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, 2003
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
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
250 Clearbrook Road, Elmsford, NY 10523
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 592-6100
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Securities registered pursuant Section 12 (b) of the Act: None
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Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value .01 per share
(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, 2002 was approximately
$884,200. 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 $0.15.
The registrant had 9,271,054 shares of Common Stock outstanding as of September
3, 2003.
The information required by Part III of Form 10-K is incorporated by reference
to the registrant's Proxy Statement for the 2003 Annual Meeting of Shareholders
tentatively scheduled for December 8, 2003 to be filed with the Securities and
Exchange Commission on or prior to October 28, 2003.
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,
o adverse changes in general economic conditions,
o 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,
o any potential economic, political, and social impact from the continuing
conflict in Iraq,
o the Company's ability to repay its debts when due,
o changes in the markets for the Company's products and services,
o the ability of the Company to successfully design, develop, manufacture and
sell new products,
o the Company's ability to successfully market its existing and new products,
o adverse business conditions,
o increased competition,
o pricing pressures,
o risk associated with foreign operations,
o the ability to attract and retain key personnel,
o difficulties in obtaining adequate long-term financing to meet the
Company's obligations,
o the willingness of the Company's senior secured lender to continue to waive
violations of covenants contained in loan documents between the Company and
the senior secured lender,
o changes in the nature or enforcement of laws and regulations concerning the
Company's products, services, suppliers, or the Company's customers,
o changes in currency exchange rates and regulations,
o and such 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,
2003, 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
producing medical and dental x-ray 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.
On October 21, 2002, the United States District Court for the Central District
of California dismissed the complaint filed by a potential customer alleging
breach of a 1996 contract with the Company for non-performance.
On November 21, 2002, the product liability insurance action commenced in the
Second Judicial Court of Nevada in 2000, alleging that the Company's equipment
caused a fire on the plaintiff's premises was settled for significantly less
2
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 approved and underwrote the settlement.
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 7
to the Consolidated Financial Statements for further discussion of the Company's
industry segments.
c) Narrative Description of Business
Principal Products and Services
Medical, Dental and Industrial X-Ray Processors & Accessories
The Company manufactures and distributes a line of freestanding and table top
medical, dental and industrial x-ray film processors. These machines are capable
of processing or developing films of various sizes. The exposed film is inserted
into equipment and returned to the operator developed, fixed, washed and dried.
The equipment can be located either in a dark room site or adapted to a daylight
loading system. These units are used for diagnostic x-ray imaging and
industrial, non-destructive testing applications. The Company's products are
distributed worldwide through an unaffiliated dealer network to doctors,
dentists, veterinarians, hospitals, medical clinics, the U.S. military, and
other facilities.
Digital Dental 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 have practical applications in both human and animal dentistry. The
Company has developed proprietary application software for use with the sensor.
The Company also manufactures and distributes intraoral video dental cameras and
related image management software.
X-Ray Systems
The Company recently obtained 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 then be developed in the Company's film processors.
These x-ray products are compatible with the Company's 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 line of radiographic equipment. These combined
systems allow the veterinarian to perform both dental and general radiography on
small animals.
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 acquired as part of
acquisitions in 1997. The Company is not aware of any patents held by others
that conflict with the Company's current product designs. The Company has agreed
to pay a nominal royalty on the domestic sales of its digital dental systems to
3
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 on the worldwide sales of its digital dental sensors to a third party,
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:
2003 2002 2001
---- ---- ----
$553,991 $499,829 $457,172
The Company conducts research and development activities internally, at its New
York facility, as well as contracts certain projects to qualified vendors and
expert consultants. The Company's research and development efforts and
technologies have been enhanced by business acquisitions completed 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 or difficult to obtain 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 a web site, which provides an easy-to-navigate, on-line
information environment, including Company information, product description and
extensive technical specifications and information.
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.
4
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 deemed to be
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
The Company believes its business is not seasonal.
Working Capital Practices
The Company believes its practices regarding inventories, receivables or other
items of working capital to be typical for the industry involved. In September
2001, the Company established a new three-year, senior secured credit facility
with a new lender. The Company has a good working relationship with its present
senior secured lender. This facility expires in September 2004, at which time
the Company expects it will be renewed with the existing lender or a new lender.
See Note 2 to the Consolidated Financial Statements and Management's Discussion
and Analysis of Financial Condition and Results of Operation for further
discussion.
Customers
In Fiscal Year ended June 2003, sales of dental imaging equipment to Henry
Schein Inc. and Patterson Dental Supply, each accounted for approximately 11% of
consolidated sales. In 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 either of these customers would initially
have an adverse effect on the Company's consolidated business. No customer
accounted for 10% or more of net sales in Fiscal Year 2001.
Backlog Orders
As of June 30, 2003, the Company's backlog of orders for its products was
approximately $511,500 as compared to $562,100 as of June 30, 2002. All of the
orders included in the backlog at June 30, 2003 are scheduled for delivery on or
before June 30, 2004. Spare part sales are not part of the Company's backlog
calculations. The Company modified its pricing structure in Fiscal Year 2002,
reducing the potential benefit for placing blanket orders for products, which
reduced the amount of the order backlog. 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 contracts in 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
contract was with the Department of the Air Force for the delivery of X-ray Film
Processors. The other 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
5
and facilities than the Company. The Company relies on internal research and
development personnel as well as subcontracted vendors. With respect to all of
its products, the Company competes on the basis of price, features, product
quality, applications, engineering, and promptness of delivery and customer
service. The Company purchases certain products from others for resale on a
non-exclusive basis, which may be subject to competition from other independent
distributors.
The Company also competes in the dental imaging market 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 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, 2003, the Company employed 90 people on a full-time basis. The
Company has no collective bargaining agreements and considers its relationship
with its employees to be satisfactory.
d) Financial Information about Foreign and Domestic Operations and Export Sales
With respect to the Company's last three fiscal years, domestic sales were
$15,111,108 (2003), $16,116,458 (2002), and$18,819,770 (2001) representing 84%,
80%, and 78%, respectively, of the Company's total sales during such periods.
Domestic operating income was $1,395 and $396,078 for the years ended June 30,
2003 and 2002, respectively, and the domestic operating loss for the year ended
June 30, 2001 was $1,260,835. Export and foreign sales during such periods were
$2,932,560 (2003), $3,970,430 (2002), and $5,231,530 (2001) or 16%, 20%, and 22%
of total Company sales for each period, respectively. The Company's Swedish
subsidiary, Regam, incurred net losses of $1,940, $4,670, and $24,950, for
fiscal years ended June 30, 2003, 2002, and 2001, respectively. The Company's
Swedish operation was liquidated in September 2003.
