are distributed worldwide through an unaffiliated
dealer network to doctors, dentists, veterinarians, hospitals, medical clinics,
the U.S. military, and other facilities.
Principal Products and Services
Digital Dental and Large Body DR and CR Imaging Systems
- --------------------------------------------------------
The Company manufactures, distributes and services a filmless, digital dental
radiography system, utilizing 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. These filmless, digital dental radiographic
systems, referred to as DR Systems, have practical applications in both human
and companion animal dentistry. The Company has developed proprietary
application software for use with the sensor. The Company also distributes a
Computed Radiology System, referred to as CR Systems, which utilize a reusable
phosphorus plate and laser scanner in place of x-ray film. The plate can be
erased and then re-exposed over a thousand times. The CR System is applicable to
larger body x-ray examinations.
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, commonly referred to as an
analog system. 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.
X-Ray Systems
- --------------
The Company has the exclusive distribution rights in the North American and
Mexican markets for a well established, European-designed intraoral dental x-ray
machine and panoramic/cephalometric dental x-ray machine. The Company also has
the North American distribution rights to a Japanese-developed panoramic/
cephalometric dental x-ray machine. The x-ray film exposed by all of these units
can be developed in the Company's film processors. Alternatively, these x-ray
products can be sourced and distributed with a digital, filmless sensor that is
compatible with the Company's other digital x-ray products and software.
Veterinary Imaging and Radiographic Systems
- --------------------------------------------
The Company manufactures and distributes a line of x-ray and related equipment
specifically designed for the veterinary marketplace. These include intraoral
x-ray systems, a filmless digital dental radiography system, film processors,
dental veterinary film, and a large body CR filmless scanner used in conjunction
with general radiographic equipment. These combined systems are tailored to
allow the veterinarian to perform both dental and general radiography on
companion animals.
5
Patents and Trademarks
The Company presently holds certain 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 obtained in connection
with acquisitions completed in 1997. The Company is not aware of any patents or
other intellectual property 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 for the computer display of
such images. The Company also has agreed to pay a royalty to a third party on
the worldwide sales of its digital dental sensors, under a license to use the
technology developed and owned by the third party. The principal technology
applied to the construction of the Company's other products 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, including AFP Imaging, DENT-X, EXCEL, and EVA,
among others. The Company believes that these utility patents and trademarks are
important to its operations and the loss or infringement by others of or to 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:
2004 2003 2002
---- ---- ----
$397,444 $553,991 $499,829
The Company conducts research and development activities internally, at its
Elmsford, New York facility, as well as contracts certain projects to qualified
vendors and external consultants. The Company's research and development efforts
and technologies have been enhanced by business acquisitions completed prior to
2001.
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 manufactures, assembles, and services its products at its ISO
9001/2000 (International Standards Organization) certified facility in Elmsford,
New York. The Company's products are manufactured from parts, components and
subassemblies obtained from several unaffiliated suppliers and/or fabricated
internally at its manufacturing facility. In most cases, the Company does not
utilize any unique procedures, nor does it traditionally have difficulties in
obtaining raw materials or processes, in the design and manufacture of its
products. Although the Company anticipates that an adequate commercial supply of
most raw material parts and components will remain available from multiple
sources, the Company does own proprietary designs and tooling to produce the
digital x-ray sensors, which are in the physical possession of a Company vendor.
While the loss of the Company's relationship with a particular supplier might
result in some productions delays, such a loss is not expected to materially
affect the Company's business, as the proprietary design is readily
reproducible.
Sales, Marketing and Distribution
All of the Company's products are manufactured domestically and distributed both
domestically and internationally to independent dealers and distributors. The
Company's products are marketed under the Company's own trade names and are
distributed through an extensive network of independent medical, dental, and
veterinary 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. The Company
also maintains two separate web sites, which provide an easy-to-navigate,
on-line information environment, including Company information, product
description and extensive technical specifications and information.
6
Government Regulation
The Company's medical and dental products are subject to government regulation
in the United States and certain other countries. The United States Food and
Drug Administration ("FDA") regulates the distribution of all equipment used as
medical devices. The Company must comply with the procedures and standards
established by the FDA and comparable foreign regulatory agencies. The Company
believes it has registered all of its applicable medical and dental products
with the FDA, and that all of its products and procedures satisfy all the
criteria necessary to comply with FDA regulations. The FDA has the right to
disapprove the marketing of any medical device that fails to comply with FDA
regulations. The Company's manufacturing facility is ISO 9001/2000 certified.
Where applicable, the Company's products are Conformite' Europeenne ("CE")
certified for sales within the European Union. Any future changes in existing
regulations, or adoption of additional regulations, domestically or
internationally, which govern devices such as the Company's medical and dental
products have the potential to have a material adverse effect on the Company's
ability to market its existing products or to market new products.
Product Liability Exposure
The Company's business involves the inherent risk of product liability claims.
The Company currently maintains general product liability insurance as well as
an umbrella liability policy, which the Company believes are sufficient to
protect the Company from any potential risks to which it may be subject. See
Item 3, Legal Proceedings, for further discussion of any outstanding product
liability claims.
Seasonal Nature
Historically, the Company's fourth quarter revenues of any fiscal year have been
higher than the subsequent first quarter's revenues. This is due to aggressive
fourth quarter marketing, followed by lower customer demand in the first quarter
attributed to summer holidays and traditional foreign business closings during
July and August.
Working Capital Practices
The Company believes its practices regarding inventories, receivables or other
items of working capital to be typical for the industry involved. On September
21, 2004, the Company renewed its senior secured credit facility (the "Renewed
Revolving Credit Loan"), with its existing senior secured lender, for an
additional three-year period. The maximum borrowing permitted under the Renewed
Revolving Credit Loan is lower than that under the prior credit facility, based
on the Company's current requirements. However, the Renewed Revolving Credit
Loan has more favorable terms, including a lower interest rate and less
stringent reporting requirements, than that under the prior credit facility and
gives the Company the ability to borrow on a specific amount of foreign accounts
receivable. The Renewed Revolving Credit Loan replaced the existing senior
credit facility (the "Original Revolving Credit Loan"). The Renewed Revolving
Credit Loan consists of a $2.5 million revolving line of credit, which is
secured by all of the Company's inventory, accounts receivable, equipment,
officer life insurance policies and proceeds thereof, trademarks, licenses,
patents and general intangibles. It is believed that the Renewed Revolving
Credit Loan is sufficient to finance the Company's ongoing working capital
requirements for the foreseeable future. The Renewed Revolving Credit Loan has
an interest rate of 1.375% over the prime rate, currently at 4-1/2 %, has a
specific formula to calculate available funds based on eligible accounts
receivable and inventory, and has certain reporting requirements to the senior
secured lender. The Renewed Revolving Credit Loan requires that certain
financial ratios and net worth amounts be maintained. The Renewed Revolving
Credit Loan provides for increases in the interest rate charged on monies
outstanding under specific circumstances.
As of June 30, 2004, the Company was in compliance with all the terms and
conditions of its Original Revolving Credit Loan, as amended. In connection with
the Original Revolving Credit Loan, the Company issued a 5-year warrant to the
lender for the purchase of 100,000 shares of the Company's common stock at $.32
per share, subject to adjustment for all subsequent issuances of stock. This
warrant expires on September 21, 2006. The Black-Scholes Method was used to
value the warrant, and the stock price was based on the stock price the day
prior to closing, plus 10%, as stipulated in the Loan and Security Agreement for
the Original Revolving Credit Loan.
See Note 4 to the Consolidated Financial Statements and Management's Discussion
and Analysis of Financial Condition and Results of Operation for further
discussion of the revised terms and conditions.
7
Customers
In the Company's fiscal year ended June 30th 2004 ("Fiscal Year 2004") sales of
dental imaging equipment to Henry Schein Inc., accounted for approximately 11%
of consolidated sales. In the Company's fiscal year ended June 30th 2003
("Fiscal Year 2003"), sales of dental imaging equipment to Henry Schein Inc.,
and Patterson Dental Supply, each accounted for approximately 11% of
consolidated sales. In the Company's fiscal year ended June 30th 2002 ("Fiscal
Year 2002"), sales of dental imaging equipment to Henry Schein Inc., accounted
for approximately 12% of consolidated sales. Management believes that the loss
of this customer would have an adverse effect on the Company's consolidated
business for a short period of time, as the Company seeks new customers.
Backlog Orders
As of June 30, 2004, the Company's backlog of orders for its products was
approximately $1,192,100 as compared to $511,500 as of June 30, 2003. All of the
orders included in the backlog at June 30, 2004 are scheduled for delivery on or
before June 30, 2005. Spare part sales are not included in 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 and end user clinical practitioners.
Government Contracts
The Company did not fulfill any significant contracts in Fiscal Year 2004 and
Fiscal Year 2003 with the United States Government that were material to the
Company's consolidated business. The Company fulfilled two contracts in Fiscal
Year 2002 with the United States Government that were material to the Company's
consolidated business. One Fiscal Year 2002 contract was with the Department of
the Air Force for the delivery of X-ray Film Processors. The other Fiscal Year
2002 contract was with the Department of the Army for the delivery of Hand Held
Dental X-ray Systems. 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. 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
purchases certain products from others for resale on an exclusive or
non-exclusive basis, which may be subject to competition from other independent
distributors.
The Company also competes in the dental imaging market 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.
While the Company believes its products are competitive in terms of
capabilities, quality and price, increased competition in the marketplace has
had an adverse effect on the Company's business and, recent business mergers and
acquisitions may continue to adversely affect the Company's business.
