UNITED STATES
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarterly Period Ended December 31, 2002
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 (IRS Employer Identification No.)
incorporation or organization)
250 Clearbrook Road, Elmsford, New York 10523
- --------------------------------------- -----
(Address of principal executive offices) (Zip Code)
914-592-6100
---------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes X No____
The registrant had 9,271,054 shares of Common Stock outstanding as of February
4, 2003.
1
This Quarterly Report on Form 10-Q contains certain forward-looking statements
within the meaning of the Private Securities Reform Act of 1995. Forward-looking
statements involve known and unknown risks and 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," "could," "project,"
"expect," "believe," "estimate," "anticipate," "intend," "continue,"
"potential," "opportunity" or similar terms, variations of such terms, or the
negative of such terms or variations. Potential risks, uncertainties and factors
include, but are not limited to:
- - adverse changes in general economic conditions,
- - the economic, political and social impact of potential future terrorist
attacks on the United States and those other countries in which the Company
conducts its business,
- - 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,
- - increased competition,
- - pricing pressures,
- - risks 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,
- - changes in currency exchange rates and regulations,
- - and other factors set forth in this Quarterly Report on Form 10-Q, and the
Company's Annual Report on Form 10-K for the year ended June 30, 2002, 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 Form 10-Q, the Company's Annual Report on Form 10-K for
the year ended June 30, 2002, 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 the Form 10-Q
speak only as of the date hereof and we disclaim 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. Financial Information
The consolidated financial statements included herein have been prepared by the
Company without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. While certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles in the United States have been condensed or
omitted pursuant to such rules and regulations, the Company believes that the
disclosures made herein are adequate to make the information presented not
misleading. It is recommended that these consolidated financial statements be
read in conjunction with the Company's consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 2002.
In the opinion of the Company, all adjustments necessary to present fairly the
Company's consolidated financial position as of December 31, 2002, and the
results of its operations for the three and six month periods ended December 31,
2002 and 2001, and its cash flows for the six months periods then ended, have
been included.
2
Item 1: FINANCIAL STATEMENTS
AFP Imaging Corporation and Subsidiaries
Consolidated Balance Sheets - December 31, 2002 and June 30, 2002
Assets December 31, June 30, Liabilities and Shareholders' December 31, June 30,
2002 2002 Equity 2002 2002
-------------- ----------- -------------- -----------
(Unaudited) (Unaudited)
CURRENT ASSETS: CURRENT LIABILITIES:
Cash and cash equivalents $793,359 $516,494 Current portion of long-term debt $1,915,276 $1,692,870
Accounts receivable, less allowance Accounts payable 741,634 1,358,696
for doubtful accounts of $92,060 Accrued expenses 899,599 794,671
and $104,000, respectively -------------- -----------
2,048,713 2,464,586 Total current liabilities 3,556,509 3,846,237
-------------- -----------
Inventories 2,208,926 2,816,073
Prepaid expenses and other 225,290 140,591 LONG TERM DEBT 905,556 1,180,556
-------------- ----------- -------------- -----------
Total current assets 5,276,288 5,937,744 SHAREHOLDERS' EQUITY
-------------- -----------
Common stock, $.01 par value,
30,000,000 shares authorized,
PROPERTY, PLANT AND EQUIPMENT, 9,271,054 shares issued and
At cost 2,243,954 2,160,054 outstanding at December 31, 2002,
Less accumulated depreciation (1,832,754) (1,726,256) and June 30, 2002, respectively 92,710 92,710
-------------- -----------
411,200 433,798 Common stock warrants 19,800 19,800
Paid-in capital in excess of par 11,545,883 11,545,883
GOODWILL, Accumulated deficit (10,290,808) (8,823,057)
net of accumulated amortization - 1,297,069 Cumulative translation adjustment (11,489) (12,619)
-------------- -----------
Total shareholders' equity 1,356,096 2,822,717
-------------- -----------
OTHER ASSETS 130,673 180,899
-------------- -----------
$5,818,161 $7,849,510 $5,818,161 $7,849,510
============== =========== ============== ===========
The accompanying notes to financial statements are an integral part of these statements.