Assets used in the manufacture of export sales are integrated with the other
assets of the Company.
Item 2. Properties
The Company's executive offices and principal 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, 2008 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 (with several other parties) in a product liability
insurance action commenced in the Court of Common Pleas, Summit County, Ohio.
The plaintiff, through their insurance company, claims that the Company's
equipment caused a fire on the plaintiff's premises in June 2001. The complaint
seeks compensatory damages of at least $76,800. The Company maintains that its
equipment was not the cause of the fire or the resultant damage. The Company's
insurance carriers, and their attorneys, are assisting in the Company's defense
6
in this matter. The Company does not believe that any adverse final outcome of
this matter will have a material adverse effect on the Company's financial
position.
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 relates to the offsite commercial disposition of trash and waste
in a landfill in New Jersey. 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. The second 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 to remedy the situation, which the plaintiff
originally estimated to be $750,000. This amount has been disputed and then
reduced based on further expert evaluation and discussions between the involved
parties. The Company maintains it took the appropriate steps and secured
clearance under the Environmental Clean-up Responsibility Act (ECRA) at the time
of sale, in 1985, and continues to investigate, with the help of legal counsel,
any applicable insurance coverage. 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. It is currently undetermined if these
claims or settlements are covered by insurance. At this time, the Company cannot
assess the amount of liability that could result from any adverse final outcome
of either of these two environmental complaints.
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 2003.
7
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 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
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September 30, 2001 .32 .24
December 31, 2001 .32 .18
March 31, 2002 .19 .15
June 30, 2002 .22 .14
September 30, 2002 .22 .12
December 31, 2002 .20 .09
March 31, 2003 .17 .11
June 30, 2003 .17 .11
b) Holders
As of September 15, 2003, the closing bid price for the Common Stock, as
reported on the OTC Bulletin Board, was $.22, and there were 461 shareholders of
record of the Common Stock. The Company estimates, based on surveys conducted by
its transfer agent in connection with the Company's 2002 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
senior secured credit facility. The Company does not currently have a set policy
with respect to payment of dividends. Any future determination to pay cash
dividends will be at the discretion of the 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 shows information with respect to the Company's Common Stock
authorized for issuance under the equity compensation plans maintained by the
Company as of June 30, 2003.
8
(a) (b) (c)
Number of securities Weighted average Number of
to be issued upon exercises price of securities available
exercise of outstanding outstanding options, for future
options, warrants and warrants and rights issuance under equity
rights compensation plans
Plan Category (excluding securities
reflected in column (a))
Equity compensation plans 945,000 $ 0.42 655,000
approved by security holders
(1)
Equity compensation plan not 0 0 400,000
approved by security holders (2)
Total 945,000 $ 0.42 1,055,000
(1) The equity compensation plans approved by the security holders are the 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.
9
Item 6. Selected Financial Data
As of and for the Years Ended June 30,
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
NET SALES $18,043,668 $20,086,888 $24,051,300 $25,366,998 $29,370,338
=========== =========== =========== =========== ===========
OPERATING INCOME (LOSS) $545 $391,408 $(1,285,785)(b) $(328,552)(c) $(1,681,888)(d)
==== ======== =============== ============= ===============
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF $(218,338) $84,002 $(1,738,346)(b) $(807,882)(c) $(2,206,972)(d)
========== ======= =============== ============= ===============
CHANGE IN ACCOUNTING PRINCIPLE
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING $(1,297,069) $-- $-- $-- $--
============ === === === ===
PRINCIPLE (a)
NET INCOME (LOSS) $(1,515,407) $84,002 $(1,738,346)(b) $(807,882)(c) $(2,206,927)(d)
============ ======= =============== ============= ===============
EARNINGS (LOSS) PER SHARE BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
BASIC $(.02) $.01 $(.19) $(.09) $(.24)
====== ==== ====== ====== ======
DILUTED $(.02) $.01 $(.19) $(.09) $(.24)
====== ==== ====== ====== ======
NET EARNINGS (LOSS) PER SHARE
BASIC $(.16) $.01 $(.19) $(.09) $(.24)
====== ==== ====== ====== ======
DILUTED $(.16) $.01 $(.19) $(.09) $(.24)
====== ==== ====== ====== ======
TOTAL ASSETS $6,043,855 $7,849,510 $8,635,214 $11,607,905 $13,986,084
========== ========== ========== =========== ===========
LONG-TERM DEBT $630,556 $1,180,556 $2,359,033 $2,482,878 $2,777,434
======== ========== ========== ========== ==========
SHAREHOLDERS' EQUITY $1,319,929 $2,822,717 $2,717,233 $4,454,939 $5,208,299
========== ========== ========== ========== ==========
SHAREHOLDERS' EQUITY PER COMMON SHARE $.14 $.30 $.29 $.48 $.56
==== ==== ==== ==== ====
COMMON SHARES OUTSTANDING, at end 9,271,054 9,271,054 9,271,054 9,271,054 9,271,054
========= ========= ========= ========= =========
of period
CASH DIVIDENDS PER COMMON SHARE none none none none none
(a) 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, 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.
(d) This amount includes charges and provisions of approximately $750,000
net, related to the Company's dental camera operations, due to the
recognized impairment in the value of this product line. See Note 8 to
the Consolidated Financial Statements for further discussion of these
special charges.
10
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation
The following should be read in conjunction with the Company's Consolidated
Financial Statements and notes thereto included elsewhere herein.
Capital Resources and Liquidity
The Company's working capital decreased approximately $709,800 between Fiscal
Year 2003 and Fiscal Year 2002. The Company significantly reduced its accounts
payable through reductions in accounts receivable and inventory throughout the
year, which were offset by an increase in current debt borrowings. 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, 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 existing 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 June 30, 2003, 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 5 3/4%, 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 adjustment for all subsequent issuances of stock. The Black-Scholes
Method was used to value 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
company acquisitions. As of June 30, 2003, these notes total $1,180,556, of
which approximately $550,000 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 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 Revolving Credit Loan.