Environmental
The Company believes it is in compliance with the current 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 operations. 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 of
the two environmental claims in which the Company is currently involved.
Employees
As of June 30, 2004, the Company employed 83 people on a full-time basis. The
Company has no collective bargaining agreements and considers its relationship
with its employees to be satisfactory.
8
d) Financial Information about Foreign and Domestic Operations and Export Sales
Financial information related to foreign and domestic operations and export
sales for the last three fiscal years is as follows:
FY2004 FY 2003 FY 2002
Domestic Sales $16,733,360 84% $15,118,108 84% $16,116,458 80%
Export and foreign sales $3,099,550 16% $2,932,560 16% $3,970,430 20%
Domestic Operating Income $1,585,477 $1,395 $396,078
Foreign Operating Loss ($12,600) ($1,940) ($4,670)
Assets used in the manufacture of export sales are integrated with the other
assets of the Company.
The Company liquidated its foreign subsidiary in September 2003.
Item 2. Properties
- -------------------
The Company's executive offices and manufacturing facility are located in
Elmsford, New York. This facility, which comprises approximately 47,735 square
feet, is subject to a lease expiring on December 31, 2009 with a current rental
of $477,350 per year, increasing through the lease term to $525,085, plus
increases for real estate taxes, utility costs and common area charges. The
Company believes its facility is well maintained, in good operating condition,
and sufficient to meet the Company's present and anticipated needs. In January
2002, the Company closed its small sales and marketing facility in Springfield,
Virginia, where its graphic arts subsidiary had been located.
Item 3. Legal Proceedings
- --------------------------
The Company is a defendant in two claims regarding environmental issues relating
to a property in New Jersey owned by the Company between August 1984 and June
1985. One claim filed relates to the offsite commercial disposition of trash and
waste in a landfill in New Jersey. The Company maintains that its waste
materials are of a general commercial nature. This claim was originally filed in
1998 by the Federal Government in United States District Court and the State of
New Jersey, citing several hundred other third party defendants. The Company
(through its former subsidiary, Kenro Corporation) was added, along with many
other defendants, to the suit. The Company's claimed liability was potentially
assessed by the plaintiff at $150,000. The Company has joined, along with other
involved companies, in an alternative dispute resolution (ADR) process for
smaller claims. No potential cost to the Company has been assessed on this
claim, and the Company cannot assess the amount of liability that could result
from any adverse final outcome of this environmental complaint.
A separate environmental claim was filed in 2001 as a civil complaint by the
current owners of the factory site in the Superior Court of New Jersey, Morris
County. This suit alleges that Kenro Corporation contaminated a portion of the
site during its manufacturing process. The complaint seeks payment by Kenro
Corporation to cover all costs (including attorney fees) to remedy the
situation, which the plaintiff estimated to be $883,800. The Company has
challenged this claim (including the reimbursement of attorney fees) and hired
their own expert who concluded that the total clean-up costs should not exceed
$347,500. The plaintiff's motion for summary judgment on the issue of the
Company's alleged liability for the contamination was recently dismissed without
prejudice by the presiding judge. The Company maintains it took the appropriate
steps and secured clearance under the New Jersey Environmental Clean-up
Responsibility Act (ECRA) at the time of sale, in 1985. The Company's insurance
carrier initially has agreed to contribute a portion of the total settlement on
this matter when settled. The Company's financial statements include a reserve
for their potential liability based on the amount of the Company's expert's
opinion, reduced by the amount agreed to be contributed by the Company's
insurance carrier.
The Company's insurance carrier has agreed to equally share with the Company the
defense costs incurred for both of the environmental claims since September
2001.
9
The Company is party to other claims and litigation arising in the ordinary
course of business. The Company believes its insurance policies cover certain of
these other claims and allegations. The underwriter is vigorously assisting in
the Company's defense in such matters. The Company does not believe that any
adverse final outcome of any of these matters, whether covered by insurance or
otherwise, would have a material adverse effect on the Company.
Item 4. Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
There were no matters submitted to a vote of security holders during the fourth
quarter of Fiscal Year 2004.
10
Part II
- --------
Item 5. Market for the Registrant's Common Equity and Related Stockholder
- ---------------------------------------------------------------------------
Matters
- -------
a) Market Information
The Common Stock, par value $.01 per share, of the Company is the only class of
the Company's common equity securities outstanding and is traded on the OTC
Bulletin Board (Symbol "AFPC"), maintained by the National Association of
Securities Dealers, Inc. The following table, based on information supplied by
Commodity Systems Inc., shows the range of the closing high and low bid
information for the Company's Common Stock for each quarterly period during the
Company's last two fiscal years. These prices reflect inter-dealer prices and do
not include retail mark-ups, markdowns or commissions, and may not represent
actual transactions.
Quarter ended High Bid Low Bid
------------- -------- -------
September 30, 2002 .22 .12
December 31, 2002 .20 .09
March 31, 2003 .17 .11
June 30, 2003 .17 .11
September 30, 2003 .32 .14
December 31, 2003 .74 .25
March 31, 2004 1.19 .64
June 30, 2004 1.64 1.02
b) Holders
As of September 16, 2004, the closing bid price for the Common Stock, as
reported on the OTC Bulletin Board, was $1.32, and there were 441 shareholders
of record of the Common Stock. The Company estimates, based on surveys conducted
by its transfer agent in connection with the Company's 2003 Annual Meeting of
Shareholders, that there are approximately 1,400 beneficial holders of the
Common Stock.
c) Dividends
No cash dividends have been declared on the Company's Common Stock to date and
the Company anticipates that any earnings will be retained for use in its
business for the foreseeable future. The Company currently is prohibited from
paying cash dividends on its Common Stock under the terms and conditions of its
Renewed Revolving Credit Loan. The Company currently does not have a set policy
with respect to payment of dividends. Any future determination to pay cash
dividends will be at the discretion of the Company's Board of Directors and will
be dependent upon the Company's financial condition, results of operations,
capital requirements and other relevant factors.
d) Securities authorized for issuance under equity compensation plans
The following table sets forth as of June 30, 2004:
-- the number of shares of common stock issuable upon exercise of
outstanding options, warrants and rights, separately identified by
those granted under equity incentive plans approved by the Company's
shareholders and those granted under plans, including individual
compensation contracts, not approved by the Company's shareholders
(column A),
-- the weighted average exercise price of such options, warrants and
rights, also as separately identified (column B), and
-- the number of shares remaining available for future issuance under
such plans, other than those shares issuable upon exercise of
outstanding options, warrants and rights (column C).
11
(a) (b) (c)
Plan Category Number of Weighted average Number of
securities to be exercise price securities
issued upon of outstanding remaining
exercise of options, available for
outstanding warrants and future issuance
options, warrants rights under equity
and rights compensation
plans (excluding
securities
reflected in
column (a))
Equity compensation
plans approved by
security holders (1) 1,008,500 $0.57 591,500
Equity compensation
plan not approved by
security holders (2) 0 0 400,000
Total 1,008,500 $0.57 991,500
(1) The equity compensation plans approved by the security holders are the
Company's 1999 Stock Option Plan and the 1995 Stock Option Plan, as
amended.
(2) The equity compensation plan not approved by the security holders
represents 400,000 shares of common stock reserved for issuance to
officers, directors, employees and consultants of the Company under
the restricted stock purchase plan originally adopted in July 1980,
and amended. The Company may sell shares under this plan to officers,
directors, employees, and consultants at a price to be determined by
the Board of Directors.
12
Item 6. Selected Financial Data
As of and for the Years Ended June 30,
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
NET SALES $19,832,910 $18,043,668 $20,086,888 $24,051,300 $25,366,998
=========== =========== =========== =========== ===========
OPERATING INCOME (LOSS) $1,453,628 $(545) $391,408 $(1,285,785)(b) $(328,552)(c)
========== ====== ======== =============== =============
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF $1,345,467 $(218,338) $84,002 $(1,738,346)(b) $(807,882)(c)
========== ========== ======= =============== =============
CHANGE IN ACCOUNTING PRINCIPLE
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING $-- $(1,297,069) $-- $-- $--
=== ============ === === ===
PRINCIPLE (a)
NET INCOME (LOSS) $1,345,467 $(1,515,407) $84,002 $(1,738,346)(b) $(807,882)(c)
========== ============ ======= =============== =============
EARNINGS (LOSS) PER SHARE BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
BASIC $.15 $(.02) $.01 $(.19) $(.09)
==== ====== ==== ====== ======
DILUTED $.14 $(.02) $.01 $(.19) $(.09)
==== ====== ==== ====== ======
NET EARNINGS (LOSS) PER SHARE
BASIC $.15 $(.16) $.01 $(.19) $(.09)
==== ====== ==== ====== ======
DILUTED $.14 $(.16) $.01 $(.19) $(.09)
==== ====== ==== ====== ======
TOTAL ASSETS $6,244,895 $6,043,855 $7,849,510 $8,635,214 $11,607,905
========== ========== ========== ========== ===========
LONG-TERM DEBT $222,223 $630,556 $1,180,556 $2,359,033 $2,482,878
======== ======== ========== ========== ==========
SHAREHOLDERS' EQUITY $2,665,396 $1,319,929 $2,822,717 $2,717,233 $4,454,939
========== ========== ========== ========== ==========
SHAREHOLDERS' EQUITY PER COMMON SHARE $.29 $.14 $.30 $.29 $.48
==== ==== ==== ==== ====
COMMON SHARES OUTSTANDING, 9,270,617 9,270,617 9,270,617 9,270,617 9,270,617
at end of period ========= ========= ========= ========= =========
CASH DIVIDENDS PER COMMON SHARE none none none none none
(a) Upon adoption of SFAS 142 in the first quarter of Fiscal Year 2003,
the Company recorded a one-time, non-cash charge of approximately
$1,297,069, to reduce the carrying value of its goodwill. Such charge
is non-operational in nature and is reflected as a cumulative effect
of an accounting change. See Note 1 to the Consolidated Financial
Statements for further discussion and required disclosures.
