Item 1. Business - -----------------
a) General Development of Business
AFP Imaging Corporation was organized on September 20, 1978, under the laws of the State of New York. Since such date, the Company has been engaged in the business of designing, developing, manufacturing and distributing equipment for generating, capturing or producing medical and dental images through digital technology as well as the chemical processing of photosensitive materials. Medical, dental, veterinary, and industrial professionals use these products. The Company's products are distributed to worldwide markets, under various brand names, through a network of independent and unaffiliated dealers.
In September 2003, the Company completely dissolved two of its wholly-owned subsidiaries: LogEtronics Corporation and Regam Medical Systems AB. The Company sold selected assets of its graphic arts business in July 2001, which had been distributed through LogEtronics Corporation. Upon completion of the transfer of the manufacturing operations to the United States, the Company, in accordance with Swedish Law, dissolved Regam Medical Systems AB.
b) Financial Information about Industry Segments
The Company is engaged in one industry segment, the manufacture and distribution of medical/dental x-ray equipment and accessories. Prior to July 2001, when the Company sold the assets related to its graphic arts subsidiary, the Company had been engaged in two industry segments, the manufacture and distribution of medical/dental x-ray equipment and accessories, and graphic arts processing equipment. The Company has agreed not to compete in this same business line of graphic arts film and plate processing equipment for ten years, to expire in July 2011. The Company's business segments were based on significant differences in the nature of their operations, including distribution channels and customers. The composition of the current industry segment is consistent with that used by the Company's management in making strategic decisions. See Note 10 to the Consolidated Financial Statements for further discussion of the Company's industry segments.
c) Narrative Description of Business
All of the Company's products are distributed worldwide through an unaffiliated dealer network to doctors, dentists, veterinarians, hospitals, medical clinics, the U.S. military, and other facilities.
Principal Products and Services
Digital Dental and Large Body DR and CR Imaging Systems - --------------------------------------------------------
The Company manufactures, distributes and services a filmless, digital dental radiography system, utilizing x-rays and electronic imaging technology. Such technology generates and captures a patient's dental images with an intraoral sensor and then displays the image on a computer screen that operates in a Windows-based software environment. These filmless, digital dental radiographic systems, referred to as DR Systems, have practical applications in both human and companion animal dentistry. The Company has developed proprietary application software for use with the sensor. The Company also distributes a Computed Radiology System, referred to as CR Systems, which utilize a reusable phosphorus plate and laser scanner in place of x-ray film. The plate can be erased and then re-exposed over a thousand times. The CR System is applicable to larger body x-ray examinations.
Medical, Dental and Industrial X-Ray Processors & Accessories - --------------------------------------------------------------
The Company manufactures and distributes a line of freestanding and table top medical, dental and industrial x-ray film processors, commonly referred to as an analog system. These machines are capable of processing or developing films of various sizes. The exposed film is inserted into equipment and returned to the operator developed, fixed, washed and dried. The equipment can be located either in a dark room site or adapted to a daylight loading system. These units are used for diagnostic x-ray imaging and industrial, non-destructive testing applications.
X-Ray Systems - --------------
The Company has the exclusive distribution rights in the North American and Mexican markets for a well established, European-designed intraoral dental x-ray machine and panoramic/cephalometric dental x-ray machine. The Company also has the North American distribution rights to a Japanese-developed panoramic/ cephalometric dental x-ray machine. The x-ray film exposed by all of these units can be developed in the Company's film processors. Alternatively, these x-ray products can be sourced and distributed with a digital, filmless sensor that is compatible with the Company's other digital x-ray products and software.
Veterinary Imaging and Radiographic Systems - --------------------------------------------
The Company manufactures and distributes a line of x-ray and related equipment specifically designed for the veterinary marketplace. These include intraoral x-ray systems, a filmless digital dental radiography system, film processors, dental veterinary film, and a large body CR filmless scanner used in conjunction with general radiographic equipment. These combined systems are tailored to allow the veterinarian to perform both dental and general radiography on companion animals.
Patents and Trademarks
The Company presently holds certain domestic and foreign utility patents, which, the Company believes, are material to the technology used in its products. The Company's intellectual property includes several patents obtained in connection with acquisitions completed in 1997. The Company is not aware of any patents or other intellectual property held by others that conflict with the Company's current product designs. The Company has agreed to pay a nominal royalty on the domestic sales of its digital dental systems to a third party under a license for the use of the third party's software format for the computer display of such images. The Company also has agreed to pay a royalty to a third party on the worldwide sales of its digital dental sensors, under a license to use the technology developed and owned by the third party. The principal technology applied to the construction of the Company's other products may be considered proprietary. Patent applications have been filed where appropriate. The Company owns several domestic and foreign trademarks, which it uses in connection with the marketing of its products, including AFP Imaging, DENT-X, EXCEL, and EVA, among others. The Company believes that these utility patents and trademarks are important to its operations and the loss or infringement by others of or to its rights to such patents and trademarks could have a material adverse effect on the Company.
Research and Development
The amounts spent by the Company during each of the Company's last three fiscal years on primary research activities relating to the development of new products and the improvement of existing products, all of which was Company sponsored, are as follows:
2004 2003 2002 ---- ---- ---- $397,444 $553,991 $499,829
The Company conducts research and development activities internally, at its Elmsford, New York facility, as well as contracts certain projects to qualified vendors and external consultants. The Company's research and development efforts and technologies have been enhanced by business acquisitions completed prior to 2001.