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 currently believes that there are no significant trends, demands,
commitments or contingencies, other than a general decline in sales and/or
unexpected adverse conclusions to 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. At September 15, 2003,
the Company had available $812,506 of unused credit under the 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 2003 were approximately $221,154. This
consisted mainly of several tooling and foundry expenditures related to the
design, development and production of the new digital imaging products, a
significant enhancement to the Company's telephone system, and other appropriate
replacements in the normal course of operations. The Company also upgraded its
Business Information System, originally implemented in 1998, including both
hardware and software, a change in the operating system, including all relevant
licensing, and computer workstation upgrades for engineering and other
departmental applications. The Company expects to continue to finance any future
capital requirements principally from internally generated funds. The total
amount of capital expenditures is limited under the Revolving Credit Loan, and
the Company is in compliance with this requirement as of June 30, 2003.
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.
11
Sales decreased by approximately $2,043,000 or 10.2% between the two fiscal
years. The dental product sales decreased $681,000, due, in part, to the fact
that Fiscal 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 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 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 FY
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 the current fiscal
year. 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 the current year. 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 2003 and Fiscal 2002. 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. 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 the current fiscal year 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 the current Fiscal Year 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
will be effective for Fiscal 2004. The Company expects to significantly reduce
both direct and non-direct overhead costs as a result of this program.
Research and Development costs increased approximately $54,000 or 11% between
Fiscal 2003 and 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.
Interest expense, net, decreased, approximately $86,000 or 29%, between Fiscal
2003 and Fiscal 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 2002 and, accordingly, incurred a
penalty interest rate in Fiscal 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 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.
Results of Operations - Fiscal 2002 vs. Fiscal 2001
Sales decreased by approximately $3,964,400 or 16.5% between the two fiscal
years. Sales of graphic arts products showed a decrease from the prior year of
approximately $2,600,000 due to the sale of this product line on July 30, 2001.
The dental product sales decreased approximately $1,348,000 or 8.8%, as Fiscal
2001 included approximately $1.0 million more in sales to the U.S. military than
in Fiscal 2002. Additionally, there was a reduction in export sales. The
12
Company's medical product sales stayed relatively constant between the two
fiscal years. There was a decrease in revenues of approximately $760,000 from
the Company's medical ultrasound and film recording cameras, mainly due to
technological changes in the marketplace. This decrease was offset by an
increase of $720,000 in medical and veterinary x-ray equipment sales. The
domestic veterinary x-ray market continues to show growth potential. Other
products did not show any significant variances from the prior fiscal year.
Gross profit as a percent of sales increased 2.36 percentage points between
Fiscal Year 2002 and Fiscal Year 2001, due to changes in the product mix, as
well as some cost reductions from certain suppliers. There were less distributor
and more Company manufactured products in the sales mix for the current fiscal
year than in the prior fiscal year. Distributor product sales tend to have lower
margins than Company manufactured products. Labor and overhead costs, as a
percent of sales, accounted for approximately .5 percentage points of this
decrease due to the cost cutting and restructuring procedures implemented by the
Company at the end of FY 2001.
Selling, general, and administrative costs decreased approximately $1,600,000 or
21.3% between Fiscal Year 2002 and Fiscal Year 2001. Approximately $890,000 of
the decrease is due to costs associated with the graphic arts product line sold
in July 2001. There was approximately $256,000 less in amortization costs in the
current fiscal year due to lower intangibles in Fiscal 2002 than Fiscal 2001.
Approximately $76,000 relates to the collection, in the first quarter Fiscal
2002, of a portion of a large receivable, which had been written off in 1993.
Approximately $35,000 relates to the favorable settlement, in the third quarter
Fiscal 2002, of an intellectual property infringement suit. The balance of
approximately $340,000 is attributable to the cost reduction programs which
management instituted in the fourth quarter of Fiscal 2001. The work force was
downsized, low margin products were discontinued, and all low priority
expenditures were reduced or eliminated. The associated benefits initially were
realized in the first quarter of Fiscal 2002. Management continues to seek ways
to reduce fixed overhead costs and eliminate potential redundancies.
Research and development costs increased approximately $42,600 or 9.3% between
Fiscal Year 2002 and Fiscal Year 2001. 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 $146,200 or 33.3% between Fiscal
Year 2002 and Fiscal Year 2001, primarily due to there being a lower average
debt balance in the current fiscal year. Outstanding loans were approximately
$1,065,000 less at June 30, 2002 compared to June 30, 2001. Additionally, the
prime rate of borrowing, which all senior debt is based upon, was several points
lower in the current twelve-month period.
The income tax provision primarily reflects the nominal state taxes due. The
Company recognized a small tax benefit for the net loses incurred in the prior
years, as the Company met the criteria described in Statement of Financial
Accounting Standard No. 109, "Accounting for Income Taxes" for recording such
benefit.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
13
CONSOLIDATED FINANCIAL STATEMENTS
AFP Imaging Corporation and Subsidiaries
Years ended June 30, 2003 and 2002
AFP Imaging Corp. and Subsidiaries
Consolidated Financial Statements
Years ended June 30, 2003 and 2002
Contents
Reports of Independent Auditors...................................................................... 1
Financial Statements
Consolidated Balance Sheets.......................................................................... 3
Consolidated Statements of Operations................................................................ 4
Consolidated Statements of Shareholders' Equity and Comprehensive Income (Loss)...................... 5
Consolidated Statements of Cash Flows................................................................ 6
Notes to Consolidated Financial Statements........................................................... 7
Supplemental Schedule
Valuation and Qualifying Accounts.................................................................... 23
Report of Independent Auditors
To the Shareholders of AFP Imaging Corporation
We have audited the accompanying consolidated balance sheets of AFP Imaging
Corporation (a New York Corporation) as of June 30, 2003 and 2002, and the
related consolidated statements of operations, shareholders' equity and
comprehensive income (loss), and cash flows for the years 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. The financial statements
and schedule as of June 30, 2001 were audited by other auditors (Arthur Andersen
LLP) who have ceased operations and whose report, dated March 11, 2002,
expressed an unqualified opinion on those financial statements and schedule.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of AFP Imaging
Corporation at June 30, 2003 and 2002, and the consolidated results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States. 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.
As discussed above, the consolidated financial statements for AFP Imaging
Corporation as of June 30, 2001, and for the year then ended, were audited by
other auditors who have ceased operations. As described in Note 1, these
consolidated financial statements have been revised to include the transitional
disclosures required by Statement No. 142. Our audit procedures with respect to
the disclosures in Note 1 with respect to 2001 included (a) agreeing the
previously reported net loss amount to the previously issued financial
statements and the adjustments to reported net loss representing amortization
expense recognized in 2001 related to goodwill to the Company's underlying
records obtained from management, and (b) testing the mathematical accuracy of
the reconciliation of adjusted net income to reported net income. In our opinion
the disclosures for 2001 in Note 1 are appropriate. However, we were not engaged
to audit, review, or apply any procedures to the Company's consolidated
financial statements for 2001 other than with respect to such disclosures and,
accordingly, we do not express an opinion or any other form of assurance on the
Company's 2001 consolidated financial statements taken as a whole.