3
AFP Imaging Corporation and Subsidiaries
Consolidated Statements of Operations
---------------------------------------
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
2002 2001 2002 2001
------------ ------------- ----------- --------
NET SALES $4,821,155 $4,612,336 $8,885,949 $9,741,779
COST OF SALES 3,136,009 3,008,581 5,849,558 6,383,119
------------- --------- ----------- ------------
Gross profit 1,685,146 1,603,755 3,036,391 3,358,660
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,379,216 1,493,121 2,794,166 2,901,939
RESEARCH AND DEVELOPMENT EXPENSES 174,658 151,492 292,542 250,253
------------- --------- ------------ -----------
1,553,874 1,644,613 3,086,708 3,152,192
------------- --------- ------------ -----------
Operating income (loss) 131,272 (40,858) (50,317) 206,468
INTEREST EXPENSE, net 55,993 73,902 111,745 174,931
------------- --------- ------------ -----------
Income (loss) before income taxes 75,279 (114,760) (162,062) 31,537
PROVISION (BENEFIT) FOR INCOME TAXES 4,620 (7,597) 8,620 8,717
------------ ---------- ------------ -----------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 70,659 (107,163) (170,682) $22,820
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE ---- ----- (1,297,069) ----
------------ ---------- ------------- ----------
NET INCOME (LOSS) $70,659 ($107,163) ($1,467,751) $22,820
============ =========== ============= ==========
INCOME (LOSS) PER SHARE BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
Basic $.01 ($.01) ($.02) $---
============ =========== ============= ==========
Diluted $.01 ($.01) ($.02) $---
============ =========== ============= ==========
NET INCOME (LOSS) PER SHARE
Basic $.01 ($.01) ($.16) $---
============ =========== ============= ==========
Diluted $.01 ($.01) ($.16) $---
============ =========== ============= ==========
WEIGHTED AVERAGE OUTSTANDING COMMON STOCK
Basic 9,271,054 9,271,054 9,271,054 9,271,054
============ ========== ============= ===========
Diluted 9,271,054 9,271,054 9,271,054 9,272,054
============ ========== ============ ===========
The accompanying notes to consolidated financial statements are an integral part of these statements.
4
AFP Imaging Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity and Comprehensive Income (Loss)
For the Six Months Ended December 31, 2002 and 2001
- ------------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Foreign
Comprehensive Common Paid-in Currency
Income Common Stock Capital In Accumulated Translation
(Loss) Stock Warrants Excess of Deficit Adjustment Total
Par
------------------------------------------------------------------------------------------------
Balance June 30, 2001 $--- $92,710 $--- $11,545,883 $(8,907,059) $(14,311) $2,717,223
Issuance of common stock
warrants --- --- 19,800 --- --- --- 19,800
Foreign currency translation
adjustment 1,892 --- --- --- --- 1,892 1,892
Net income for six months
ended December 31, 2001 22,820 --- --- --- 22,820 --- 22,820
---------------
Comprehensive Income $24,712 --- --- --- --- --- ---
===============---------------------------------------------------------------------------------
Balance December 31, 2001 $92,710 $19,800 $11,545,883 $(8,884,239) $(12,419) $2,761,735
=================================================================================
Balance June 30, 2002 $--- $92,710 $19,800 $11,545,883 $(8,823,057) $(12,619) $2,822,717
Foreign currency translation
adjustment 1,130 --- --- --- --- 1,130 1,130
Net loss for six months
ended December 31, 2002 (1,467,751), --- --- --- (1,467,751) --- (1,467,751)
===============
Comprehensive Loss $(1,466,621) --- --- --- --- --- ---
===============---------------------------------------------------------------------------------
Balance December 31, 2002 $92,710 $19,800 $11,545,883 $(10,290,808) $(11,489) $1,356,096
=================================================================================
The accompanying notes to consolidated financial statements are an integral part of these statements.