(b) This amount includes charges and provisions of $846,000 to reduce the
goodwill associated with the medical diagnostic imager product line to
$0, and $110,000 to reflect the sale of the graphic arts business,
including $50,000 to reduce the graphic arts inventory to the fair
market value and $60,000 for severance and other closing costs.
(c) This amount includes charges and provisions of $400,000 due to the
recognized impairment in the fair market value of the graphic arts
inventory; offset by a benefit of $100,000, to reflect the
restructuring and reduction in the principal amount of a Subordinated
Promissory Note issued in 1997.
13
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 increased by approximately $1,082,000 between
Fiscal Year 2004 and Fiscal Year 2003. This increase is principally due to
internally generated funds with corresponding reductions in the revolver debt,
offset by reductions in long-term debt. The Company was able to obtain better
credit terms from several vendors in Fiscal 2004, which allowed the Company to
increase its level of accounts payable, while not adversely impacting its
borrowing costs. The Company used the current availability from the revolving
line of credit to make the required principal payments on the two subordinated
notes. The Company is current on all of its principal payments.
On September 21, 2004, the Company renewed its senior secured credit facility
(the "Renewed Revolving Credit Loan"), with its existing senior secured lender,
for an additional three-year period. The maximum borrowing permitted under the
Renewed Revolving Credit Loan is lower than that under the prior credit
facility, based on the Company's current requirements. However, the Renewed
Revolving Credit Loan has more favorable terms, including a lower interest rate
and less stringent reporting requirements, than that under the prior credit
facility and gives the Company the ability to borrow on a specific amount of
foreign accounts receivable. The Renewed Revolving Credit Loan replaced the
existing senior credit facility (the "Original Revolving Credit Loan"). The
Renewed Revolving Credit Loan consists of a $2.5 million revolving line of
credit, which is secured by all of the Company's inventory, accounts receivable,
equipment, officer life insurance policies and proceeds thereof, trademarks,
licenses, patents and general intangibles. It is believed that the Renewed
Revolving Credit Loan is sufficient to finance the Company's ongoing working
capital requirements for the foreseeable future. The Renewed Revolving Credit
Loan has an interest rate of 1.375% over the prime rate, currently at 4-1/2 %,
has a specific formula to calculate available funds based on eligible accounts
receivable and inventory, and has certain reporting requirements to the senior
secured lender. The Renewed Revolving Credit Loan requires that certain
financial ratios and net worth amounts be maintained. The Renewed Revolving
Credit Loan provides for increases in the interest rate charged on monies
outstanding under specific circumstances.
As of June 30, 2004, the Company was in compliance with all the terms and
conditions of its Original Revolving Credit Loan, as amended. In connection with
the Original Revolving Credit Loan, the Company issued a 5-year warrant to the
lender for the purchase of 100,000 shares of the Company's common stock at $.32
per share, subject to adjustment for all subsequent issuances of stock. This
Warrant expires on September 21, 2006. The Black-Scholes Method was used to
value the warrant, and the stock price was based on the stock price the day
prior to closing, plus 10%, as stipulated in the Loan and Security Agreement for
the Revolving Credit Loan.
Included in debt are two subordinated promissory notes related to prior dental
company acquisitions. As of June 30, 2004, these notes total $630,556, of which
$408,333 has been classified as a current liability. One note will be repaid in
full as of December 31, 2004, and the second note will be repaid in full as of
April 17, 2006.
The Company's historical operating cash flows have been positive; however, the
Company is dependent upon the Revolving Credit Loan to finance its ongoing
operations. The Company expects its working capital requirements will continue
to be financed by operations and from borrowings on the Renewed Revolving Credit
Loan. It is believed that the Renewed Revolving Credit Loan is sufficient to
finance the Company's ongoing working capital requirements for the foreseeable
future. The Company currently believes that there are no significant trends,
demands, commitments or contingencies, other than an unexpected adverse
conclusion to either of the ongoing environmental litigation cases, which are
reasonably likely to result in a material increase or decrease in its liquidity
or capital resources in the foreseeable future. As of June 30, 2004, the Company
had available $1,131,545 of unused credit under the Original Revolving Credit
Loan. As of September 17, 2004, the Company had available $950,821 of unused
credit under the Original Revolving Credit Loan. No assurances can be given that
the Company will have sufficient cash flow in the long term.
Capital expenditures for Fiscal Year 2004 were approximately $107,512. This
consisted mainly of several tooling, foundry and test equipment expenditures
related to the design, development and production of the new imaging products;
improvements to the Company's telephone system, computer system upgrades, and
the purchase of a new modular trade show booth for national exhibitions, and
other appropriate replacements in the normal course of operations. The Company
expects to continue to finance any future capital requirements principally from
internally generated funds. The total amount of capital expenditures was limited
under the Original Revolving Credit Loan, and continues to be limited under the
Renewed Revolving Credit Loan. The Company was in compliance with this
requirement as of June 30, 2004.
14
Results of Operations - Fiscal 2004 vs. Fiscal 2003
- ----------------------------------------------------
In June 2003, management developed a significant cost reduction program, which
was implemented effective July 2003. This program reduced overhead costs, both
direct and non-direct, and payroll and related costs by over $500,000. These
reductions included elimination of non-productive product lines, a 7% decrease
in the work force, and numerous cost cutbacks throughout the Company. Management
reviewed all significant cost centers and eliminated or reduced many major
expenses, including payroll and related benefit costs, communication, and travel
and entertainment. Management will continue to monitor and control the level of
discretionary spending. In Fiscal Year 2004, the Company reorganized its
marketing/sales department resulting in increased operating efficiencies.
Management was able to significantly increase sales with only a modest increase
in total expenditures. Management continues to search for and develop new
products that satisfy its niche markets in medical, dental and veterinary
diagnostic imaging.
The Company began shipments of its new digital dental sensor, "EVA" (R), in
November 2002 to international dealers and distributors. The Company received
FDA clearance for the EVA sensor in March 2003, which permitted the Company to
begin to market and distribute the product domestically. This digital sensor can
also be used in veterinary dental applications. The Company is continuing to
develop its sensors, accessories and related software, and anticipates both
domestic and international growth in this product line.
Sales increased approximately $1,789,200 or 10% between Fiscal Year 2004 and
Fiscal Year 2003. A significant portion of this increase is attributable to the
introduction of the Company's digital products to the domestic marketplace.
Medical product sales, including veterinary products, showed an increase of
$970,000. Dental product sales, including digital products, increased
approximately $820,000, both domestically and internationally. The Company's
analog products stayed relatively constant throughout the two periods.
International sales increased approximately 6% in Fiscal Year 2004 compared to
Fiscal Year 2003, mainly in dental equipment sales.
Gross profit as a percent of sales increased 4.4 percentage points between the
Fiscal Year 2004 and Fiscal Year 2003. All product lines showed improvements in
their margins, due to increased operating efficiencies. The product mix between
manufactured and distributor goods stayed relatively constant between the two
fiscal years. Labor and overhead costs, which are included in cost of sales,
were approximately $240,000 lower and or 2.7 percentage points lower as a
percent of sales in Fiscal Year 2004 compared to Fiscal Year 2003, due to the
above-mentioned cost reductions.
Selling, general, and administrative costs increased approximately $178,500 or
3.2%, between Fiscal Year 2004 and Fiscal Year 2003. Most of this increase is
attributable to a 7% increase in marketing/selling costs to promote the new
digital sensor and the veterinary imaging products, including advertising and
attendance at several more exhibition shows, offset by the results of the
Company's cost reduction program developed in June 2003. Additionally, the
Company increased its reserve on the environmental litigation related to the
property in New Jersey, based upon the advise of their expert counsel in this
matter.
Research and development costs decreased, approximately $156,500 or 28.3%
between the Fiscal Year 2004 and Fiscal Year 2003. This decrease is mainly
attributable to the timing of expenditures relating to the Company's continued
investment in the design, development and refinement of its new imaging products
as well as the completion of several engineering projects and the introduction
of these products into commercial use. The Company continues to invest in
sustaining engineering and related costs for its existing products. Research and
development costs are expected to continue to fluctuate between reporting
periods.
Interest expense, net, decreased by approximately $49,900 or 24.1%, between
Fiscal Year 2004 and Fiscal Year 2003 primarily due to several factors. There
was approximately $566,000 less in average monthly revolving credit borrowings
for the current year; the prime rate of borrowing, upon which interest rates for
all senior debt is based, was slightly lower in the current period; and the
LIBOR rate of borrowing, upon which a subordinated note is based was
significantly lower in the current period.
The income tax benefit for Fiscal Year 2004 and the income tax provision for
Fiscal Year 2003 primarily reflect certain state capital taxes and Federal
alternative tax. In Fiscal Year 2004, the Company realized net operating losses
previously subject to valuation allowances to offset federal and state income
tax provisions. In Fiscal Year 2003, no tax benefit was recognized for the
losses incurred.