/s/ Ernst & Young LLP
Stamford, Connecticut
August 25, 2003
1
PREDECESSOR AUDITOR'S REPORT
THIS REPORT IS A COPY OF THE REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN
LLP. THIS REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP, NOR HAS ARTHUR
ANDERSEN LLP PROVIDED ITS CONSENT TO THE INCLUSION OF THEIR REPORT IN OUR FORM
10-K.
Report of Independent Public Accountants
To the Shareholders of AFP Imaging Corporation:
We have audited the accompanying consolidated balance sheets of AFP Imaging
Corporation (a New York Corporation) and subsidiaries as of June 30, 2001 and
2000, and the related consolidated statements of operations, shareholders'
equity and comprehensive loss and cash flows for each of the three years in the
period ended June 30, 2001. These financial statements and the schedule referred
to below are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of AFP Imaging Corporation and
subsidiaries as of June 30, 2001 and 2000 and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
2001 in conformity with accounting principles generally accepted in the United
States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II, Valuation and Qualifying
Accounts, is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not a required part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic financial statements and, in our opinion, is fairly
stated, in all material respects, in relation to the basic financial statements
taken as a whole.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Stamford, Connecticut
September 24, 2001
2
AFP Imaging Corporation and Subsidiaries
Consolidated Balance Sheets
June 30,
2003 2002
------------------ -----------------
Assets:
Cash and cash equivalents $ 658,138 $ 516,494
Accounts receivable, less allowance for doubtful accounts of $95,200 and
$104,000, respectively 2,249,481 2,478,193
Inventories 2,482,004 2,816,073
Prepaid expenses and other current assets 99,092 140,591
------------------ -----------------
Total current assets 5,488,715 5,951,351
PROPERTY, PLANT AND EQUIPMENT, at cost:
Leasehold improvements 318,260 315,421
Machinery and equipment 1,716,704 1,844,633
------------------ -----------------
2,034,964 2,160,054
Less - Accumulated depreciation (1,582,697) (1,726,256)
------------------ -----------------
452,267 433,798
GOODWILL, net of accumulated amortization of $0 and $1,860,273, respectively
- 1,297,069
OTHER ASSETS 102,873 167,292
------------------ -----------------
$ 6,043,855 $ 7,849,510
================== =================
Liabilities and Shareholders' Equity:
Current portion of long-term debt $ 2,141,931 $ 1,692,870
Accounts payable 998,710 1,358,696
Accrued expenses 546,602 370,996
Accrued payroll expenses 406,127 423,675
------------------ -----------------
Total current liabilities 4,093,370 3,846,237
LONG-TERM DEBT 630,556 1,180,556
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common Stock, $.01 par value, 30,000,000 shares authorized and 9,271,054
shares issued and outstanding at June 30, 2003 and 2002 92,710 92,710
Common stock warrants 19,800 19,800
Paid-in capital in excess of par 11,545,883 11,545,883
Accumulated deficit (10,338,464) (8,823,057)
Cumulative translation adjustment - (12,619)
------------------ -----------------
Total shareholders' equity 1,319,929 2,822,717
------------------ -----------------
------------------ -----------------
$ 6,043,855 $ 7,849,510
================== =================
See accompanying notes.
3
AFP Imaging Corporation and Subsidiaries
Consolidated Statements of Operations
Years ended June 30, 2003, 2002 and 2001
2003 2002 2001
----------------- ------------------ -----------------
NET SALES $18,043,668 $20,086,888 $24,051,300
COST OF SALES 11,864,995 13,273,218 16,460,554
----------------- ------------------ -----------------
Gross profit 6,178,673 6,813,670 7,590,746
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 5,625,227 5,922,433 7,513,359
RESEARCH AND DEVELOPMENT EXPENSES 553,991 499,829 457,172
SPECIAL CHARGES - - 906,000
----------------- ------------------ -----------------
Operating income (loss) (545) 391,408 (1,285,785)
INTEREST EXPENSE, net 206,878 293,089 439,249
----------------- ------------------ -----------------
Income (loss) before income taxes (207,423) 98,319 (1,725,034)
PROVISION FOR INCOME TAXES 10,915 14,317 13,312
----------------- ------------------ -----------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (218,338) 84,002 (1,738,346)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (1,297,069) - -
----------------- ------------------ -----------------
NET INCOME (LOSS) $ (1,515,407) $ 84,002 $(1,738,346)
================= ================== =================
INCOME (LOSS) PER SHARE BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE
Basic $ (.02) $ .01 $ (.19)
Diluted $ (.02) $ .01 $ (.19)
NET INCOME (LOSS) PER COMMON SHARE
Basic $ (.16) $ .01 $ (.19)
Diluted $ (.16) $ .01 $ (.19)
See accompanying notes.
4
AFP Imaging Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity and Comprehensive Income (Loss)
Years ended June 30, 2003, 2002 and 2001
Paid-in Foreign
Capital Currency
Comprehensive Common Common In Excess Accumulated Translation
Stock
Income (Loss) Stock Warrants Of Par Deficit Adjustment Total
----------------------------------------------------------------------------
Balance June 30, 2000 $92,710 $- $11,545,883 $(7,168,713) $(14,941)$4,454,939
Foreign currency translation adjustment $630 - - - - 630 630
Net loss (1,738,346) - - - (1,738,346) - (1,738,346)
-------------
Comprehensive loss $(1,737,716) - - - - - -
=============---------------------------------------------------------------
Balance June 30, 2001 92,710 - 11,545,883 (8,907,059) (14,311) 2,717,223
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 income $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
===============================================================
See accompanying notes.