The Company's level of research and development spending is discussed further in Management's Discussion and Analysis of Financial Condition and Results of Operation.
Raw Materials
The Company manufactures, assembles, and services its products at its ISO 9001/2000 (International Standards Organization) certified facility in Elmsford, New York. The Company's products are manufactured from parts, components and subassemblies obtained from several unaffiliated suppliers and/or fabricated internally at its manufacturing facility. In most cases, the Company does not utilize any unique procedures, nor does it traditionally have difficulties in obtaining raw materials or processes, in the design and manufacture of its products. Although the Company anticipates that an adequate commercial supply of most raw material parts and components will remain available from multiple sources, the Company does own proprietary designs and tooling to produce the digital x-ray sensors, which are in the physical possession of a Company vendor. While the loss of the Company's relationship with a particular supplier might result in some productions delays, such a loss is not expected to materially affect the Company's business, as the proprietary design is readily reproducible.
Sales, Marketing and Distribution
All of the Company's products are manufactured domestically and distributed both domestically and internationally to independent dealers and distributors. The Company's products are marketed under the Company's own trade names and are distributed through an extensive network of independent medical, dental, and veterinary dealers. These dealers install and service such products.
The Company conducts worldwide marketing and regional sales management efforts to promote all of its products and brand names. The Company advertises in domestic and international trade journals, provides sales support and literature, prepares technical manuals and conducts customer education and training programs in order to promote its products. In addition, the Company participates in domestic and international trade and clinical shows. The Company also maintains two separate web sites, which provide an easy-to-navigate, on-line information environment, including Company information, product description and extensive technical specifications and information.
Government Regulation
The Company's medical and dental products are subject to government regulation in the United States and certain other countries. The United States Food and Drug Administration ("FDA") regulates the distribution of all equipment used as medical devices. The Company must comply with the procedures and standards established by the FDA and comparable foreign regulatory agencies. The Company believes it has registered all of its applicable medical and dental products with the FDA, and that all of its products and procedures satisfy all the criteria necessary to comply with FDA regulations. The FDA has the right to disapprove the marketing of any medical device that fails to comply with FDA regulations. The Company's manufacturing facility is ISO 9001/2000 certified. Where applicable, the Company's products are Conformite' Europeenne ("CE") certified for sales within the European Union. Any future changes in existing regulations, or adoption of additional regulations, domestically or internationally, which govern devices such as the Company's medical and dental products have the potential to have a material adverse effect on the Company's ability to market its existing products or to market new products.
Product Liability Exposure
The Company's business involves the inherent risk of product liability claims. The Company currently maintains general product liability insurance as well as an umbrella liability policy, which the Company believes are sufficient to protect the Company from any potential risks to which it may be subject. See Item 3, Legal Proceedings, for further discussion of any outstanding product liability claims.
Seasonal Nature
Historically, the Company's fourth quarter revenues of any fiscal year have been higher than the subsequent first quarter's revenues. This is due to aggressive fourth quarter marketing, followed by lower customer demand in the first quarter attributed to summer holidays and traditional foreign business closings during July and August.
Working Capital Practices
The Company believes its practices regarding inventories, receivables or other items of working capital to be typical for the industry involved. On September 21, 2004, the Company renewed its senior secured credit facility (the "Renewed Revolving Credit Loan"), with its existing senior secured lender, for an additional three-year period. The maximum borrowing permitted under the Renewed Revolving Credit Loan is lower than that under the prior credit facility, based on the Company's current requirements. However, the Renewed Revolving Credit Loan has more favorable terms, including a lower interest rate and less stringent reporting requirements, than that under the prior credit facility and gives the Company the ability to borrow on a specific amount of foreign accounts receivable. The Renewed Revolving Credit Loan replaced the existing senior credit facility (the "Original Revolving Credit Loan"). The Renewed Revolving Credit Loan consists of a $2.5 million revolving line of credit, which is secured by all of the Company's inventory, accounts receivable, equipment, officer life insurance policies and proceeds thereof, trademarks, licenses, patents and general intangibles. It is believed that the Renewed Revolving Credit Loan is sufficient to finance the Company's ongoing working capital requirements for the foreseeable future. The Renewed Revolving Credit Loan has an interest rate of 1.375% over the prime rate, currently at 4-1/2 %, has a specific formula to calculate available funds based on eligible accounts receivable and inventory, and has certain reporting requirements to the senior secured lender. The Renewed Revolving Credit Loan requires that certain financial ratios and net worth amounts be maintained. The Renewed Revolving Credit Loan provides for increases in the interest rate charged on monies outstanding under specific circumstances.
As of June 30, 2004, the Company was in compliance with all the terms and conditions of its Original Revolving Credit Loan, as amended. In connection with the Original Revolving Credit Loan, the Company issued a 5-year warrant to the lender for the purchase of 100,000 shares of the Company's common stock at $.32 per share, subject to adjustment for all subsequent issuances of stock. This warrant expires on September 21, 2006. The Black-Scholes Method was used to value the warrant, and the stock price was based on the stock price the day prior to closing, plus 10%, as stipulated in the Loan and Security Agreement for the Original Revolving Credit Loan.
See Note 4 to the Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operation for further discussion of the revised terms and conditions.