15
In Fiscal Year 2003, in compliance with the FASB SFAS No. 142, "Goodwill and
Other Intangible Assets," the Company reviewed its remaining goodwill, which
related to the Swedish dental acquisition in April 1997, and determined that,
under the revised accounting valuation rules, such goodwill had significantly
diminished in value. Therefore, in compliance with SFAS No. 142, the Company
took a one-time charge of $1,297,069 to completely write-off the goodwill
associated with this acquisition. As the Company no longer has any goodwill,
management does not expect that future compliance with SFAS No. 142 will have a
material effect on the Company's financial position or results of operation,
except for any potential future acquisitions involving goodwill or other
intangible assets.
Results of Operations - Fiscal 2003 vs. Fiscal 2002
- ----------------------------------------------------
The Company began shipments of its new digital dental sensor, "EVA" (R) during
November 2002, mainly to international dealers and distributors, and will
increase production of this new product as sales develop. The Company received
FDA approval for the EVA sensor in March 2003, which permits the Company to
market and distribute the product domestically. This digital sensor is also used
in various veterinary dental applications. The Company is continuing to develop
various sized digital sensors, accessories and related software, and anticipates
both domestic and international growth in this product line.
Sales decreased by approximately $2,043,000 or 10.2% between Fiscal year 2003
and Fiscal year 2002. The dental product sales decreased $681,000, due, in part,
to the fact that Fiscal Year 2002 sales included approximately $260,000 more in
sales to the US military, and the Company phased out its older digital sensor.
The Company experienced a decline of about 7% in its analog dental products due
to changing customer demands, competition and evolving replacement technology.
The Company's medical product sales decreased approximately $1,635,000 between
the two fiscal years. Fiscal Year 2002 included a large medical products sale to
the US military of approximately $490,000, and there were no significant
military sales in Fiscal 2003. There was approximately $700,000 lower sales
attributable to the Company's medical ultrasound recording cameras, mainly due
to significant technological changes away from analog processing in the
marketplace. The Company experienced a decline of about 17% in its analog
medical products due to changing customer demands. This decline was offset by a
31% increase in Fiscal year 2003 in the Company's veterinary line. The Company
continues to focus efforts on the veterinary marketplace and expects to expand
its veterinary product line. International sales declined approximately $1.0
million, mainly in medical products. The Company believes that the overall
decline in equipment sales in Fiscal Year 2003 also can be attributed to
uncertainty in the global markets, the weak US economy, and the impact of
hostilities around the world.
Gross profit as a percent of sales increased slightly in Fiscal Year 2003 as
compared to Fiscal Year 2002. The product mix between manufactured and
distributed goods remained fairly constant between the two fiscal years. The
Company was able to keep material costs as a percent of sales fairly constant,
even though several distributor products are purchased from European sources in
Euro denomination, which significantly strengthened in relation to the US dollar
this current fiscal year. The Company reduced its direct labor costs and
associated manufacturing overhead costs by approximately $280,000 in Fiscal Year
2003. However, due to the lower sales base, the percentages relative to sales
remained constant.
Selling, general and administrative costs decreased by approximately $297,000 or
5.0% between Fiscal Year 2003 and Fiscal Year 2002. Approximately $76,000
relates to the collection (reducing expenses), in the first quarter Fiscal Year
2002, of a portion of a large receivable, which had been written off in 1993.
The Company received approximately $40,000 in January 2003 as part of the final
waste haulage settlement (for prior years) in Westchester, NY. There was
approximately $144,000 less in amortization costs in the current fiscal year due
to the change in accounting principle related to the treatment of goodwill.
There was approximately $145,000 less in legal fees in Fiscal Year 2003 due to
the settlement of several outstanding claims in Fiscal Year 2002. Additionally,
the Company negotiated and received approximately $46,00 from its insurance
carrier in Fiscal Year 2003 to help defray the legal costs associated with the
outstanding environmental litigation. These legal costs will continue to be
shared by the outside insurance carrier. There was approximately $180,000 less
in sales commissions due to the lower sales volume in Fiscal Year 2003 compared
to Fiscal Year 2002. The amount of commissions as a percent of sales stayed
relatively constant between the two fiscal years. Costs related to trade shows
increased about $25,000 due to attendance at a biannual international dental
trade show in Germany (IDS) in March 2003 and attendance at several more
national veterinary trade shows to further promote the veterinary product line.
Management developed a significant cost reduction program in June 2003, which
was made effective for Fiscal 2004. The Company expected to significantly reduce
both direct and non-direct overhead costs as a result of this program.
16
Research and Development costs increased approximately $54,000 or 11% between
Fiscal year 2003 and Fiscal Year 2002. This increase is mainly attributable to
the timing of expenditures relating to the Company's continued investment in the
design, development and refinement of its digital imaging products. The Company
continues to invest in sustaining engineering and related costs for its existing
analog products.
Interest expense, net, decreased, approximately $86,000 or 29%, between Fiscal
Year 2003 and Fiscal Year 2002, primarily due to several factors. There was
approximately $200,000 less in average monthly revolving credit borrowings in
the current fiscal year; the Company was in violation of certain of its
obligations with its previous lender in the first quarter Fiscal Year 2002 and,
accordingly, incurred a penalty interest rate in Fiscal Year 2002 on all
outstanding borrowings; and, the prime rate of borrowing, upon which all senior
debt is based, was considerably lower in the current fiscal year.
The income tax provisions for Fiscal Year 2003 and Fiscal Year 2002,
respectively, primarily reflect the nominal state taxes due. No tax benefit has
been recognized for the losses incurred in prior years.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- ----------------------------------------------------------------------
Not applicable.
Item 8. Financial Statements and Supplementary Data
- -----------------------------------------------------
AFP IMAGING CORPORATION AND SUBSIDIARIES
CONTENTS
June 30, 2004
- -------------------------------------------------------------------------------
Reports of Independent Registered Public Accounting Firms F-1 - F-2
Consolidated Financial Statements:
Balance Sheet F-3
Statement of Operations F-4
Statement of Shareholders' Equity and Comprehensive Income (Loss) F-5
Statement of Cash Flows F-6
Notes to Consolidated Financial Statements F-7 - F-19
Supplemental Schedule:
Schedule of Valuation and Qualifying Accounts F-20
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
AFP Imaging Corporation
We have audited the accompanying consolidated balance sheet of AFP Imaging
Corporation and Subsidiaries (the "Company") as of June 30, 2004, and the
related consolidated statements of operations, shareholders' equity and
comprehensive income (loss), and cash flows for the year then ended. Our audit
also included the financial statement schedule listed in the Index at Item 15.
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audit.
We conducted our audit 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. 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 audit provides 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 AFP
Imaging Corporation and Subsidiaries as of June 30, 2004 and the consolidated
results of its operations and its cash flows for the year then ended, in
conformity with United States generally accepted accounting principles. Also, in
our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
August 10, 2004, except for the third paragraph of Note 4,
as to which the date is September 21, 2004
F-1
PREDECESSOR AUDITOR'S REPORT
Report of Independent Registered Public Accounting Firm
To the Shareholders of AFP Imaging Corporation
We have audited the accompanying consolidated balance sheet of AFP Imaging
Corporation (a New York Corporation) as of June 30, 2003, and the related
consolidated statements of operations, shareholders' equity and comprehensive
income (loss), and cash flows for the two year period then ended. Our audits
also included the financial statement schedule listed in the Index at Item
15(a). These financial statements and schedule 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 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. 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 consolidated financial position of AFP Imaging
Corporation at June 30, 2003, and the consolidated results of their operations
and their cash flows for the two year period then ended in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 1 to the consolidated financial statements, on July 1,
2002, the Company changed its method of accounting for goodwill and other
intangible assets.