5
AFP Imaging Corporation and Subsidiaries
Consolidated Statements Of Cash Flows
Years ended June 30, 2003, 2002 and 2001
2003 2002 2001
----------------- --------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,515,407) $ 84,002 $(1,738,346)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities-
Depreciation and amortization 202,685 354,688 761,233
Cumulative effect of change in accounting principle 1,297,069 - -
Reclassification of translation adjustments included in net loss 11,149 - -
Non-cash special charges - - 846,000
Provision for losses on accounts receivable 49,344 64,248 99,356
Change in assets and liabilities:
Decrease in accounts receivable 179,368 134,105 468,311
Decrease in inventories 334,069 331,329 589,856
(Increase) decrease in prepaid expenses and other 41,499 (9,871) (2,705)
(Increase) decrease in other assets 64,419 (57,584) 178,264
Increase (decrease) in accounts payable (359,986) 375,871 (182,187)
Increase (decrease) in accrued expenses 175,606 (118,964) (30,540)
Increase (decrease) in accrued payroll expenses (17,548) (6,883) 32,665
----------------- --------------- -----------------
Total adjustments 1,977,674 1,066,939 2,760,253
----------------- --------------- -----------------
Net cash provided by operating activities 462,267 1,150,941 1,021,907
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of graphic arts business - 340,815 -
Capital expenditures (221,154) (34,008) (202,968)
----------------- --------------- -----------------
Net cash provided by (used in) investing activities (221,154) 306,807 (202,968)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing of debt 226,838 1,801,065 -
Repayments of debt (327,777) (2,942,287) (1,054,913)
----------------- --------------- -----------------
Net cash used in financing activities (100,939) (1,141,222) (1,054,913)
EXCHANGE RATE EFFECTS ON CASH AND CASH EQUIVALENTS
1,470 1,692 630
----------------- --------------- -----------------
Net increase (decrease) in cash and cash equivalents 141,644 318,218 (235,344)
CASH AND CASH EQUIVALENTS, at beginning of year 516,494 198,276 433,620
----------------- --------------- -----------------
CASH AND CASH EQUIVALENTS, at end of year $ 658,138 $ 516,494 $ 198,276
================= =============== =================
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid during the year for-
Interest $ 213,040 $ 298,631 $ 444,912
Income taxes $ 19,702 $ 16,115 $ 19,713
See accompanying notes.
6
AFP Imaging Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2003
1. Nature of Business and Significant Accounting Policies
The Company
AFP Imaging Corporation, together with its subsidiaries, (the "Company") was
organized on September 20, 1978, under the laws of the State of New York. Since
its inception, the Company has been engaged in the business of designing,
developing, manufacturing and distributing equipment for generating, capturing
or producing medical and dental images by chemical processing photosensitive
materials as well as manufacturing other electro/optical imaging equipment.
These products are used by medical, dental, veterinary and industrial
professionals. The Company's products are distributed to worldwide markets
through a network of independent dealers and original equipment manufacturers.
The Company disposed of its graphic arts product line on July 30, 2001 (see Note
8).
Principles of Consolidation
The consolidated financial statements include AFP Imaging Corporation and its
wholly owned subsidiaries. All significant intercompany transactions have been
eliminated in consolidation.
Revenue Recognition
Revenue is recognized by the Company when products are shipped and title passes
to the customer. The Company includes shipping and handling costs as a component
of cost of sales.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
7
AFP Imaging Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Nature of Business and Significant Accounting Policies (continued)
Cash and Cash Equivalents
Cash and cash equivalents include deposits with original maturities of three
months or less.
Inventories
Inventories, which include material, labor and manufacturing overhead, are
stated at the lower of cost (first-in, first-out) or market (net realizable
value). At June 30, 2003 and 2002, inventories consist of the following:
2003 2002
-------------------- --------------------
Raw materials and sub-component parts $1,455,164 $1,786,027
Work-in-process and finished goods 1,026,840 1,030,046
-------------------- --------------------
$2,482,004 $2,816,073
==================== ====================
Depreciation
Machinery and equipment are depreciated using straight-line and accelerated
methods over estimated useful lives ranging from three to ten years. Leasehold
improvements are depreciated on a straight-line basis over the shorter of their
estimated useful lives or the life of the lease. Depreciation was $202,685,
$210,688 and $399,185 for the years ended June 30, 2003, 2002 and 2001,
respectively.
The Company retired approximately $346,239 and $883,791 of fully depreciated
assets during fiscal 2003 and fiscal 2002, respectively.
Research and Development Costs
Research and development costs are charged to expense as incurred. These costs
have been incurred in connection with the design and development of the
Company's products.
8
AFP Imaging Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Nature of Business and Significant Accounting Policies (continued)
Stock Based Compensation
The Company applies APB Opinion No. 25, "Accounting for Stock Based
Compensation," which recognizes compensation expense based on the difference
between the option exercise price and the fair market value of the Company
shares at the date of grant (see Note 3). 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," ("FAS 123") the Company's
net income (loss) and net income (loss) per share would have been reduced to the
following pro forma amounts:
2003 2002 2001
----------------- ---------------- ------------------
Net income (loss), as reported $(1,515,407) $ 84,002 $(1,738,346)
Add: Stock compensation expense included in reported net
income (loss), net of tax - - -
Deduct: Stock compensation expense determined under fair
value based method for all awards, net of tax (2,766) (19,461) (148,844)
----------------- ---------------- ------------------
Pro forma net income (loss) $(1,518,173) $ 64,541 $(1,887,190)
================= ================ ==================
Basic net income (loss) per share, as reported $ (.16) $ .01 $ (.19)
Basic net income (loss) per share, pro forma $ (.16) $ .01 $ (.20)
Diluted net income (loss) per share, as reported $ (.16) $ .01 $ (.19)
Diluted net income (loss) per share, pro forma $ (.16) $ .01 $ (.20)
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 2003, 2002 and 2001: dividend yield of 0%; expected volatility ranging
from 62% to 155%; expected life of five years and risk-free interest rate
ranging from 3.4% to 6.2%.