5
AFP Imaging Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For the Six Months Ended December 31, 2002 and 2001
---------------------------------------------------
(Unaudited)
2002 2001
----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) ($1,467,751) $22,820
Adjustments to reconcile net income (loss) to net cash provided by operating
activities-
Depreciation and amortization 134,494 180,000
Cumulative effect of change in accounting principle 1,297,069 ---
Change in assets and liabilities:
Decrease in accounts receivable 415,873 744,552
Decrease in inventories 607,147 510,727
Increase in prepaid expenses and other assets (62,469) (90,095)
Decrease in accounts payable (617,062) (314,356)
Increase (decrease) in accrued expenses 104,928 (237,584)
------------ ----------
Total adjustments 1,879,980 793,244
------------ ----------
Net cash provided by operating activities 412,229 816,064
------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of graphic arts business --- 340,815
Capital expenditures (83,900) (11,456)
------------- ----------
Net cash (used by) provided by investing activities (83,900) 329,359
------------- ----------
CASH FLOW FROM FINANCING ACTIVITIES:
Borrowing of debt 89,072 1,801,065
Repayment of debt (141,666) (2,359,407)
------------- ----------
Net cash used by financing activities (52,594) (558,342)
------------- ----------
EXCHANGE RATE EFFECTS ON CASH AND CASH EQUIVALENTS 1,130 1,892
------------- ----------
Net increase in cash and cash equivalents 276,865 558,973
CASH AND CASH EQUIVALENTS, at beginning of period 516,494 198,276
------------ ----------
CASH AND CASH EQUIVALENTS, at end of period $793,359 $787,249
============ ==========
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements.
6
AFP Imaging Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2002
- -----------------
(Unaudited)
(1) General:
- ------------
AFP Imaging Corporation (together with its subsidiaries, the "Company") was
organized on September 20, 1978, under the laws of the State of New York. Since
its inception, the Company has been engaged in the business of designing,
developing, manufacturing and distributing equipment for producing medical and
dental x-ray images through digital technology as well as the chemical
processing of photosensitive materials. Medical, dental and veterinary
professionals use these products.
The accounting policies followed during the interim periods reported on herein
are in conformity with accounting principles generally accepted in the United
States and are consistent with those applied for annual periods, as described in
the Company's financial statements included in the Company's Annual Report on
Form 10-K for the year ended June 30, 2002, except as discussed below.
Certain reclassifications have been made to the prior year's financial
statements to conform to the current year's presentation.
(2) Adoption of New Accounting Standards:
- -----------------------------------------
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" (SFAS No. 143). SFAS No. 143 requires that legal obligations
associated with the retirement of tangible long-lived assets be recorded at fair
value when incurred and is effective beginning on July 1, 2002 for the Company.
The Company determined that the provisions of SFAS No. 143 did not have a
material effect on the Company's results of operations or financial position.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS No. 144). SFAS No. 144 requires that one
accounting model be used for long-lived assets to be disposed of by sale.
Discontinued operations will be measured similar to other long-lived assets
classified as held for sale at the lower of its carrying amount or fair value
less cost to sell. Future operating losses will no longer be recognized before
they occur. SFAS No. 144 also broadens the presentation of discontinued
operations to include a component entity when operations and cash flows can be
clearly distinguished, and establishes criteria to determine when a long-lived
asset is held for sale, and is effective beginning on July 1, 2002 for the
Company. The Company determined that the provisions of SFAS No. 144 did not have
a material effect on the Company's results of operations or financial position.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" ("SFAS
141") and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 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. Instead, goodwill and intangible assets deemed
to have an indefinite useful life will be subject to an annual review for
impairment. The new standards generally were effective for the Company as of
July 1, 2002 and for purchase business combinations consummated after June 30,
2001. SFAS 142 requires that goodwill and intangible assets deemed to have an
indefinite useful life be reviewed for impairment upon adoption of SFAS 142
(July 1, 2002) and annually thereafter.