/s/ Ernst & Young LLP
Stamford, Connecticut
August 25, 2003
See Notes to Consolidated Financial Statements
F-2
AFP IMAGING CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET
June 30, 2004 2003
- ------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 331,993 $ 658,138
Accounts receivable, less allowance for doubtful accounts
of $95,000 and $95,200, respectively 2,503,760 2,249,481
Inventories 2,704,009 2,482,004
Prepaid expenses and other current assets 267,380 99,092
- ------------------------------------------------------------------------------------------------------------------------
Total current assets 5,807,142 5,488,715
Property and Equipment, net of accumulated depreciation
of $1,114,540 and $1,582,697, respectively 388,271 452,267
Other Assets 49,482 102,873
- ------------------------------------------------------------------------------------------------------------------------
Total Assets $ 6,244,895 $ 6,043,855
========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 1,451,094 $ 2,141,931
Accounts payable 922,499 916,326
Accrued expenses 847,923 926,742
- -----------------------------------------------------------------------------------------------------------------------
Total current liabilities 3,221,516 3,984,999
Long-term Debt 222,223 630,556
Deferred Rent 135,760 108,371
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities 3,579,499 4,723,926
- -----------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies
Shareholders' Equity:
Common stock - $.01 par value; authorized 30,000,000 shares,
issued and outstanding 9,270,617 shares 92,710 92,710
Common stock warrants 19,800 19,800
Paid-in capital 11,545,883 11,545,883
Accumulated deficit (8,992,997) (10,338,464)
- ------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 2,665,396 1,319,929
- ------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 6,244,895 $ 6,043,855
========================================================================================================================
See Notes to Consolidated Financial Statements
F-3
AFP IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------------
Year ended June 30, 2004 2003 2002
- ------------------------------------------------------------------------------------------------------------------------
Net sales $ 19,832,910 $ 18,043,668 $ 20,086,888
Cost of sales 12,178,072 11,864,995 13,273,218
- ------------------------------------------------------------------------------------------------------------------------
Gross profit 7,654,838 6,178,673 6,813,670
Selling, general and administrative expenses 5,803,766 5,625,227 5,922,433
Research and development expenses 397,444 553,991 499,829
- ------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 1,453,628 (545) 391,408
Interest expense, net of interest income 157,015 206,878 293,089
- ------------------------------------------------------------------------------------------------------------------------
Income (loss) before provision (benefit) for
income taxes 1,296,613 (207,423) 98,319
Provision (benefit) for income taxes (48,854) 10,915 14,317
- ------------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of change
in accounting principle 1,345,467 (218,338) 84,002
Cumulative effect of change in accounting principle -- (1,297,069) --
- ------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1,345,467 $ (1,515,407) $ 84,002
========================================================================================================================
Income (loss) per share before cumulative effect
of change in accounting principle:
Basic $ .15 $ (.02 ) $ .01
Diluted $ .14 $ (.02) $ .01
========================================================================================================================
Net income (loss) per common share:
Basic $ .15 $ (.16) $ .01
Diluted $ .14 $ (.16) $ .01
========================================================================================================================
See Notes to Consolidated Financial Statements
F-4
AFP IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
- -------------------------------------------------------------------------------
Years ended June 30, 2002, 2003 and 2004
- -------------------------------------------------------------------------------
Foreign
Common Currency
Comprehensive Common Stock Paid-in Accumulated Translation
Income (Loss) Stock Warrants Capital Deficit Adjustment Total
- ----------------------------------------------------------------------------------------------------------------------------------
Balance June 30, 2001 -- $ 92,710 -- $ 11,545,883 $ (8,907,059) $ (14,311) $ 2,717,223
Common stock warrants -- -- $ 19,800 -- -- -- 19,800
Foreign currency translation
adjustment $ 1,692 -- -- -- -- 1,692 1,692
Net income 84,002 -- -- -- 84,002 -- 84,002
------------
Comprehensive loss $ 85,694
============
- ----------------------------------------------------------------------------------------------------------------------------------
Balance June 30, 2002 92,710 19,800 11,545,883 (8,823,057) (12,619) 2,822,717
Foreign currency translation
adjustment $ 1,470 -- -- -- -- 1,470 1,470
Reclassification adjustment 11,149 -- -- -- -- 11,149 11,149
Net loss (1,515,407) -- -- -- (1,515,407) -- (1,515,407)
------------
Comprehensive loss $ (1,502,788)
============
- ----------------------------------------------------------------------------------------------------------------------------------
Balance June 30, 2003 92,710 19,800 11,545,883 (10,338,464) -- 1,319,929
Net income $ 1,345,467 -- -- -- 1,345,467 -- 1,345,467
===========
- ----------------------------------------------------------------------------------------------------------------------------------
Balance June 30, 2004 -- $ 92,710 $ 19,800 $ 11,545,883 $ (8,992,997) $ - 0 - $ 2,665,396
==================================================================================================================================
See Notes to Consolidated Financial Statements
F-5
AFP IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------
Years ended June 30, 2004 2003 2002
- ----------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ 1,345,467 $(1,515,407) $ 84,002
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 159,823 202,685 354,688
Loss on disposal of property and equipment 11,685 -- --
Cumulative effect of change in accounting principle -- 1,297,069 --
Reclassification of translation adjustments included
in net loss -- 11,149 --
Provision for losses on accounts receivable 5,989 49,344 64,248
Change in assets and liabilities:
(Increase) decrease in accounts receivable (260,268) 179,368 134,105
(Increase) decrease in inventories (222,005) 334,069 331,329
(Increase) decrease in prepaid expenses and other
current assets (168,288) 41,499 (9,871)
Decrease (increase) in other assets 53,391 64,419 (57,584)
Increase (decrease) in accounts payable 6,171 (359,986) 375,871
(Decrease) increase in accrued expenses (78,819) 158,058 (125,847)
Increase in deferred rent 27,389 -- --
- ---------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 880,535 462,267 1,150,941
- ---------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of graphic arts business -- -- 340,815
Purchases of property and equipment (107,512) (221,154) (34,008)
- ---------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (107,512) (221,154) 306,807
- ---------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Borrowing of debt -- 226,838 1,801,065
Repayments of debt (1,099,168) (327,777) (2,942,287)
- ---------------------------------------------------------------------------------------------------------
Net cash used in financing activities (1,099,168) (100,939) (1,141,222)
- ---------------------------------------------------------------------------------------------------------
Exchange rate effects on cash and cash equivalents -- 1,470 1,692
- ---------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (326,145) 141,644 318,218
Cash and cash equivalents at beginning of year 658,138 516,494 198,276
- ---------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 331,993 $ 658,138 $ 516,494
=========================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 161,266 $ 213,040 $ 298,631
=========================================================================================================
Income taxes $ 13,528 $ 19,702 $ 16,115
=========================================================================================================
See Notes to Consolidated Financial Statements
F-6
AFP IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
- -------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND AFP Imaging Corporation together with its subsidiaries (the "Company"), was organized
SIGNIFICANT ACCOUNTING on September 20, 1978 under the laws of the State of New York. The Company is engaged
POLICIES: in the business of designing, developing, manufacturing and distributing equipment for
generating, capturing or producing medical and dental images through digital
technology as well as the chemical processing of photosensitive materials. These
products are used by medical, dental, veterinary and industrial professionals. The
Company's products are distributed to worldwide markets, under various brand names,
through a network of independent and unaffiliated dealers.
In September 2003, the Company completely dissolved two of its wholly owned
subsidiaries: LogEtronics Corporation and Regam Medical Systems AB. The Company sold
selected assets of its graphic arts business in July 2001, which had been distributed
through LogEtronics Corporation. Upon completion of the transfer of the manufacturing
operations to the United States, the Company, in accordance with Swedish law, dissolved
Regam Medical Systems AB.
The consolidated financial statements include AFP Imaging Corporation and its wholly
owned subsidiaries. All significant intercompany transactions have been eliminated in
consolidation.
Revenue is recognized by the Company when products are shipped and title passes to the
customer. The Company includes shipping and handling costs as a component of cost of
sales.
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 include deposits with original maturities of three months or
less.
The Company maintains cash in bank deposit accounts which, at times, exceed federally
insured limits. The Company has not experienced any losses on these accounts.
Inventories, which include material, labor and manufacturing overhead, are stated at
the lower of cost (first-in, first-out) or market (net realizable value).
Machinery and equipment are depreciated using straight-line and accelerated methods
over their estimated useful lives, ranging from three to seven years. Leasehold
improvements are depreciated on a straight-line basis over the shorter of their
estimated useful lives or the life of the lease.
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.
F-7
AFP IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
- -------------------------------------------------------------------------------
The Company has elected, in accordance with the provisions of SFAS No. 123, to apply
the current accounting rules under APB Opinion No. 25 and related interpretations in
accounting for stock options and, accordingly, is presenting the disclosure-only
information as required by SFAS No. 123. If the Company had elected to recognize
compensation cost based on the fair value of the options granted at the grant date, as
prescribed by SFAS No. 123, the Company's net income (loss) and net income (loss) per
common share would approximate the pro forma amounts shown in the following table:
June 30, 2004 2003 2002
-----------------------------------------------------------------------------------------
Net income (loss), as reported $1,345,467 $(1,515,407) $ 84,002
Deduct:
Stock compensation expense
determined under fair-value-based
method for all awards, net of related
tax effect (231,815) (2,766) (19,461
-----------------------------------------------------------------------------------------
Pro forma net income (loss) $1,113,652 $(1,518,173) $ 64,541
=========================================================================================
Basic net income (loss) per share,
as reported $ .15 $ (.16) $ .01
Basic net income (loss) per share,
pro forma $ .13 $ (.16) $ .01
Diluted net income (loss) per share,
as reported $ .14 $ (.16) $ .01
Diluted net income (loss) per share,
pro forma $ .12 $ (.16) $ .01
-----------------------------------------------------------------------------------------
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
2004, 2003 and 2002: dividend yield of 0%; expected volatility ranging from 62% to
155%; expected life of five to ten years; and risk-free interest rate ranging from
3.4% to 5.8%.
Revenue and expenses of the Company's foreign operations were translated at the
applicable weighted-average rates of exchange in effect during the period reported.
The Company liquidated its foreign operation and reclassified the foreign currency
translation adjustment to the net loss in fiscal 2003. Any transaction gains and
losses are included in net income.
Accounts receivable are recorded at the invoiced amount and do not bear interest. The
allowance for doubtful accounts is the Company's best estimate of the amount of
probable credit losses in the Company's existing accounts receivable. The Company
establishes an allowance for doubtful accounts based upon factors surrounding the
credit risk of specific customers, historical trends and other information. Receivable
balances are reviewed on an aged basis and account balances are charged off against the
allowance after all means of collection have been exhausted and the potential for
recovery is doubtful.
F-8
AFP IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
- -------------------------------------------------------------------------------
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.