Customers
In the Company's fiscal year ended June 30th 2004 ("Fiscal Year 2004") sales of dental imaging equipment to Henry Schein Inc., accounted for approximately 11% of consolidated sales. In the Company's fiscal year ended June 30th 2003 ("Fiscal Year 2003"), sales of dental imaging equipment to Henry Schein Inc., and Patterson Dental Supply, each accounted for approximately 11% of consolidated sales. In the Company's fiscal year ended June 30th 2002 ("Fiscal Year 2002"), sales of dental imaging equipment to Henry Schein Inc., accounted for approximately 12% of consolidated sales. Management believes that the loss of this customer would have an adverse effect on the Company's consolidated business for a short period of time, as the Company seeks new customers.
Backlog Orders
As of June 30, 2004, the Company's backlog of orders for its products was approximately $1,192,100 as compared to $511,500 as of June 30, 2003. All of the orders included in the backlog at June 30, 2004 are scheduled for delivery on or before June 30, 2005. Spare part sales are not included in the Company's backlog calculations. In the opinion of the Company, fluctuations in the backlog and its size at any given time are not necessarily indicative of intermediate or long-term trends in the Company's business. Much of the Company's backlog can be canceled or the delivery dates of orders can be accelerated or extended without penalty. Delivery of capital equipment is frequently subject to changing budget conditions of medical institutions and end user clinical practitioners.
Government Contracts
The Company did not fulfill any significant contracts in Fiscal Year 2004 and Fiscal Year 2003 with the United States Government that were material to the Company's consolidated business. The Company fulfilled two contracts in Fiscal Year 2002 with the United States Government that were material to the Company's consolidated business. One Fiscal Year 2002 contract was with the Department of the Air Force for the delivery of X-ray Film Processors. The other Fiscal Year 2002 contract was with the Department of the Army for the delivery of Hand Held Dental X-ray Systems. The Company's policy is to be responsive to all governmental Requests for Quotations (RFQ), which can be fulfilled within the scope of the Company's product lines.
Competition
The Company's products utilize mechanical, as well as analog and digital electronic, technologies. The Company is subject to both foreign and domestic competition. The competition is characterized by significant investment in research and development of new technologies, products and services. Some competitors are well established in the film processor manufacturing and distribution businesses and may have greater financial, distribution resources and facilities than the Company. With respect to all of its products, the Company competes on the basis of price, features, product quality, applications, engineering, and promptness of delivery and customer service. The Company purchases certain products from others for resale on an exclusive or non-exclusive basis, which may be subject to competition from other independent distributors.
The Company also competes in the dental imaging market on the basis of its proprietary and patented technologies. Certain competitors have significant or greater resources and revenues in electronic digital imaging technologies and expertise in software development utilized in dental imaging products.
While the Company believes its products are competitive in terms of capabilities, quality and price, increased competition in the marketplace has had an adverse effect on the Company's business and, recent business mergers and acquisitions may continue to adversely affect the Company's business.
Environmental
The Company believes it is in compliance with the current laws and regulations governing the protection of the environment and that continued compliance would not have a material adverse effect on the Company or require any material capital expenditures. The Company believes it does not use any controlled or regulated materials or processes in its operations. Compliance with local codes for the installation and operation of the Company's products is the responsibility of the end user, or the dealer who independently provides installation services. See Item 3, Legal Proceedings, for further discussion of the two environmental claims in which the Company is currently involved.
Employees
As of June 30, 2004, the Company employed 83 people on a full-time basis. The Company has no collective bargaining agreements and considers its relationship with its employees to be satisfactory.
d) Financial Information about Foreign and Domestic Operations and Export Sales
Financial information related to foreign and domestic operations and export sales for the last three fiscal years is as follows:
FY2004 FY 2003 FY 2002
Domestic Sales $16,733,360 84% $15,118,108 84% $16,116,458 80% Export and foreign sales $3,099,550 16% $2,932,560 16% $3,970,430 20%
Domestic Operating Income $1,585,477 $1,395 $396,078 Foreign Operating Loss ($12,600) ($1,940) ($4,670)
Assets used in the manufacture of export sales are integrated with the other assets of the Company.
The Company liquidated its foreign subsidiary in September 2003.
Item 2.
Item 2. Properties - -------------------
The Company's executive offices and manufacturing facility are located in Elmsford, New York. This facility, which comprises approximately 47,735 square feet, is subject to a lease expiring on December 31, 2009 with a current rental of $477,350 per year, increasing through the lease term to $525,085, plus increases for real estate taxes, utility costs and common area charges. The Company believes its facility is well maintained, in good operating condition, and sufficient to meet the Company's present and anticipated needs. In January 2002, the Company closed its small sales and marketing facility in Springfield, Virginia, where its graphic arts subsidiary had been located.
Item 3.
Item 3. Legal Proceedings - --------------------------
The Company is a defendant in two claims regarding environmental issues relating to a property in New Jersey owned by the Company between August 1984 and June 1985. One claim filed relates to the offsite commercial disposition of trash and waste in a landfill in New Jersey. The Company maintains that its waste materials are of a general commercial nature. This claim was originally filed in 1998 by the Federal Government in United States District Court and the State of New Jersey, citing several hundred other third party defendants. The Company (through its former subsidiary, Kenro Corporation) was added, along with many other defendants, to the suit. The Company's claimed liability was potentially assessed by the plaintiff at $150,000. The Company has joined, along with other involved companies, in an alternative dispute resolution (ADR) process for smaller claims. No potential cost to the Company has been assessed on this claim, and the Company cannot assess the amount of liability that could result from any adverse final outcome of this environmental complaint.