Under SFAS 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 142 in the first quarter of Fiscal 2003, the Company
recorded a one-time, non-cash charge of approximately $1,297,069 ($.14 basic and
diluted loss per share), 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 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 Fiscal 2002 results on a historical basis do not reflect the provisions of
SFAS 142. Had the Company adopted FAS 142 on July 1, 2001, the historical net
income and basic and diluted net income per common share would have been changed
to the adjusted amounts indicated below:
7
Six Months Ended December 31, 2001
----------------------------------
Net Income per basic Net Income per diluted
Net Income common share common share
As reported--historical
basis $ 22,820 $ --- $ ---
Add: Goodwill amortization 72,000 0.01 0.01
Income tax impact - - -
--------------------- --------------------------- ----------------------
Adjusted $ 94,820 $ 0.01 $ 0.01
====== ==== =====
(3) Basic and Diluted Earnings (Loss) Per Common Share:
---------------------------------------------------
The computation of net earnings per common share is based upon the weighted
average number of common shares outstanding during the period plus in periods
in which they have a dilutive effect, the effect of shares contingently
issuable. The diluted weighted average number of shares outstanding does not
include any shares of common stock issuable upon exercise of outstanding stock
options in the first six months Fiscal 2003, as all of the outstanding stock
options are at a strike price equal to or above the average stock price for
the six month period. It does include 1,000 shares of common stock issuable
upon exercise of outstanding stock options in the first six months Fiscal
2002.
(4) Common Stock Options and Stock Purchase Plan
------------------------------------------------
The Company has two employee incentive stock option plans, under which
approximately 1,600,000 shares of Common Stock are authorized and available for
issuance. Under the terms of the plans, options to purchase common stock of the
Company may be granted at not less than 100% of the fair market value of the
stock on the date of grant, or 110% of the fair market value if granted to
persons owning more than 10% of the outstanding stock of the Company.
The Company accounts for these plans pursuant to Accounting Principles Board
Opinion No. 25 "Accounting for Stock Issued to Employees," under which no
compensation cost has been recognized. Had compensation cost for these plans
been determined based on the fair value at the grant dates consistent with SFAS
No. 123, "Accounting for Stock-Based Compensation" and SFAS No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure-an Amendment
of FASB Statement No. 123", the Company's net income and earnings per share
would have been reduced by an insignificant amount.
(5) Long and Short Term Debt:
-----------------------------
On September 21, 2001, the Company established a new three-year senior secured
credit facility (the "Revolving Credit Loan"), consisting of a $3.5 million
revolving line of credit, which replaced its then current senior secured credit
facility. The Revolving Credit Loan 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
Revolving Credit Loan requires that certain financial ratios and net worth
amounts be maintained. As of December 31, 2002, the Company was in compliance
with all the terms and conditions of the Revolving Credit Loan, as amended. The
Revolving Credit Loan has an interest rate of 1-3/4% over the prime rate,
currently at 6%, 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. In connection with the Revolving
Credit Facility, 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 an adjustment for all issuances of stock. The Black-Scholes method
was used to account for these warrants, 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
acquisitions. These notes total $1,366,667 at December 31, 2002, of which
approximately $461,100 has been classified as a current liability.
The Company is dependent upon the Revolving Credit Loan to finance its overall
operations. It is believed that the Revolving Credit Loan is sufficient to
finance the Company's ongoing working capital requirements for the foreseeable
future. At January 31, 2003, the Company had available $690,300 of unused credit
under the Revolving Credit Loan.