The computation of net income (loss) and income (loss) per common share before
cumulative effect of change in accounting principle 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 net income (loss) per common share and income (loss) per common share before
cumulative effect of change in accounting principle for the fiscal years ended 2004,
2003 and 2002 is presented below:
June 30, 2004 2003 2002
-------------------------------------------------------------------------------------------
Income (loss) before cumulative
effect of change in accounting
principle $1,345,467 $ (218,338) $ 84,002
==========================================================================================
Net income (loss) $1,345,467 $(1,515,407) $ 84,002
==========================================================================================
Weighted-average common stock
outstanding - basic 9,270,617 9,270,617 9,270,617
==========================================================================================
Basic:
Income (loss) per share before
cumulative effect of change in
accounting principle $ .15 $ (.02) $ .01
Net income (loss) per share $ .15 $ (.16) $ .01
=========================================================================================
Weighted-average common stock
outstanding - basic 9,270,617 9,270,617 9,270,617
Dilutive effect of stock options 361,571 -- 375
-----------------------------------------------------------------------------------------
Weighted-average common stock
outstanding - diluted 9,632,188 9,270,617 9,270,992
=========================================================================================
Diluted:
Income (loss) per share before
cumulative effect of change in
accounting principle $ .14 $ (.02) $ .01
Net income (loss) per share $ .14 $ (.16) $ .01
=========================================================================================
F-9
AFP IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
- -------------------------------------------------------------------------------
The diluted income (loss) per common share before cumulative effect of change in
accounting principle computation reflects the effect of common shares contingently
issuable upon the exercise of warrants and options in periods in which conversion
would cause dilution. The diluted weighted-average number of shares outstanding for
the years ended June 30, 2004 and 2003 did not include the potential exercise of
81,000 and 945,000 stock options, respectively, as such amounts are antidilutive.
In June 2001, the Financial Accounting Standards Board (the "FASB") issued Statements
No. 141, Business Combinations ("SFAS No. 141") and No. 142, Goodwill and Other
Intangible Assets ("SFAS No. 142"). These standards change the accounting for
business combinations by, among other things, prohibiting the prospective use of
pooling-of-interests accounting and requiring companies to stop amortizing goodwill
and certain intangible assets with an indefinite useful life created by business
combinations accounted for using the purchase method of accounting. Instead, goodwill
and intangible assets deemed to have an indefinite useful life will be subject to an
annual review for impairment. SFAS No. 141 was effective for purchase business
combinations consummated after June 30, 2001. The Company adopted SFAS No. 142 on
July 1, 2002. SFAS No. 142 requires that goodwill and intangible assets deemed to
have an indefinite useful life be reviewed for impairment upon adoption and annually
thereafter.
Under SFAS No. 142, goodwill impairment is deemed to exist if the net book value of a
reporting unit exceeds its estimated fair value. The Company has one reporting unit,
which comprises its entire operating segment. This methodology differs from the
Company's previous policy, as permitted under accounting standards existing at that
time, of using undiscounted cash flows to determine if goodwill is recoverable.
Upon adoption of SFAS No. 142, the Company recorded a one-time, noncash charge of
$1,297,069 ($.14 basic and diluted loss per common share) to reduce the carrying value
of its goodwill. Such charge is nonoperational in nature and is reflected as a
cumulative effect of an accounting change in the accompanying consolidated statement
of operations. In calculating the impairment charge, the fair value of its reporting
unit was estimated by comparison to the Company's quoted market capitalization at July
1, 2002 since the reporting unit represents all of the Company's operations.
The results for the years ended June 30, 2002 on a historical basis do not reflect the
provisions of SFAS No. 142. Had the Company adopted the nonamortization provisions of
SFAS No. 142 on July 1, 2001, the historical net income (loss) for the year ended June
30, 2002 would have been $228,022 ($.02 per basic and diluted common share).
Certain prior-year amounts have been reclassified to conform to the current-period
presentation.
Management does not believe that any recently issued, but not yet effective, accounting
standards if currently adopted would have a material effect on the accompanying
consolidated financial statements.
F-10
AFP IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
- -------------------------------------------------------------------------------
2. INVENTORIES: Inventories consist of the following:
June 30, 2004 2003
-------------------------------------------------------------------------------------------
Raw materials and subcomponent parts $ 1,354,424 $ 1,455,164
Work-in-process and finished goods 1,348,585 1,026,840
-------------------------------------------------------------------------------------------
$2,704,009 $2,482,004
===========================================================================================
3. PROPERTY AND EQUIPMENT: Property and equipment, at cost, consists of the following:
June 30, 2004 2003
-------------------------------------------------------------------------------------------
Leasehold improvements $ 232,139 $ 318,260
Machinery and equipment 1,270,672 1,716,704
-------------------------------------------------------------------------------------------
1,502,811 2,034,964
Less accumulated depreciation and amortization (1,114,540) (1,582,697)
-------------------------------------------------------------------------------------------
Property and equipment, net $ 388,271 $ 452,267
===========================================================================================
Depreciation and amortization was $159,823, $202,685 and $210,688 for the years
ended June 30, 2004, 2003 and 2002, respectively.
The Company retired $639,665 and $346,239 of assets during fiscal 2004 and
fiscal 2003, respectively.
4. DEBT: On September 21, 2001, the Company established a three-year senior secured credit
facility (the "Original Revolving Credit Loan"), consisting of a $3,500,000 revolving
line of credit. The Original Revolving Credit Loan, as amended, was secured by
substantially all of the Company's assets, required that certain financial ratios and
net worth amounts be maintained and prohibited the paying of dividends. As of June
30, 2004, the Company was in compliance with all terms and conditions of the Original
Revolving Credit Loan. The Revolving Credit Loan had an interest rate of prime (4% at
June 30, 2004) plus 1.75%, had a specific formula to calculate available funds based
on eligible accounts receivable and inventory, and had certain reporting requirements
to the senior secured lender.
In connection with this facility, the Company issued a five-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. The Black- Scholes option
pricing model was used to value these warrants, and the stock purchase price was based
on the stock price the day prior to closing, plus 10% as stipulated in the Loan and
Security Agreement for the Revolving Credit Loan.
F-11
AFP IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
- -------------------------------------------------------------------------------
On September 21, 2004, the Company renewed its senior secured credit facility (the
"Renewed Revolving Credit Loan") for an additional three-year period. The Renewed
Revolving Credit Loan replaced the Original Revolving Credit Loan. The Renewed
Revolving Credit Loan consists of a $2,500,000 revolving line of credit, which is
secured by all of the Company's inventory, accounts receivable, equipment, officer life
insurance policies and proceeds thereof, trademarks, licenses, patents and general
intangibles. The Renewed Revolving Credit Loan has an interest rate of prime (4.5% at
September 21, 2004) plus 1.375%, has a specific formula to calculate available funds
based on eligible accounts receivable and inventory, and has certain reporting
requirements to the senior secured lender. The Renewed Revolving Credit Loan requires
that certain financial ratios and net worth amounts be maintained. The Renewed
Revolving Credit Loan provides for increases in the interest rate charged on monies
outstanding under specific circumstances.
As of June 30, 2004 and 2003, debt consisted of the following:
June 30, 2004 2003
--------------------------------------------------------------------------------------------
Revolver $ 1,042,761 $ 1,591,931
Nystrom subordinated note payable (a) 488,889 755,556
Dental product line subordinated note payable (b) 141,667 425,000
--------------------------------------------------------------------------------------------
1,673,317 2,772,487
Less current portion (1,451,094) (2,141,931)
--------------------------------------------------------------------------------------------
Total long-term debt $ 222,223 $ 630,556
============================================================================================
(a) This note payable consists of an $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, interest only was paid
quarterly for the first three years, followed by 36 equal monthly
installments of $22,222 plus interest on the unpaid balance, which began in
May 2003. The Nystrom promissory note bears interest at a rate reset
annually based on the LIBOR plus 2%. The applicable interest rate at June
30, 2004 was 3.61%.
(b) 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, $150,000 was due and paid on August 10,
1999, and the residual balance of $850,000 is being paid in 36 equal
installments effective January 2002. The note bears interest at a fixed
rate of 7.75%.
At June 30, 2004, the Company had available $1,131,545 of unused lines of credit under
the facility.
Due to the short-term nature of the majority of the debt as well as borrowing rates
currently available to the Company, the fair market value of all of the Company's debt
approximates its carrying value.