A separate environmental claim was filed in 2001 as a civil complaint by the current owners of the factory site in the Superior Court of New Jersey, Morris County. This suit alleges that Kenro Corporation contaminated a portion of the site during its manufacturing process. The complaint seeks payment by Kenro Corporation to cover all costs (including attorney fees) to remedy the situation, which the plaintiff estimated to be $883,800. The Company has challenged this claim (including the reimbursement of attorney fees) and hired their own expert who concluded that the total clean-up costs should not exceed $347,500. The plaintiff's motion for summary judgment on the issue of the Company's alleged liability for the contamination was recently dismissed without prejudice by the presiding judge. The Company maintains it took the appropriate steps and secured clearance under the New Jersey Environmental Clean-up Responsibility Act (ECRA) at the time of sale, in 1985. The Company's insurance carrier initially has agreed to contribute a portion of the total settlement on this matter when settled. The Company's financial statements include a reserve for their potential liability based on the amount of the Company's expert's opinion, reduced by the amount agreed to be contributed by the Company's insurance carrier.
The Company's insurance carrier has agreed to equally share with the Company the defense costs incurred for both of the environmental claims since September 2001.
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.
Item 4. Submission of Matters to a Vote of Security Holders - -------------------------------------------------------------
There were no matters submitted to a vote of security holders during the fourth quarter of Fiscal Year 2004.
Part II - --------
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder - --------------------------------------------------------------------------- Matters - -------
a) Market Information
The Common Stock, par value $.01 per share, of the Company is the only class of the Company's common equity securities outstanding and is traded on the OTC Bulletin Board (Symbol "AFPC"), maintained by the National Association of Securities Dealers, Inc. The following table, based on information supplied by Commodity Systems Inc., shows the range of the closing high and low bid information for the Company's Common Stock for each quarterly period during the Company's last two fiscal years. These prices reflect inter-dealer prices and do not include retail mark-ups, markdowns or commissions, and may not represent actual transactions.
Quarter ended High Bid Low Bid ------------- -------- ------- September 30, 2002 .22 .12 December 31, 2002 .20 .09 March 31, 2003 .17 .11 June 30, 2003 .17 .11 September 30, 2003 .32 .14 December 31, 2003 .74 .25 March 31, 2004 1.19 .64 June 30, 2004 1.64 1.02
b) Holders
As of September 16, 2004, the closing bid price for the Common Stock, as reported on the OTC Bulletin Board, was $1.32, and there were 441 shareholders of record of the Common Stock. The Company estimates, based on surveys conducted by its transfer agent in connection with the Company's 2003 Annual Meeting of Shareholders, that there are approximately 1,400 beneficial holders of the Common Stock.
c) Dividends
No cash dividends have been declared on the Company's Common Stock to date and the Company anticipates that any earnings will be retained for use in its business for the foreseeable future. The Company currently is prohibited from paying cash dividends on its Common Stock under the terms and conditions of its Renewed Revolving Credit Loan. The Company currently does not have a set policy with respect to payment of dividends. Any future determination to pay cash dividends will be at the discretion of the Company's Board of Directors and will be dependent upon the Company's financial condition, results of operations, capital requirements and other relevant factors.
d) Securities authorized for issuance under equity compensation plans
The following table sets forth as of June 30, 2004: -- the number of shares of common stock issuable upon exercise of outstanding options, warrants and rights, separately identified by those granted under equity incentive plans approved by the Company's shareholders and those granted under plans, including individual compensation contracts, not approved by the Company's shareholders (column A), -- the weighted average exercise price of such options, warrants and rights, also as separately identified (column B), and -- the number of shares remaining available for future issuance under such plans, other than those shares issuable upon exercise of outstanding options, warrants and rights (column C).
(a) (b) (c) Plan Category Number of Weighted average Number of securities to be exercise price securities issued upon of outstanding remaining exercise of options, available for outstanding warrants and future issuance options, warrants rights under equity and rights compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders (1) 1,008,500 $0.57 591,500
Equity compensation plan not approved by security holders (2) 0 0 400,000
Total 1,008,500 $0.57 991,500
(1) The equity compensation plans approved by the security holders are the Company's 1999 Stock Option Plan and the 1995 Stock Option Plan, as amended.
(2) The equity compensation plan not approved by the security holders represents 400,000 shares of common stock reserved for issuance to officers, directors, employees and consultants of the Company under the restricted stock purchase plan originally adopted in July 1980, and amended. The Company may sell shares under this plan to officers, directors, employees, and consultants at a price to be determined by the Board of Directors.
Item 6.
Item 6. Selected Financial Data
(a) Upon adoption of SFAS 142 in the first quarter of Fiscal Year 2003, the Company recorded a one-time, non-cash charge of approximately $1,297,069, to reduce the carrying value of its goodwill. Such charge is non-operational in nature and is reflected as a cumulative effect of an accounting change. See Note 1 to the Consolidated Financial Statements for further discussion and required disclosures.
(b) This amount includes charges and provisions of $846,000 to reduce the goodwill associated with the medical diagnostic imager product line to $0, and $110,000 to reflect the sale of the graphic arts business, including $50,000 to reduce the graphic arts inventory to the fair market value and $60,000 for severance and other closing costs.