8
(6) Inventory:
Inventories, which include material, labor and manufacturing overhead, are
stated at the lower of cost (first-in, first-out) or market (net realizable
value). The Company uses a standard cost accounting system in conjunction with
an actual perpetual inventory system to properly account for, control, and
maintain the movement of all inventory components. All standard costs are
reviewed periodically and updated accordingly, to verify that the standard costs
approximate the actual costs. At December 31, 2002 and June 30, 2002,
inventories consist of the following:
December 31, 2002 June 30, 2002
----------------- -------------
Raw materials and sub-component parts $1,575,911 $1,786,027
Work-in-process and finished goods 633,015 1,030,046
----------- ---------
$2,208,926 $2,816,073
========== ==========
(7) Income Taxes:
- -----------------
Income taxes are accounted for under the asset and liability method. The
Company's income tax provision for the Fiscal 2003 and 2002 six-month periods
relate to state or foreign income and capital taxes, net of any refunds
received. No income tax benefits related to the losses reported in prior years
have been recorded, in accordance with SFAS No. 109.
(8) Segment Information:
- ------------------------
As of December 31, 2002, the Company only had one business segment,
Medical/Dental, as the Company sold its graphic arts business to a third party
in July 2001. All costs associated with the disposition of this product line
were recorded in fiscal 2001. The segment information for the three and six
months ended December 31, 2001 is shown below. Segment information related to
operating income includes costs directly attributable to each segment's
operations.
Operating Net
Income Depreciation Capital Interest
Net Sales (Loss) Assets & Amortization Expenditures Expense
For the three months ended --------- -------- ------ --------------- ------------ ---------
--------------------------
December 31, 2001
-----------------
Medical/Dental $4,612,336 ($40,858) $7,569,444 $90,000 $11,456 $73,902
Graphic Arts 0 0 0 0 0 0
---------- --------- ---------- ---------- -------- -------
Consolidated $4,612,336 ($40,858) $7,569,444 $90,000 $11,456 $73,902
========== ========= ========== ========== ======== =======
For the six months ended
------------------------
December 31, 2001
------------------------
Medical/Dental $9,675,524 $261,159 $7,569,444 $180,000 $11,456 $174,931
Graphic Arts 66,255 (54,691) 0 0 0 0
----------- --------- ----------- ---------- -------- --------
Consolidated $9,741,779 $206,468 $7,569,444 $180,000 $11,456 $174,931
=========== ========= =========== ========== ======== ========
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operation
Capital Resources and Liquidity
- -------------------------------
The Company's working capital at December 31, 2002 decreased by approximately
$371,700 from June 30, 2002. The Company significantly reduced its accounts
payable through reductions in accounts receivable and inventory, which were
offset by an increase in current debt borrowings and prepayment for foreign
inventory purchases. Additionally, as of December 31, 2002, there are now two
subordinated notes, portions of which are classified in the current portion of
long-term debt, whereas at June 30, 2002, only one subordinated note had a
portion classified as current debt.
9
On September 21, 2001, the Company established a new three-year senior secured
credit facility (the "Revolving Credit Loan"), consisting of a $3.5 million
revolving line of credit, which replaced its then current senior secured credit
facility. The Revolving Credit Loan 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
Revolving Credit Loan requires that certain financial ratios and net worth
amounts be maintained. As of December 31, 2002, the Company was in compliance
with all the terms and conditions of the Revolving Credit Loan, as amended. The
Revolving Credit Loan has an interest rate of 1-3/4% over the prime rate,
currently at 6%, 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. In connection with the Revolving
Credit Facility, 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 an adjustment for all issuances of stock. The Black-Scholes method
was used to account for these warrants, 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
acquisitions. These notes total $1,366,667 in principal amount at December 31,
2002, of which approximately $461,100 has been classified as a current
liability.
The Company's historical operating cash flows have been positive; however, the
Company is dependent upon the Revolving Credit Facility to finance its ongoing
operations. It is believed that the Revolving Credit Loan is sufficient to
finance the Company's ongoing working capital requirements for the foreseeable
future. The Company expects its working capital requirements will continue to be
financed by operations and from borrowings. The Company currently believes that
there are no significant trends, demands, commitments or contingencies, other
than a general decline in sales and/or the ongoing litigation cases, which are
reasonably likely to result in a material increase or decrease in its liquidity
or capital resources in the foreseeable future. At January 31, 2003, the Company
had available $690,300 of unused credit under the Revolving Credit Loan.