F-12
AFP IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
- -------------------------------------------------------------------------------
Maturities of debt by fiscal year are as follows:
Year ending June 30,
2005 $1,451,094
2006 222,223
--------------------------------------------------------------------------------------------
$1,673,317
============================================================================================
5. ACCRUED EXPENSES: Accrued expenses consist of:
June 30, 2004 2003
-------------------------------------------------------------------------------------------
Accrued environmental claim (see Note 9) $200,000 $ 50,000
Accrued payroll expenses 338,418 406,127
Accrued expenses - other 309,505 470,615
-------------------------------------------------------------------------------------------
$847,923 $926,742
===========================================================================================
6. COMMON STOCK OPTIONS The Company has two employee incentive stock option plans under which approximately
AND STOCK 1,600,000 shares of common stock are authorized and available for issuance. Most
PURCHASE PLAN: options that are granted under the plans are fully vested when granted. The Company
accounts for these plans pursuant to Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, ("APB No. 25") under which no compensation
costs have been recognized. 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 plans for fiscal 2004, 2003 and 2002 are as follows:
-------------------------------------------------------------------------------------------
Year ended June 30, 2004 2003 2002
Weighted- Weighted- Weighted-
average average average
Options Price Options Price Options Price
--------------------------------------------------------------------------------------------
Outstanding, beginning
of fiscal year 945,000 $.42 1,229,500 $.51 1,288,500 $.49
Granted 259,500 1.13 24,000 .13 30,000 .97
Forfeited (155,000) .49 (8,500) .51 (37,000) .31
Expired (41,000) 1.00 (300,000) .75 (52,000) .50
--------------------------------------------------------------------------------------------
Outstanding, end of
fiscal year 1,008,500 $.57 945,000 $.42 1,229,500 $.51
============================================================================================
Exercisable at June 30 708,500 645,000 929,500
============================================================================================
Weighted-average fair value of
options granted during years
ended June 30 $.89 $.13 $.65
============================================================================================
F-13
AFP IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
- -------------------------------------------------------------------------------
At June 30, 2004, the range of exercise prices is as follows:
Options Outstanding Options Exercisable
------------------------------------------ -------------------------
Weighted-
Number average Weighted- Number Weighted-
Exercisable Remaining average Exercisable average
Range of at June 30, Contractual Exercise at June 30, Exercise
Exercise Prices 2004 Life (Years) Price 2004 Price
-------------------------------------------------------------------------------------------
$ .11 - $ .50 711,500 3.4 $ .32 411,500 $ .32
$ .53 - $ .81 25,500 5.9 .61 25,500 .61
$1.06 - $1.75 253,500 8.4 1.18 253,500 1.18
$2.00 - $2.26 18,000 4.8 2.16 18,000 2.16
------------------------------------------------------------------------------------------
1,008,500 4.7 $ .57 708,500 $ .68
==========================================================================================
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,
2004.
7. INCOME TAXES: The income (loss) before provision for income taxes is comprised of the following:
June 30, 2004 2003 2002
------------------------------------------------------------------------------------------
United States $1,309,213 $(205,483) $102,989
Foreign (12,600) (1,940) (4,670)
------------------------------------------------------------------------------------------
Total $1,296,613 $(207,423) $ 98,319
==========================================================================================
The provision (benefit) for income taxes is comprised of the following:
June 30, 2004 2003 2002
------------------------------------------------------------------------------------------
Current:
Federal $ 20,000 -- --
State 13,530 $10,915 $14,317
Adjustment to income tax liability
accounts (82,384) -- --
------------------------------------------------------------------------------------------
Total $(48,854) $10,915 $14,317
==========================================================================================
F-14
AFP IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
- -------------------------------------------------------------------------------
The difference between the provision for income taxes at the effective federal
statutory rates and the amounts provided in the consolidated financial
statements is summarized as follows:
June 30, 2004 2003 2002
- ------------------------------------------------------------------------------------------------------------------------
Tax provision (benefit) at federal
statutory rates $ 440,848 $(70,524) $ 33,428
Increase (decrease) in tax provision
resulting from:
State income tax provision 13,530 10,915 14,317
Foreign losses not benefited -- 660 1,588
U.S. losses not benefited -- 69,864 --
Adjustment to income tax liability
accounts (82,384) -- --
Utilization of federal and state
operating loss carryforwards (420,848) -- (36,271)
Other - -- 1,255
------------------------------------------------------------------------------------------
Provision for income taxes $ (48,854) $ 10,915 $ 14,317
==========================================================================================
The items that comprise the deferred tax balance are as follows:
June 30, 2004 2003
------------------------------------------------------------------------------------------
Depreciation and amortization $ 945,800 $ 900,208
Accrued liabilities and reserves not
currently deductible 207,700 103,332
Inventory 76,600 59,132
Net operating loss carryforwards 3,321,300 2,914,070
------------------------------------------------------------------------------------------
4,551,400 3,976,742
Deferred tax asset valuation reserve (4,551,400) (3,976,742)
------------------------------------------------------------------------------------------
Tax asset recognized on balance sheet $ - 0 - $ - 0 -
==========================================================================================
Net operating loss carryforwards ("NOLs") amounting to approximately $7,700,000 at
June 30, 2004, will expire beginning in 2010. 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.
F-15
AFP IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
- -------------------------------------------------------------------------------
8. 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 IRS regulations.
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 made
a contribution of $60,000 for the year ended June 30, 2004. The Company did not made
any contributions related to profit sharing for the years ended June 30, 2003 and 2002.
9. COMMITMENTS The Company is a defendant in two claims regarding environmental issues relating to a
AND CONTINGENCIES: property in New Jersey owned by the Company between August 1984 and June 1985. One
claim filed relates to the offsite commercial disposition of trash and waste in a
landfill in New Jersey. The Company maintains that its waste materials are of a
general commercial nature. This claim was originally filed in 1998 by the federal
government in United States District Court and the State of New Jersey, citing several
hundred other third-party defendants. The Company (through its former subsidiary,
Kenro Corporation) was added, along with many other defendants, to the suit. The
Company's claimed liability was potentially assessed by the plaintiff at $150,000.
The Company has joined, along with other involved companies, in an alternative dispute
resolution (ADR) process for smaller claims. No potential cost to the Company has
been assessed on this claim, and the Company cannot assess the amount of liability
that could result from any adverse final outcome of this environmental complaint.
A separate environmental claim was filed in 2001 as a civil complaint by the current
owners of the factory site in the Superior Court of New Jersey, Morris County. This
suit alleges that Kenro Corporation contaminated a portion of the site during its
manufacturing process. The complaint seeks payment by Kenro Corporation to cover all
costs (including attorney fees) to remedy the situation, which the plaintiff estimated
to be $883,800. The Company has challenged this claim (including the reimbursement of
attorney fees) and hired their own expert who concluded that the total clean-up costs
should not exceed $347,500. The plaintiff's motion for summary judgment on the issue
of the Company's alleged liability for the contamination was recently dismissed
without prejudice by the presiding judge. The Company maintains it took the
appropriate steps and secured clearance under the New Jersey Environmental Clean-up
Responsibility Act (ECRA) at the time of sale, in 1985. The Company's insurance
carrier initially has agreed to contribute a portion of the total settlement on this
matter when settled. The Company's financial statements include a reserve for their
potential liability based on the amount of the Company's expert's opinion, reduced by
the amount agreed to be contributed by the Company's insurance carrier.
The Company's insurance carrier has agreed to equally share with the Company the
defense costs incurred for both of the environmental claims since September 2001.
The Company is party to other claims and litigation arising in the ordinary course of
business. The Company believes its insurance policies cover certain of these other
claims and allegations. The underwriter is vigorously assisting in the Company's
defense in such matters. The Company does not believe that any adverse final outcome
of any of these matters, whether covered by insurance or otherwise, would have a
material adverse effect on the Company.
The Company has a noncancelable operating lease, as amended in March 2004, for office
and manufacturing facilities expiring in fiscal year 2010. Minimum annual rental
payments under this lease are as follows:
F-16
AFP IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
- -------------------------------------------------------------------------------
Year ending June 30,
2005 $ 525,085
2006 548,953
2007 525,085
2008 525,085
2009 525,085
2010 262,543
-------------------------------------------------------------------------------------------
$2,911,836
===========================================================================================
The lease provides for rent abatements and scheduled increases in base rent. Rent
expense is charged to operations ratably over the term of the leases resulting in
deferred rent payable which represents cumulative rent expense charged to operations
from inception of these leases in excess of required lease payments. Rent expense was
approximately $505,000, $496,000 and $503,000 for the years ended June 30, 2004, 2003
and 2002, respectively.
10. SEGMENT INFORMATION: On July 30, 2001, the Company sold its graphic arts business and selected related
assets. As of June 30, 2004 and 2003, the Company had only one business segment,
medical/dental. Medical/dental segment operations are conducted under the Dent-X and
AFP trade names and consists of the design, development, manufacturing and marketing
of medical and dental imaging systems and all related accessories. The graphic arts
segment operated under the LogE trade name and included products such as paper and
film developers.
The segment information for fiscal 2002 is shown below. Segment information related to
operating income (loss) includes costs directly attributable to each segment's operations.
Operating Depreciation Net
Income and Capital Interest
Net Sales (Loss) Assets Amortization Expenditures Expense
------------------------------------------------------------------------------------------
Year ended June 30, 2002
Medical/dental $20,020,633 $446,099 $7,849,510 $354,688 $ 34,008 $293,089
Graphic arts 66,255 (54,691) -- -- -- --
------------------------------------------------------------------------------------------
Consolidated $20,086,888 $391,408 $7,849,510 $354,688 $ 34,008 $293,089
==========================================================================================
F-17
AFP IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
- -------------------------------------------------------------------------------
Geographic financial information for the years ended June 30, 2004, 2003 and 2002 is as follows:
June 30, 2004 2003 2002
------------------------------------------------------------------------------------------
Sales:
United States $ 16,733,360 $15,111,108 $16,116,458
Domestic export sales 3,099,550 2,932,560 3,970,430
------------------------------------------------------------------------------------------
$ 19,832,910 $18,043,668 $20,086,888
==========================================================================================
Net income (loss):
United States $ 1,358,067 $(1,513,467) $ 88,672
Europe (12,600) (1,940) (4,670)
------------------------------------------------------------------------------------------
$ 1,345,467 $(1,515,407) $ 84,002
==========================================================================================
Identifiable assets:
United States $ 6,244,895 $ 6,029,735 $ 7,826,700
Europe - 14,120 22,810
------------------------------------------------------------------------------------------
Total $ 6,244,895 $ 6,043,855 $ 7,849,510
==========================================================================================
During the year ended June 30, 2004, one customer aggregated approximately 11% of
consolidated net sales. During the year ended June 30, 2003, net sales to this
customer and another customer were approximately 11% each. During the year ended June
30, 2002, net sales to one of these customers was approximately 12%.