(c) This amount includes charges and provisions of $400,000 due to the recognized impairment in the fair market value of the graphic arts inventory; offset by a benefit of $100,000, to reflect the restructuring and reduction in the principal amount of a Subordinated Promissory Note issued in 1997.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operation - ------------
The following should be read in conjunction with the Company's Consolidated Financial Statements and notes thereto included elsewhere herein.
Capital Resources and Liquidity - -------------------------------
The Company's working capital increased by approximately $1,082,000 between Fiscal Year 2004 and Fiscal Year 2003. This increase is principally due to internally generated funds with corresponding reductions in the revolver debt, offset by reductions in long-term debt. The Company was able to obtain better credit terms from several vendors in Fiscal 2004, which allowed the Company to increase its level of accounts payable, while not adversely impacting its borrowing costs. The Company used the current availability from the revolving line of credit to make the required principal payments on the two subordinated notes. The Company is current on all of its principal payments.
On September 21, 2004, the Company renewed its senior secured credit facility (the "Renewed Revolving Credit Loan"), with its existing senior secured lender, for an additional three-year period. The maximum borrowing permitted under the Renewed Revolving Credit Loan is lower than that under the prior credit facility, based on the Company's current requirements. However, the Renewed Revolving Credit Loan has more favorable terms, including a lower interest rate and less stringent reporting requirements, than that under the prior credit facility and gives the Company the ability to borrow on a specific amount of foreign accounts receivable. The Renewed Revolving Credit Loan replaced the existing senior credit facility (the "Original Revolving Credit Loan"). The Renewed Revolving Credit Loan consists of a $2.5 million revolving line of credit, which is secured by all of the Company's inventory, accounts receivable, equipment, officer life insurance policies and proceeds thereof, trademarks, licenses, patents and general intangibles. It is believed that the Renewed Revolving Credit Loan is sufficient to finance the Company's ongoing working capital requirements for the foreseeable future. The Renewed Revolving Credit Loan has an interest rate of 1.375% over the prime rate, currently at 4-1/2 %, has a specific formula to calculate available funds based on eligible accounts receivable and inventory, and has certain reporting requirements to the senior secured lender. The Renewed Revolving Credit Loan requires that certain financial ratios and net worth amounts be maintained. The Renewed Revolving Credit Loan provides for increases in the interest rate charged on monies outstanding under specific circumstances.
As of June 30, 2004, the Company was in compliance with all the terms and conditions of its Original Revolving Credit Loan, as amended. In connection with the Original Revolving Credit Loan, the Company issued a 5-year warrant to the lender for the purchase of 100,000 shares of the Company's common stock at $.32 per share, subject to adjustment for all subsequent issuances of stock. This Warrant expires on September 21, 2006. The Black-Scholes Method was used to value the warrant, and the stock price was based on the stock price the day prior to closing, plus 10%, as stipulated in the Loan and Security Agreement for the Revolving Credit Loan.
Included in debt are two subordinated promissory notes related to prior dental company acquisitions. As of June 30, 2004, these notes total $630,556, of which $408,333 has been classified as a current liability. One note will be repaid in full as of December 31, 2004, and the second note will be repaid in full as of April 17, 2006.
The Company's historical operating cash flows have been positive; however, the Company is dependent upon the Revolving Credit Loan to finance its ongoing operations. The Company expects its working capital requirements will continue to be financed by operations and from borrowings on the Renewed Revolving Credit Loan. It is believed that the Renewed Revolving Credit Loan is sufficient to finance the Company's ongoing working capital requirements for the foreseeable future. The Company currently believes that there are no significant trends, demands, commitments or contingencies, other than an unexpected adverse conclusion to either of the ongoing environmental litigation cases, which are reasonably likely to result in a material increase or decrease in its liquidity or capital resources in the foreseeable future. As of June 30, 2004, the Company had available $1,131,545 of unused credit under the Original Revolving Credit Loan. As of September 17, 2004, the Company had available $950,821 of unused credit under the Original Revolving Credit Loan. No assurances can be given that the Company will have sufficient cash flow in the long term.
Capital expenditures for Fiscal Year 2004 were approximately $107,512. This consisted mainly of several tooling, foundry and test equipment expenditures related to the design, development and production of the new imaging products; improvements to the Company's telephone system, computer system upgrades, and the purchase of a new modular trade show booth for national exhibitions, and other appropriate replacements in the normal course of operations. The Company expects to continue to finance any future capital requirements principally from internally generated funds. The total amount of capital expenditures was limited under the Original Revolving Credit Loan, and continues to be limited under the Renewed Revolving Credit Loan. The Company was in compliance with this requirement as of June 30, 2004.
Results of Operations - Fiscal 2004 vs. Fiscal 2003 - ----------------------------------------------------
In June 2003, management developed a significant cost reduction program, which was implemented effective July 2003. This program reduced overhead costs, both direct and non-direct, and payroll and related costs by over $500,000. These reductions included elimination of non-productive product lines, a 7% decrease in the work force, and numerous cost cutbacks throughout the Company. Management reviewed all significant cost centers and eliminated or reduced many major expenses, including payroll and related benefit costs, communication, and travel and entertainment. Management will continue to monitor and control the level of discretionary spending. In Fiscal Year 2004, the Company reorganized its marketing/sales department resulting in increased operating efficiencies. Management was able to significantly increase sales with only a modest increase in total expenditures. Management continues to search for and develop new products that satisfy its niche markets in medical, dental and veterinary diagnostic imaging.