9
AFP Imaging Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Nature of Business and Significant Accounting Policies (continued)
Foreign Currency Translation
Assets and liabilities of the Company's foreign operations have been translated
into United States dollars at the applicable rates of exchange in effect at the
end of the period reported. Revenues and expenses have been translated at the
applicable weighted average rates of exchange in effect during the period
reported. Prior to fiscal 2003 translation adjustments were reflected as a
separate component of shareholders' equity. The Company is in the process of
liquidating 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
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.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
10
AFP Imaging Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Nature of Business and Significant Accounting Policies (continued)
Basic and Diluted Income (Loss) Per Common Share Before Cumulative Effect
of Change in Accounting Principle
The computation of 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 income (loss) per common share before cumulative effect of change in
accounting principle for the fiscal years ended 2003, 2002 and 2001 are
presented below:
2003 2002 2001
------------------- ------------------ -------------------
Income (Loss) Before Cumulative Effect Of $ (218,338) $ 84,002 $(1,738,346)
Change In Accounting Principle
Weighted Average Common Stock Outstanding -
Basic 9,271,054 9,271,054 9,271,054
------------------- ------------------ -------------------
Basic Income (Loss) Per Share Before
Cumulative Effect of Change in Accounting
Principle $ (.02) $ .01 $ (.19)
=================== ================== ===================
Income (Loss) Before Cumulative Effect of $ (218,338) $ 84,002 $(1,738,346)
Change In Accounting Principle
Weighted Average Common Stock Outstanding -
Basic 9,271,054 9,271,054 9,271,054
------------------- ------------------ -------------------
Dilutive Effect of Stock Options - 375 -
Weighted Average Common Stock Outstanding -
Diluted 9,271,054 9,271,429 9,271,054
------------------- ------------------ -------------------
Diluted Income (Loss) Per Share Before
Cumulative Effect of Change in Accounting
Principle $ (.02) $ .01 $ (.19)
=================== ================== ===================
11
AFP Imaging Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Nature of Business and Significant Accounting Policies (continued)
Basic and Diluted Income (Loss) Per Common Share Before Cumulative Effect
of Change in Accounting Principle (continued)
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 does not include the potential exercise of 945,000 and
1,288,500 stock options in fiscal 2003 and 2001, respectively, as such amounts
are antidilutive when there is a loss.
Adoption of New Financial Accounting Standards
In June 2001, the Financial Accounting Standards Board (FASB) issued Statements
No. 141, "Business Combinations" ("FAS 141") and No. 142, "Goodwill and Other
Intangible Assets" ("FAS 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. FAS 141 was effective for
purchase business combinations consummated after June 30, 2001. The Company
adopted FAS 142 on July 1, 2002. FAS 142 requires that goodwill and intangible
assets deemed to have an indefinite useful life be reviewed for impairment upon
adoption and annually thereafter.
Under FAS 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.
12
AFP Imaging Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Nature of Business and Significant Accounting Policies (continued)
Adoption of New Financial Standards (continued)
Upon adoption of FAS 142 the Company recorded a one-time, non-cash charge of
approximately $1,297,069 ($.14 basic and diluted loss per common 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 results for the years ended June 30, 2002 and 2001 on a historical basis do
not reflect the provisions of FAS 142. Had the Company adopted the
non-amortization provisions of FAS 142 on July 1, 2000 the historical net income
(loss) for the years ended June 30, 2002 and 2001 would have been $228,002 ($.02
per basic and diluted common share) and $(1,376,298) (($.15) per basic and
diluted common share), respectively.
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" ("FAS
146"). FAS 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. FAS
146 is effective for exit or disposal activities initiated after December 31,
2002. FAS 146 had no impact on the Company during the year ended June 30, 2003.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
period presentation.
13
AFP Imaging Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. 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 existing 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 and prohibits the paying of dividends. As of June 30,
2003, the Company was in compliance with all terms and conditions of the
Revolving Credit Loan, as amended. The Revolving Credit Loan has an interest
rate of 1.75% over the prime rate, 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 this facility, the Company issued a 5-year warrant to the
lender for the purchase of 100,000 shares of the Company's stock at $0.32 per
share, subject to an adjustment for all subsequent issuances of stock. 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.
The Company has restated its Consolidated Balance Sheet as of June 30, 2002 to
properly classify the Revolving Credit Loan as a current liability in accordance
with EITF 95-22, "Balance Sheet Classification of Borrowings Outstanding under
Revolving Credit Agreements That Include Both a Subjective Acceleration Clause
and a Lock-Box Arrangement" ("EITF 95-22"). This restatement has no impact on
the Company's results of operations or cash flows for the year ended June 30,
2002. The Revolving Credit Loan is classified as a current liability in
accordance with EITF 95-22 since the Loan and Security Agreement contains a
subjective acceleration clause and contractual provisions that require the cash
receipts of the Company be used to repay amounts outstanding under the revolving
credit facility.
14
AFP Imaging Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Debt (continued)
As of June 30, 2003 and 2002, debt consisted of the following:
2003 2002
--------------------- -----------------------
Revolver $ 1,591,931 $ 1,365,093
Nystrom Subordinated Note Payable (a) 755,556 800,000
Dental Product Line Subordinated Note Payable (b) 425,000 708,333
--------------------- -----------------------
2,772,487 2,873,426
Less - Current Portion (2,141,931) (1,692,870)
--------------------- -----------------------
Total long-term debt $ 630,556 $ 1,180,556
===================== =======================
(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 will be paid quarterly for the first three years, followed by
thirty-six equal monthly installments of $22,222 plus interest on
the unpaid balance, beginning in May 2003. The Nystrom promissory
note bears interest at a rate reset annually based on LIBOR plus
2% (3.19% at June 30, 2003).
(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, 2003, the Company had available $441,521 of unused lines of credit
under the new facility.
The fair market value of all of the Company's debt approximates its carrying
value.
Maturities of debt by fiscal year ended June 30 are as follows:
2004 $2,141,931
2005 408,334
2006 222,222
-----------------
Total $2,772,487
=================
15
AFP Imaging Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. 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. Most 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 25")
under which no compensation costs has 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 plan for fiscal 2003,
2002 and 2001 are as follows:
2003 2002 2001
---------------------- ----------------------- --------------------------
Options Weighted Options Weighted Options Weighted
Average Average Average
Price Price Price
----------- ---------- ------------ ---------- ------------ -------------
Outstanding, beginning of fiscal
year 1,229,500 $0.51 1,288,500 $0.49 1,675,500 $0.64
Granted 24,000 0.13 30,000 0.97 520,500 0.41
Exercised - - - - - -
Forfeited (8,500) 0.51 (37,000) 0.31 (337,000) 0.49
Expired (300,000) 0.75 (52,000) 0.50 (570,500) 0.82
----------- ------------ ------------
Outstanding, end of fiscal year 945,000 0.42 1,229,500 0.51 1,288,500 0.49
=========== ============ ============
Exercisable at June 30 645,000 929,500 988,500
=========== ============ ============
Weighted average fair value of $0.13 $0.65 $0.29
options granted during years
ended June 30 =========== ============ ============
At June 30, 2003, outstanding options had exercise prices ranging from $.11 to
$2.28 with a weighted average remaining contractual life of four years.
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, 2003.