11. QUARTERLY FINANCIAL Summarized unaudited quarterly financial data for fiscal 2004 and 2003 are as follows
DATA (UNAUDITED): (in thousands, except per share data):
June 30, 2004
-----------------------------------------------------------------------------------------
1st 2nd 3rd 4th Total
Quarter Quarter Quarter Quarter Year
-----------------------------------------------------------------------------------------
Net sales $4,034,879 $4,680,557 $5,476,342 $5,641,132 $19,832,910
Gross profit 1,558,542 1,847,534 2,090,697 2,158,065 7,654,838
Net income 115,060 398,444 424,507 407,456 1,345,467
=========================================================================================
Net income per
common share:
Basic $ .01 $ .04 $ .05 $ .04
=========================================================================================
Diluted $ .01 $ .04 $ .04 $ .04
=========================================================================================
F-18
AFP IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
- -------------------------------------------------------------------------------
June 30, 2003
-------------------------------------------------------------------------------------------
1st 2nd 3rd 4th Total
Quarter Quarter Quarter Quarter Year
-------------------------------------------------------------------------------------------
Net sales $ 4,064,794 $4,821,155 $4,316,261 $ 4,841,458 $18,043,668
Gross profit 1,351,245 1,685,146 1,414,633 1,727,649 6,178,673
============================================================================================
Income (loss) before
cumulative effect of
change in accounting
principle $ (241,341) $ 70,659 $ (145,844) $ 98,188 $ (218,338)
Cumulative effect of
change in accounting
principle (1,297,069) -- -- -- (1,297,069)
--------------------------------------------------------------------------------------------
Net income (loss) $ (1,538,410) $ 70,659 $ (145,844) $ 98,188 $ (1,515,407)
=============================================================================================
Income (loss) per
share before
cumulative effect of
change in accounting
principle:
Basic $ (.03) $ .01 $ (.02) $ .01
===========================================================================================
Diluted $ (.03) $ .01 $ (.02) $ .01
============================================================================================
Net income per
common share:
Basic $ (.17)$ .01 $ (.02) $ .01
===========================================================================================
Diluted $ (.17)$ .01 $ (.02) $ .01
===========================================================================================
F-19
AFP IMAGING CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
- --------------------------------------------------------------------------------
Years ended June 30, 2004, 2003 and 2002
- ------------------------------------------------------------------------------------------------------------------------
Balance at Charged to Balance at
Beginning Costs and End of
Description of Year Expenses Deductions Year
- ------------------------------------------------------------------------------------------------------------------------
June 30, 2004
Allowance for doubtful accounts and sales
returns $ 95,200 $ 5,989 $ (6,189) $ 95,000
June 30, 2003
Allowance for doubtful accounts and sales
returns 104,000 49,344 (58,144) 95,200
June 30, 2002
Allowance for doubtful accounts and sales
returns 110,000 64,248 (70,248) 104,000
F-20
17
Item 9. Changes in and Disagreements with Accountants and Financial Disclosure
- -------------------------------------------------------------------------------
Not applicable
Item 9A. Controls and Procedures
- ----------------------------------
(a) Evaluation of disclosure controls and procedures.
- -----------------------------------------------------
An evaluation was performed as of June 30, 2004, under the supervision and with
the participation of the Company's management, including its co-chief executive
officers and chief financial officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures. Based on such
evaluation, the Company's management has concluded that the Company's disclosure
controls and procedures were effective as of June 30, 2004. There have been no
significant changes in our internal controls or in other factors that could
significantly affect our internal control subsequent to June 30, 2004.
Part III
- --------
The information required in items 10, 11,12, 13, and 14 are hereby incorporated
by reference from the Company's Proxy Statement for the Annual Meeting of
Shareholders, tentatively scheduled for December 10, 2004, to be filed with the
SEC on or prior to October 28, 2004.
18
Part IV
- -------
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- ---------------------------------------------------------------------------
1. (a) Financial Statements.
The financial statements and schedules listed in Item 8 are filed as a
part of this Annual Report on Form 10K.
(b) Exhibits.
The following exhibits are filed pursuant to Item 601 of Regulation
S-K. The numbers set forth below opposite the description of each
exhibit correspond to the Exhibit Table of Item 601 of Regulation S-K.
2. (a) -- Stock Purchase Agreement between ACG Nystromgruppen AB and AFP
Imaging Corporation, dated April 17, 1997. (9)
(b) -- Asset Purchase Agreement between AFP Imaging and ProDen Systems,
Inc., dated December 24, 1997. (10).
(c) --Promissory Note between ProDen Systems, Inc. and AFP Imaging
Corporation, dated August 10, 1999. (11)
(d) -- Amended Promissory Note between ACG Nystromgruppen AB and AFP
Imaging Corporation, dated August 11, 1999. (11)
3. (a) -- Certificate of Incorporation of Registrant as amended. (1)
(b) -- Restated Certificate of Incorporation of Registrant. (3)
(c) -- Certificate of Amendment to Certificate of Incorporation of
Registrant. (6)
(d) -- Certificate of Amendment of the Certificate of Incorporation of
the Company filed with the Secretary of the State of New York on
October 12, 1995. (7)
(e) -- By-Laws of Registrant. (1)
(f) -- Excerpt from minutes of Board of Directors meeting of August 12,
1982, Amending the By-Laws of Registrant. (4)
4. (a) -- Specimen of Common Stock Certificates. (1)
(b) -- 1980 Restricted Stock Purchase Plan of the Registrant. (1)
(c) -- Form of Restricted Stock Purchase Agreement. (1)
(d) -- Common Stock Purchase Warrant issued to Keltic Financial Partners
LP. (12)
10. (a) -- Health and Medical Reimbursement Plan. (1)
(b) -- Lease Agreement dated September 1, 1985, for premises at
250 Clearbrook Road, Elmsford, NY. (5)
(c) -- Profit Sharing Plan of the Registrant, as supplemented. (1)
(d) -- Registrant's 1995 Stock Option Plan. (8)
(e) -- Registrants' 1999 Incentive Stock Option Plan. (11)
(f) -- Mediation Resolution Agreement dated August 10, 1999. (11)
(g) -- Keltic Financial Partners LP Loan and Security Agreement. (12)
(h) -- Keltic Financial Partners LP Revolving Note. (12)
(i) -- Keltic Financial Partners LP Fifth Amendment to Loan and
Security Agreement.
(j) -- Keltic Financial Partners LP Restated Revolving Note
(k) -- Contract for Sale of Business Assets between AFP Imaging and
Amergraph Corporation, dated July 30, 2001. (12)
11.-- Statement re computation per share earnings. (2)
16 (a) -- Change in Certifying Accountant (October 3, 2003). (14)
21.-- Subsidiaries of the Registrant.
23.1, 23.2 -- Consents of Goldstein Golub Kessler LLP and Ernst & Young LLP
31.1, 31.2, 31.3 - Certifications pursuant to Exchange Act Rule 13a-14 (a).
32.1, 32.2, 32.3 - Certifications pursuant to Section 1350 of the Sarbanes -
Oxley Act of 2002.
19
b) Reports on Form 8-K:
No Company Reports on Form 8-K were filed by the Company during the three months
ended June 30, 2004.
(1) Incorporated by reference from the exhibits filed with Registration
Statement file #2-G8980 of the Company, as amended, on file with the
Securities and Exchange Commission.
(2) See Note 1 to "Notes to Financial Statements".
(3) Incorporated by reference from the Exhibits filed with Registrant's
Current Report on Form 8-K, dated August 12, 1982.
(4) Incorporated herein by reference from the Exhibits filed with the
Registrant's Annual Report on Form 10-K for the fiscal year ended June 30,
1982.
(5) Incorporated by reference from the Exhibits filed with Registrant's
Current Report on Form 8-K, dated July 31, 1995.
(6) Incorporated by reference from the Exhibits filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended June 30, 1994.
(7) Incorporated by reference from the Exhibits filed with Registrant's
Current report on Form 8-K, dated October 12, 1995.
(8) Incorporated by reference from the Exhibits filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended June 30, 1996.
(9) Incorporated by reference from the Exhibits filed with the Registrant's
Current Report on Form 8-K, dated May 1, 1997.
(10) Incorporated by reference from the Exhibits filed with Registrant's
Current Report on Form 8-K, dated January 8, 1998.
(11) Incorporated by reference from the Exhibits filed with the Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30, 1999.
(12) Incorporated by reference from the Exhibits filed with the Registrant's
Annual Report on Form 10K for the fiscal year ended June 30, 2001.
(13) Incorporated by reference from the Exhibits filed with the Registrant's
Current Report on Form 8-K, dated June 14, 2002.
(14) Incorporated by reference from the Exhibits filed with the Registrant's
Current Report on Form 8-K, dated October 3, 2003.
20
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.
AFP IMAGING CORPORATION
By: __________/s/_________________
Elise Nissen, Chief Financial Officer
Date: September 27, 2004
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.
By: _____________/s/___________
Donald Rabinovitch, President
& Director
(Principal Executive Officer)
Date: September 27, 2004
By: ____________/s/_____________
David Vozick, Chairman of the Board,
Secretary and Treasurer
Date: September 27, 2004
By: __________/s/_______________
Robert Blatt, Director
Date: September 27, 2004
By: _________ /s/________________
Jack Becker, Director
Date: September 27, 2004
By: _________ /s/________________
Elise Nissen, Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: September 27, 2004
21