The Company began shipments of its new digital dental sensor, "EVA" (R), in November 2002 to international dealers and distributors. The Company received FDA clearance for the EVA sensor in March 2003, which permitted the Company to begin to market and distribute the product domestically. This digital sensor can also be used in veterinary dental applications. The Company is continuing to develop its sensors, accessories and related software, and anticipates both domestic and international growth in this product line.
Sales increased approximately $1,789,200 or 10% between Fiscal Year 2004 and Fiscal Year 2003. A significant portion of this increase is attributable to the introduction of the Company's digital products to the domestic marketplace. Medical product sales, including veterinary products, showed an increase of $970,000. Dental product sales, including digital products, increased approximately $820,000, both domestically and internationally. The Company's analog products stayed relatively constant throughout the two periods. International sales increased approximately 6% in Fiscal Year 2004 compared to Fiscal Year 2003, mainly in dental equipment sales.
Gross profit as a percent of sales increased 4.4 percentage points between the Fiscal Year 2004 and Fiscal Year 2003. All product lines showed improvements in their margins, due to increased operating efficiencies. The product mix between manufactured and distributor goods stayed relatively constant between the two fiscal years. Labor and overhead costs, which are included in cost of sales, were approximately $240,000 lower and or 2.7 percentage points lower as a percent of sales in Fiscal Year 2004 compared to Fiscal Year 2003, due to the above-mentioned cost reductions.
Selling, general, and administrative costs increased approximately $178,500 or 3.2%, between Fiscal Year 2004 and Fiscal Year 2003. Most of this increase is attributable to a 7% increase in marketing/selling costs to promote the new digital sensor and the veterinary imaging products, including advertising and attendance at several more exhibition shows, offset by the results of the Company's cost reduction program developed in June 2003. Additionally, the Company increased its reserve on the environmental litigation related to the property in New Jersey, based upon the advise of their expert counsel in this matter.
Research and development costs decreased, approximately $156,500 or 28.3% between the Fiscal Year 2004 and Fiscal Year 2003. This decrease is mainly attributable to the timing of expenditures relating to the Company's continued investment in the design, development and refinement of its new imaging products as well as the completion of several engineering projects and the introduction of these products into commercial use. The Company continues to invest in sustaining engineering and related costs for its existing products. Research and development costs are expected to continue to fluctuate between reporting periods.
Interest expense, net, decreased by approximately $49,900 or 24.1%, between Fiscal Year 2004 and Fiscal Year 2003 primarily due to several factors. There was approximately $566,000 less in average monthly revolving credit borrowings for the current year; the prime rate of borrowing, upon which interest rates for all senior debt is based, was slightly lower in the current period; and the LIBOR rate of borrowing, upon which a subordinated note is based was significantly lower in the current period.
The income tax benefit for Fiscal Year 2004 and the income tax provision for Fiscal Year 2003 primarily reflect certain state capital taxes and Federal alternative tax. In Fiscal Year 2004, the Company realized net operating losses previously subject to valuation allowances to offset federal and state income tax provisions. In Fiscal Year 2003, no tax benefit was recognized for the losses incurred.
In Fiscal Year 2003, in compliance with the FASB SFAS No. 142, "Goodwill and Other Intangible Assets," the Company reviewed its remaining goodwill, which related to the Swedish dental acquisition in April 1997, and determined that, under the revised accounting valuation rules, such goodwill had significantly diminished in value. Therefore, in compliance with SFAS No. 142, the Company took a one-time charge of $1,297,069 to completely write-off the goodwill associated with this acquisition. As the Company no longer has any goodwill, management does not expect that future compliance with SFAS No. 142 will have a material effect on the Company's financial position or results of operation, except for any potential future acquisitions involving goodwill or other intangible assets.
Results of Operations - Fiscal 2003 vs. Fiscal 2002 - ----------------------------------------------------
The Company began shipments of its new digital dental sensor, "EVA" (R) during November 2002, mainly to international dealers and distributors, and will increase production of this new product as sales develop. The Company received FDA approval for the EVA sensor in March 2003, which permits the Company to market and distribute the product domestically. This digital sensor is also used in various veterinary dental applications. The Company is continuing to develop various sized digital sensors, accessories and related software, and anticipates both domestic and international growth in this product line.
Sales decreased by approximately $2,043,000 or 10.2% between Fiscal year 2003 and Fiscal year 2002. The dental product sales decreased $681,000, due, in part, to the fact that Fiscal Year 2002 sales included approximately $260,000 more in sales to the US military, and the Company phased out its older digital sensor. The Company experienced a decline of about 7% in its analog dental products due to changing customer demands, competition and evolving replacement technology. The Company's medical product sales decreased approximately $1,635,000 between the two fiscal years. Fiscal Year 2002 included a large medical products sale to the US military of approximately $490,000, and there were no significant military sales in Fiscal 2003. There was approximately $700,000 lower sales attributable to the Company's medical ultrasound recording cameras, mainly due to significant technological changes away from analog processing in the marketplace. The Company experienced a decline of about 17% in its analog medical products due to changing customer demands. This decline was offset by a 31% increase in Fiscal year 2003 in the Company's veterinary line. The Company continues to focus efforts on the veterinary marketplace and expects to expand its veterinary product line. International sales declined approximately $1.0 million, mainly in medical products. The Company believes that the overall decline in equipment sales in Fiscal Year 2003 also can be attributed to uncertainty in the global markets, the weak US economy, and the impact of hostilities around the world.