16
AFP Imaging Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Income Taxes
The income (loss) before provision for income taxes is comprised of the
following:
2003 2002 2001
-------------------- -------------------- --------------------
United States $(205,483) $102,989 $(1,700,084)
Foreign (1,940) (4,670) (24,950)
-------------------- -------------------- --------------------
Total $(207,423) $ 98,319 $(1,725,034)
==================== ==================== ====================
The provision for income taxes is comprised of the following:
2003 2002 2001
-------------------- -------------------- --------------------
Current:
State $10,915 $14,317 $13,312
Foreign - - -
-------------------- -------------------- --------------------
Total $10,915 $14,317 $13,312
==================== ==================== ====================
The difference between the provision for income taxes at the effective federal
statutory rates and the amounts provided in the financial statements is
summarized as follows:
2003 2002 2001
--------------- ---------------- -----------------
Tax provision (benefit) at federal statutory rates $(70,524) $ 33,428 $(586,512)
Increase (decrease) in tax provision resulting from:
State income tax provision 10,915 14,317 13,312
Foreign losses not benefited 660 1,588 9,980
U.S. losses not benefited 69,864 - 566,540
Utilization of operating loss carryforward - (36,271) -
Other - 1,255 9,992
--------------- ---------------- -----------------
Provision for income taxes $ 10,915 $ 14,317 $ 13,312
=============== ================ =================
17
AFP Imaging Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Income Taxes (continued)
The items which comprise the deferred tax balance are as follows:
2003 2002
----------------- --------------------
Depreciation and amortization $ 900,208 $ 978,487
Accrued liabilities and reserves not currently deductible 103,332 114,894
Inventory 59,132 123,702
Net operating loss carryforwards 2,914,070 2,694,928
----------------- --------------------
3,976,742 3,912,011
Deferred tax asset valuation reserve (3,976,742) (3,912,011)
----------------- --------------------
Tax asset recognized on balance sheets $ - $ -
================= ====================
Net operating loss carryforwards ("NOLs") 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.
5. Profit Sharing Plan
The Company maintains a defined contribution profit sharing plan and trust
pursuant to which participants receive certain benefits upon retirement, death,
disability and, to a limited extent, upon termination of employment for other
reasons. Allocation among participants' interests, including officers and
directors who are employees, is in accordance with Internal Revenue Service
regulations.
The aggregate amount contributed to the plan by the Company each fiscal year is
determined by the Board of Directors following a review of the profits of such
fiscal year. The plan requires no minimum contribution by the Company. The
Company has not made any contributions related to profit sharing for the years
ended June 30, 2003, 2002 and 2001.
18
AFP Imaging Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Commitments and Contingencies
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 relates to the offsite disposition of trash and waste in a
landfill in New Jersey. 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. In 2001 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 process for smaller
claims. The second claim was filed as a civil complaint by the current owners of
the factory site in New Jersey, in the Superior Court of New Jersey, Morris
County. This suit alleges that Kenro Corporation contaminated a portion of its
site during its manufacturing process. The complaint seeks payment by Kenro
Corporation to cover all costs to remedy the situation, which the plaintiff
estimates to be $750,000. The Company maintains it took the appropriate step and
secured clearance under the Environmental Clean-up Responsibility Act at the
time of sale, in 1985, and continues to investigate, with the help of legal
counsel, any applicable insurance coverage. The Company's insurance carrier has
agreed to equally share the defense costs incurred for both of the environmental
claims since September 2001. The Company has not yet been able to determine if
these claims are covered by insurance. At this time, the Company cannot assess
the final outcome of either of these two environmental complaints.
The Company is a defendant (with several other parties) in a product liability
insurance action commenced in the Court of Common Pleas, Summit County, Ohio.
The plaintiff, through its insurance company, claims that the Company's
equipment caused a fire on the plaintiff's premises in June 2001. The complaint
seeks compensatory damages of at least $76,800. The Company maintains that its
equipment was not the cause of the fire or the resultant damage. The Company's
insurance carriers, and their attorneys, are assisting in the Company's defense
in this matter. The Company does not believe that the final outcome of this
matter will have a material adverse effect on the Company.
19
AFP Imaging Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Commitments and Contingencies (continued)
The Company is party to other claims and litigation arising in the ordinary
course of business. The Company's insurance policies cover certain of these
other claims and allegations. As such, the underwriter is vigorously assisting
in the Company's defense in such matters. The Company does not believe that the
final outcome of any of these matters, whether covered by insurance or
otherwise, will have a material adverse effect on the Company.
The Company has leases for office and manufacturing facilities for periods
expiring through fiscal year 2008. Minimum annual rental payments under these
leases as of the fiscal year ended June 30 are as follows:
2004 $ 501,218
2005 525,085
2006 525,085
2007 525,085
2008 525,085
2009 and thereafter 262,543
-----------------
Total $2,864,101
=================
Rent expense was approximately $496,000, $503,000 and $592,000 for the years
ended June 30, 2003, 2002 and 2001, respectively.
7. Segment Information
On July 30, 2001, the Company sold its graphic arts business and selected
related assets (see Note 8). As of June 30, 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 (see Note 8).
20
AFP Imaging Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Segment Information (continued)
The segment information for fiscal 2002 and 2001 is shown below. Segment
information related to operating income (loss) includes costs directly
attributable to each segment's operations.
Net Sales Operating Assets Depreciation Capital Net
and Interest
Income (Loss) Amortization Expenditures Expense
-------------- -------------- ------------- ------------- ------------ -------------
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
============== ============== ============= ============= ============ =============
2001
Medical/Dental $21,386,150 $(1,216,075) $8,132,734 $761,233 $202,968 $359,249
Graphic Arts 2,665,150 (69,710) 502,480 - - 80,000
-------------- -------------- ------------- ------------- ------------ -------------
Consolidated $24,051,300 $(1,285,785) $8,635,214 $761,233 $202,968 $439,249
============== ============== ============= ============= ============ =============
Geographic financial information for the years ended June 30, 2003, 2002 and
2001 are as follows:
2003 2002 2001
----------------- ---------------- -----------------
Sales
United States $15,111,108 $16,116,458 $18,819,770
Domestic export sales 2,932,560 3,970,430 5,231,530
----------------- ---------------- -----------------
Total $18,043,668 $20,086,888 $24,051,300
================= ================ =================
Net Income (Loss)
United States $(1,513,467) $ 88,672 $(1,713,396)
Europe (1,940) (4,670) (24,950)
----------------- ---------------- -----------------
Total $(1,515,407) $ 84,002 $(1,738,346)
================= ================ =================
Identifiable Assets
United States $ 6,029,735 $ 7,826,700 $ 8,617,654
Europe 14,120 22,810 17,560
----------------- ---------------- -----------------
Total $ 6,043,855 $ 7,849,510 $ 8,635,214
================= ================ =================
21
AFP Imaging Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Segment Information (continued)
During the year ended June 30, 2003 two customers each aggregated approximately
11% of consolidated net revenues. During the year ended June 30, 2002 net sales
to one of these customers were approximately 12% of consolidated net revenues
and net sales to the other customer were less than 10% of consolidated net
revenues. The Company's net sales to each of these customers aggregated less
than 10% of consolidated net revenues for the year ended June 30, 2001.