Capital expenditures for the first six months of Fiscal 2003 were $83,900
consisting of a significant enhancement to the telephone system, computer
workstation upgrades for engineering and other departmental applications, and
tooling charges related to the new digital imaging product development. Where
practical, the Company continues to conserve its cash expenditures. The Company
expects to continue to finance any future capital requirements principally from
internally generated funds. Future capital expenditures are limited under the
terms of the Revolving Credit Loan.
Results of Operations - Six Months Fiscal 2003 Versus Six Months Fiscal 2002
- ----------------------------------------------------------------------------
Sales decreased approximately $855,800 or 9% between the Fiscal 2003 and Fiscal
2002 six-month periods. The dental product sales decreased approximately
$350,000, as the Fiscal 2002 six-month period included approximately $260,000
more in sales to the U.S. military than the Fiscal 2003 six-month period, and
the Company phased out its older digital sensor. The Company's medical product
sales showed a decrease of approximately $490,000. First quarter Fiscal 2002
included a large medical products sale to the U.S. military of approximately
$490,000. The Company's growing veterinary line showed an increase of 58% over
the prior year. Medical processor sales increased approximately 4% in the
current six-month period. This was offset by approximately $250,000 lower sales
attributable to the Company's medical ultrasound and film recording cameras,
mainly due to technological changes in the marketplace. The Company began
shipments of its new digital dental sensor, "EVA"(R), during November 2002,
mainly to international dealers and distributors.
Gross profit as a percent of sales did not change significantly between the
Fiscal 2003 and Fiscal 2002 six-month periods. The product mix between
manufactured and distributor goods were relatively constant between the two
six-month periods. Labor and overhead costs, which are included in cost of
sales, were just slightly lower in the current six -month period.
Selling, general, and administrative costs decreased slightly, approximately
$107,800 or 4%, between the Fiscal 2003 and Fiscal 2002 six-month periods.
Approximately $76,000 relates to the collection (reducing expenses), in the
first quarter Fiscal 2002, of a portion of a large receivable, which had been
written off in 1993. There was approximately $72,000 less in amortization costs
in the current six-month period due to the Change in Accounting Principle
related to the treatment of goodwill. There was approximately $100,000 less in
legal fees in the current six-month period due to the settlement of several
outstanding claims in the prior fiscal year. Additionally, the Company
negotiated and received approximately $20,000 from its insurance carrier in the
current six-month period to help defray the legal costs associated with the
outstanding environment litigation. These legal costs will continue to be shared
by the outside insurance carrier. Management instituted cost reduction programs
in the fourth quarter of Fiscal 2001 and continues to monitor and maintain them.
10
Research and development costs increased, approximately $42,200 or 17%, between
the Fiscal 2003 and Fiscal 2002 six-month periods. 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. Where applicable, the Company is acting
as an import distributor for new products developed by others.
Interest expense, net, decreased, approximately $63,200 or 36%, between the
Fiscal 2003 and Fiscal 2002 six-month periods, primarily due to there being
approximately $540,000 less in total debt at December 31, 2002 compared to
December 31, 2001. The Company was in breech of certain of its obligations with
its previous lender in the first quarter Fiscal 2002 and, accordingly, incurred
a penalty interest rate on all outstanding borrowings. Additionally, the prime
rate of borrowing, upon which all senior debt is based, was several points lower
in the current six-month period.
The income tax provisions for Fiscal 2003 and Fiscal 2002, respectively,
primarily reflect the nominal state taxes due. No tax benefit has been
recognized for the losses incurred in prior years.
In compliance with the FASB Statement 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 new
accounting valuation rules such goodwill had significantly diminished in value.
Therefore, in compliance with FASB Statement 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 this Statement will have a material
effect on the Company's financial position or results of operation.