Gross profit as a percent of sales increased slightly in Fiscal Year 2003 as compared to Fiscal Year 2002. The product mix between manufactured and distributed goods remained fairly constant between the two fiscal years. The Company was able to keep material costs as a percent of sales fairly constant, even though several distributor products are purchased from European sources in Euro denomination, which significantly strengthened in relation to the US dollar this current fiscal year. The Company reduced its direct labor costs and associated manufacturing overhead costs by approximately $280,000 in Fiscal Year 2003. However, due to the lower sales base, the percentages relative to sales remained constant.
Selling, general and administrative costs decreased by approximately $297,000 or 5.0% between Fiscal Year 2003 and Fiscal Year 2002. Approximately $76,000 relates to the collection (reducing expenses), in the first quarter Fiscal Year 2002, of a portion of a large receivable, which had been written off in 1993. The Company received approximately $40,000 in January 2003 as part of the final waste haulage settlement (for prior years) in Westchester, NY. There was approximately $144,000 less in amortization costs in the current fiscal year due to the change in accounting principle related to the treatment of goodwill. There was approximately $145,000 less in legal fees in Fiscal Year 2003 due to the settlement of several outstanding claims in Fiscal Year 2002. Additionally, the Company negotiated and received approximately $46,00 from its insurance carrier in Fiscal Year 2003 to help defray the legal costs associated with the outstanding environmental litigation. These legal costs will continue to be shared by the outside insurance carrier. There was approximately $180,000 less in sales commissions due to the lower sales volume in Fiscal Year 2003 compared to Fiscal Year 2002. The amount of commissions as a percent of sales stayed relatively constant between the two fiscal years. Costs related to trade shows increased about $25,000 due to attendance at a biannual international dental trade show in Germany (IDS) in March 2003 and attendance at several more national veterinary trade shows to further promote the veterinary product line. Management developed a significant cost reduction program in June 2003, which was made effective for Fiscal 2004. The Company expected to significantly reduce both direct and non-direct overhead costs as a result of this program.
Research and Development costs increased approximately $54,000 or 11% between Fiscal year 2003 and Fiscal Year 2002. This increase is mainly attributable to the timing of expenditures relating to the Company's continued investment in the design, development and refinement of its digital imaging products. The Company continues to invest in sustaining engineering and related costs for its existing analog products.
Interest expense, net, decreased, approximately $86,000 or 29%, between Fiscal Year 2003 and Fiscal Year 2002, primarily due to several factors. There was approximately $200,000 less in average monthly revolving credit borrowings in the current fiscal year; the Company was in violation of certain of its obligations with its previous lender in the first quarter Fiscal Year 2002 and, accordingly, incurred a penalty interest rate in Fiscal Year 2002 on all outstanding borrowings; and, the prime rate of borrowing, upon which all senior debt is based, was considerably lower in the current fiscal year.
The income tax provisions for Fiscal Year 2003 and Fiscal Year 2002, respectively, primarily reflect the nominal state taxes due. No tax benefit has been recognized for the losses incurred in prior years.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk - ----------------------------------------------------------------------
Not applicable.
Item 8.
Item 8. Financial Statements and Supplementary Data - -----------------------------------------------------
AFP IMAGING CORPORATION AND SUBSIDIARIES
CONTENTS June 30, 2004 - -------------------------------------------------------------------------------
Reports of Independent Registered Public Accounting Firms -
Consolidated Financial Statements:
Balance Sheet Statement of Operations Statement of Shareholders' Equity and Comprehensive Income (Loss) Statement of Cash Flows Notes to Consolidated Financial Statements -
Supplemental Schedule:
Schedule of Valuation and Qualifying Accounts
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors AFP Imaging Corporation
We have audited the accompanying consolidated balance sheet of AFP Imaging Corporation and Subsidiaries (the "Company") as of June 30, 2004, and the related consolidated statements of operations, shareholders' equity and comprehensive income (loss), and cash flows for the year then ended. Our audit also included the financial statement schedule listed in the Index at Item 15. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit.
We conducted our audit in accordance with the Standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of AFP Imaging Corporation and Subsidiaries as of June 30, 2004 and the consolidated results of its operations and its cash flows for the year then ended, in conformity with United States generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
GOLDSTEIN GOLUB KESSLER LLP New York, New York
August 10, 2004, except for the third paragraph of Note 4, as to which the date is September 21, 2004
PREDECESSOR AUDITOR'S REPORT
Report of Independent Registered Public Accounting Firm
To the Shareholders of AFP Imaging Corporation
We have audited the accompanying consolidated balance sheet of AFP Imaging Corporation (a New York Corporation) as of June 30, 2003, and the related consolidated statements of operations, shareholders' equity and comprehensive income (loss), and cash flows for the two year period then ended. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of AFP Imaging Corporation at June 30, 2003, and the consolidated results of their operations and their cash flows for the two year period then ended in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, on July 1, 2002, the Company changed its method of accounting for goodwill and other intangible assets.