8. Special Charges
During 2001, the Company recorded a special charge of approximately $846,000 to
write-off the balance of goodwill associated with the July 1995 acquisition of
its medical diagnostic imager product line, due to impairment of this product
line caused by changing technology and market conditions. Also, in July 2001,
the Company completed the sale of its LogE graphic arts product line at a loss
of approximately $110,000. Approximately $60,000 is included in special charges
for severance and other closing costs, the balance of $50,000 is included in
cost of sales to reduce the inventory to fair market value.
22
AFP Imaging Corp. and Subsidiaries
Valuation and Qualifying Accounts
June 30, 2003
Balance at Charged to Charged to
Beginning Costs and Other Accounts Balance at End
Description of Period Expenses Deductions of Period
- ------------------------------------ --------------- ---------------- --------------- ----------------- ----------------
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
June 30, 2001
Allowance for doubtful accounts
and sales returns 163,000 99,356 - (152,356) 110,000
23
Supplemental Schedule
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.
Our co-chief executive officers and chief financial officer have evaluated the
effectiveness of the Registrant's disclosure controls and procedures (as defined
in Rules 13a - 14 (c) and 15 d -14 (c) of the Securities Exchange Act of 1934
(the "Act") as of a date within 90 days of the filing date of this annual report
(Evaluation Date). They have concluded that, as of the Evaluation Date, the
Registrant's disclosure controls and procedures were adequate and effective to
ensure that information required to be disclosed by the Registrant in the
reports that it files or submits under the Act is recorded, processed,
summarized and reported, within the time periods specified in the rules and
forms of the Securities and Exchange Commission.
(b) Changes in internal controls.
There were no significant changes in the Registrant's internal controls or in
other factors that could significantly affect these controls subsequent to the
Evaluation Date, nor were there any significant deficiencies or material
weaknesses in these controls requiring corrective actions.
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 8, 2003, to be filed with the
SEC on or prior to October 28, 2003.
14
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.
(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) -- 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. -- Change in Certifying Accountant (June 14, 2002). (13)
21.-- Subsidiaries of the Registrant.
23.-- Consent of Ernst & Young LLP.
31.1, 31.2, 31.3 - Certifications pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 302 of the Sarbanes - Oxley Act of 2002.
32.1, 32.2, 32.3 - Certifications pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002
15
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, 2003.
(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.
16
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 24, 2003
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 24, 2003
By: ____________/s/_____________
David Vozick, Chairman of the Board,
Secretary and Treasurer
Date: September 24, 2003
By: __________/s/_______________
Robert Blatt, Director
Date: September 24, 2003
By: _________ /s/________________
Jack Becker, Director
Date: September 24, 2003
By: _________ /s/________________
Elise Nissen, Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: September 24, 2003
17
Exhibit 21
Subsidiaries of Registrant
Country/State of % of Voting
Name Incorporation Securities Owned
- ---- ------------- ----------------
LogEtronics Corporation New York 100%
Visiplex Instruments Corporation New York 100%
Regam Medical Systems
International AB Sweden 100%
Dent-X International Inc. New York 100%
18
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-43601) pertaining to the 1995 Stock Option Plan and Consultants
Option Plan of AFP Imaging Corporation of our report dated August 25, 2003, with
respect to the consolidated financial statements and schedule of AFP Imaging
Corporation included in the Annual Report (Form 10-K) for the year ended June
30, 2003.
/s/ Ernst & Young LLP
Stamford, Connecticut
September 23, 2003
19
Exhibit 31.1
CERTIFICATION
I, David Vozick, Co-Principal Executive Officer of AFP Imaging Corporation,
certify that:
1. I have reviewed this annual report on Form 10-K of AFP Imaging Corporation;
2. Based on my knowledge, this 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
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. 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-1415(e) and 15d-15(e)) for the registrant and
have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to enable 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 report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information: and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls over financial reporting.
Date: September 24, 2003 ___________/s/______________
David Vozick
Chairman of the Board
Co-Principal Executive Officer
20
Exhibit 31.2
CERTIFICATION
I, Donald Rabinovitch Co-Principal Executive Officer of AFP Imaging
Corporation, certify that:
1. I have reviewed this annual report on Form 10-K of AFP Imaging Corporation;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. 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-1415(e) and 15d-15(e)) for the registrant and
have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to enable 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 report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information: and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls over financial reporting.
Date: September 24, 2003 ___________/s/______________
Donald Rabinovitch
President
Co-Principal Executive Officer
21
Exhibit 31.3
CERTIFICATION
I, Elise Nissen, Chief Financial Officer of AFP Imaging Corporation, certify
that:
1. I have reviewed this annual report on Form 10-K of AFP Imaging Corporation;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. 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-1415(e) and 15d-15(e)) for the registrant and
have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to enable 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 report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information: and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls over financial reporting.
Date: September 24, 2003 ___________/s/______________
Elise Nissen
Chief Financial Officer
22
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of AFP Imaging Corporation (the "Company")
on Form 10-K for the year ended June 30, 2003, as filed with the Securities and
Exchange Commission (the "Report"), I David Vozick, Co-Chief Executive Officer
of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to
ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13 (a) or 15 (d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ David Vozick
David Vozick,
Chairman of the Board
Co-Principal Executive Officer
September 24, 2003
23
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of AFP Imaging Corporation (the "Company")
on Form 10-K for the year ended June 30, 2003 as filed with the Securities and
Exchange Commission (the "Report"), I Donald Rabinovitch, Co-Chief Executive
Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted
pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13 (a) or 15 (d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Donald Rabinovitch
Donald Rabinovitch,
President
(Co-Principal Executive Officer)
September 24, 2003
24
Exhibit 32.3
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of AFP Imaging Corporation (the "Company")
on Form 10-K for the year ended June 30, 2003, as filed with the Securities and
Exchange Commission (the "Report"), I Elise Nissen, Chief Financial Officer of
the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss.
906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13 (a) or 15 (d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents in all material
respects, the financial condition and results of operations of the Company.
/s/ Elise Nissen
Elise Nissen,
Chief Financial Officer
September 24, 2003
25