Results of Operations - Second Quarter Fiscal 2003 Versus Second Quarter Fiscal
2002
- -------------------------------------------------------------------------------
Sales increased approximately $209,000 or 4.5% between the second quarter Fiscal
2003 and the second quarter Fiscal 2002. Dental product sales, including the
relative mix of these products, stayed relatively constant between second
quarter Fiscal 2003 and second quarter Fiscal 2002. The Company's medical
product sales showed an increase of approximately $200,000 due to the Company's
growing veterinary line and an increase in medical processor sales in the
current second quarter. The Company began shipments of its new digital dental
sensor, "EVA"(R), during November 2002, mainly to international dealers and
distributors.
Gross profit as a percent of sales did not change significantly between the
Fiscal 2003 and Fiscal 2002 second quarters. The product mix between
manufactured and distributor goods were relatively constant between the two
periods. Labor and overhead costs, which are included in cost of sales, were
approximately the same amount in the two comparative periods.
Selling, general, and administrative costs decreased by approximately $114,000
or 7.6%, between second quarter Fiscal 2003 and second quarter Fiscal 2002 .
There was approximately $36,000 less in amortization costs in the current second
quarter due to the Change in Accounting Principle related to the treatment of
goodwill. There was approximately $78,000 less in legal fees in the current
second quarter due to the settlement of several outstanding claims in the prior
fiscal year. Additionally, the Company negotiated and received approximately
$20,000 from its insurance carrier in the current second quarter to help defray
the legal costs associated with the outstanding environment litigation. These
legal costs will continue to be shared by the outside insurance carrier.
Research and development costs increased, approximately $23,200 or 15%, between
the second quarter Fiscal 2003 and the second quarter Fiscal 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. Where applicable, the Company is
acting as an import distributor for new products developed by others.
Interest expense, net, decreased, approximately $18,000 or 24%, between the
second quarter Fiscal 2003 and the second quarter Fiscal 2002 primarily due to
there being approximately $270,000 less in total debt for the three month period
ended December 31, 2002 compared to the three month period ended December 31,
2001. Additionally, the prime rate of borrowing, upon which all senior debt is
based, was a point lower in the current second quarter.
The income tax provisions for the second quarter Fiscal 2003 and Fiscal 2002,
respectively, primarily reflect the nominal state taxes due. No tax benefit has
been recognized for the losses incurred in prior years.
11
Other
- -----
Adoption of New Financial Standards
- -----------------------------------
In July 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities and nullifies EITF Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring" ("SFAS
146"). SFAS 146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred, whereas EITF No.
94-3 had recognized the liability at the commitment date to an exit plan. The
Company is required to adopt the provisions of SFAS 146 effective for exit or
disposal activities initiated after December 31, 2002. The Company is currently
evaluating the impact of this Statement; however, the Company does not expect
that the adoption of SFAS 146 will have a material impact on the Company's
financial position or results of operations.
In October 2002, the FASB issued Statement No. 147, "Acquisitions of Certain
Financial Institutions-an Amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9". The Company does not expect this Statement to have any
effect on its financial position or results of operation.
In December 2002, the FASB issued Statement No. 148, "Accounting for Stock Based
Compensation-Transition and Disclosure-an Amendment of FASB Statement No. 123".
The Company is currently evaluating the impact of this Statement; however the
Company does not expect the adoption of SFAS 148 will have a material impact on
the Company's financial position or results of operation. The Company has
accordingly included additional disclosures on its incentive stock option plans
in the accompanying Notes to the Consolidated Financial Statements. The Company
is required to adopt the provisions of SFAS 148 as of June 30, 2003.
Item 3: Quantitative and Qualitative Disclosures About Market Risk.
- ---------------------------------------------------------------------
Not Applicable.
Item 4: Controls and Procedures.
- ---------------------------------
As of December 31, 2002, an evaluation was performed under the supervision and
with the participation of the Company's management, including the Co-Chief
Executive Officers and the Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures. Based
on that evaluation, the Company's management, including the Co-Chief Executive
Officers and the Chief Financial Officer, concluded that the Company's
disclosure controls and procedures were effective as of December 31, 2002. There
have been no significant changes in the Company's internal controls or in other
factors that could significantly affect internal controls subsequent to December
31, 2002.
Part II Other Information
- -------------------------
Item 1: Legal Proceedings
- -------------------------
Reference is made to Item 3 in the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 2002, and to Part II, Item 1 in the Company's
Quarterly Report on Form 10Q for the period ended September 30, 2002, and to the
references therein, for a discussion of all material pending legal proceedings
to which the Company and its subsidiaries are parties.
Reference is made to the product liability insurance action commenced in the
Second Judicial District Court of Nevada in 2000, alleging that the Company's
equipment caused a fire on the plaintiff's premises in December 1998. This case
was settled on November 21, 2002, for significantly less than the originally
claimed amount, and included mutual releases for all participating parties from
any liability arising from this claim. The Company's insurance carrier was
responsible for the settlement. Therefore, such settlement had no material
effect on the Company.
Item 2: Changes in Securities and Use of Proceeds.
- ----------------------------------------------------
None
Item 3: Defaults Upon Senior Securities.
- -------------------------------------------
12
None
Item 4: Submission of Matters to a Vote of Security Holders.
- ---------------------------------------------------------------
On December 9, 2002, the Company held an Annual Meeting of Shareholders to (1)
elect four directors for a term of one year or until their successors are duly
elected and (2) ratify the appointment of Ernst & Young LLP as the independent
auditors of the Corporation's accounts for the year ending June 30, 2003.
The nominees were each elected to the Board of Director's by the following
votes:
For Election Against Election
------------ ----------------
David Vozick 8,357,868 198,133
Donald Rabinovitch 8,357,868 198,133
Jack Becker 8,357,868 198,133
Robert Blatt 8,357,868 198,133
In connection with the ratification of the appointment of Ernst & Young LLP as
the Company's independent auditors, 8,517,451 shares voted for, 8,500 shares
abstained, and 30,500 shares voted against.
Item 5: Other Information.
- -----------------------------
None
Item 6: Exhibits and Reports on Form 8-K.
- --------------------------------------------
(a) Exhibits:
None
(b) Reports on Form 8-K:
None
13
Signatures
Pursuant to the requirements 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
_________/s/________________
David Vozick
Chairman of the Board
Secretary, Treasurer
Date: February 12, 2003
_________/s/________________
Donald Rabinovitch
President
(Principal Executive Officer)
Date: February 12, 2003
__________/s/_______________
Elise Nissen
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: February 12, 2003
14
CERTIFICATIONS
- --------------
1) I, David Vozick, Chairman of the Board and Co-Principal Executive Officer
of AFP Imaging Corporation, certify that:
2) I have reviewed this Quarterly Report on Form 10-Q of AFP Imaging
Corporation;
3) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
4) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and, for the periods presented in this
quarterly report;
5) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
6) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees that have a significant role in the registrant's internal
controls; and
7) The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 12, 2003 ___________/s/______________
David Vozick
Chairman of the Board
(Co-Principal Executive Officer)
15
CERTIFICATIONS
- --------------
1) I, Donald Rabinovitch, President and Co-Principal Executive Officer of AFP
Imaging Corporation, certify that:
2) I have reviewed this Quarterly Report on Form 10-Q of AFP Imaging
Corporation;
3) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
4) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and, for the periods presented in this
quarterly report;
5) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
6) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees that have a significant role in the registrant's internal
controls; and
7) The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 12, 2003 ___________/s/______________
Donald Rabinovitch
President
(Co-Principal Executive Officer)
16
CERTIFICATIONS
- --------------
1. I, Elise Nissen, Chief Financial Officer of AFP Imaging Corporation,
certify that:
2. I have reviewed this Quarterly Report on Form 10-Q of AFP Imaging
Corporation;
3. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
4. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and, for the periods presented in this
quarterly report;
5. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
6) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees that have a significant role in the registrant's internal
controls; and
7) The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 12, 2003 ___________/s/______________
Elise Nissen
Chief Financial Officer
17