/s/ Ernst & Young LLP Stamford, Connecticut August 25, 2003
See Notes to Consolidated Financial Statements
AFP IMAGING CORPORATION AND SUBSIDIARIES
- ------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEET
See Notes to Consolidated Financial Statements
AFP IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS - -------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
AFP IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) - -------------------------------------------------------------------------------
Years ended June 30, 2002, 2003 and 2004 - -------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
AFP IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
See Notes to Consolidated Financial Statements
AFP IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004 - -------------------------------------------------------------------------------
AFP IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004 - -------------------------------------------------------------------------------
AFP IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004 - -------------------------------------------------------------------------------
AFP IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004 - -------------------------------------------------------------------------------
AFP IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004 - -------------------------------------------------------------------------------
AFP IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004 - -------------------------------------------------------------------------------
AFP IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004 - -------------------------------------------------------------------------------
AFP IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004 - -------------------------------------------------------------------------------
AFP IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004 - -------------------------------------------------------------------------------
AFP IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004 - -------------------------------------------------------------------------------
AFP IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004 - -------------------------------------------------------------------------------
AFP IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004 - -------------------------------------------------------------------------------
AFP IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004 - -------------------------------------------------------------------------------
AFP IMAGING CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS - --------------------------------------------------------------------------------
Item 9.
Item 9. Changes in and Disagreements with Accountants and Financial Disclosure - -------------------------------------------------------------------------------
Not applicable
Item 9A.
Item 9A. Controls and Procedures - ----------------------------------
(a) Evaluation of disclosure controls and procedures. - -----------------------------------------------------
An evaluation was performed as of June 30, 2004, under the supervision and with the participation of the Company's management, including its co-chief executive officers and chief financial officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on such evaluation, the Company's management has concluded that the Company's disclosure controls and procedures were effective as of June 30, 2004. There have been no significant changes in our internal controls or in other factors that could significantly affect our internal control subsequent to June 30, 2004.
Part III - --------
The information required in items 10, 11,12, 13, and 14 are hereby incorporated by reference from the Company's Proxy Statement for the Annual Meeting of Shareholders, tentatively scheduled for December 10, 2004, to be filed with the SEC on or prior to October 28, 2004.
Part IV - -------
Item 15.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K - ---------------------------------------------------------------------------
1. (a) Financial Statements. The financial statements and schedules listed in Item 8 are filed as a part of this Annual Report on Form 10K. (b) Exhibits. The following exhibits are filed pursuant to Item 601 of Regulation S-K. The numbers set forth below opposite the description of each exhibit correspond to the Exhibit Table of Item 601 of Regulation S-K.
2. (a) -- Stock Purchase Agreement between ACG Nystromgruppen AB and AFP Imaging Corporation, dated April 17, 1997. (9) (b) -- Asset Purchase Agreement between AFP Imaging and ProDen Systems, Inc., dated December 24, 1997. (10). (c) --Promissory Note between ProDen Systems, Inc. and AFP Imaging Corporation, dated August 10, 1999. (11) (d) -- Amended Promissory Note between ACG Nystromgruppen AB and AFP Imaging Corporation, dated August 11, 1999. (11)
3. (a) -- Certificate of Incorporation of Registrant as amended. (1) (b) -- Restated Certificate of Incorporation of Registrant. (3) (c) -- Certificate of Amendment to Certificate of Incorporation of Registrant. (6) (d) -- Certificate of Amendment of the Certificate of Incorporation of the Company filed with the Secretary of the State of New York on October 12, 1995. (7) (e) -- By-Laws of Registrant. (1) (f) -- Excerpt from minutes of Board of Directors meeting of August 12, 1982, Amending the By-Laws of Registrant. (4)
4. (a) -- Specimen of Common Stock Certificates. (1) (b) -- 1980 Restricted Stock Purchase Plan of the Registrant. (1) (c) -- Form of Restricted Stock Purchase Agreement. (1) (d) -- Common Stock Purchase Warrant issued to Keltic Financial Partners LP. (12)
10. (a) -- Health and Medical Reimbursement Plan. (1) (b) -- Lease Agreement dated September 1, 1985, for premises at 250 Clearbrook Road, Elmsford, NY. (5) (c) -- Profit Sharing Plan of the Registrant, as supplemented. (1) (d) -- Registrant's 1995 Stock Option Plan. (8) (e) -- Registrants' 1999 Incentive Stock Option Plan. (11) (f) -- Mediation Resolution Agreement dated August 10, 1999. (11) (g) -- Keltic Financial Partners LP Loan and Security Agreement. (12) (h) -- Keltic Financial Partners LP Revolving Note. (12) (i) -- Keltic Financial Partners LP Fifth Amendment to Loan and Security Agreement. (j) -- Keltic Financial Partners LP Restated Revolving Note (k) -- Contract for Sale of Business Assets between AFP Imaging and Amergraph Corporation, dated July 30, 2001. (12)
11.-- Statement re computation per share earnings. (2)
16 (a) -- Change in Certifying Accountant (October 3, 2003). (14)
21.-- Subsidiaries of the Registrant.
23.1, 23.2 -- Consents of Goldstein Golub Kessler LLP and Ernst & Young LLP
31.1, 31.2, 31.3 - Certifications pursuant to Exchange Act Rule 13a-14 (a).
32.1, 32.2, 32.3 - Certifications pursuant to Section 1350 of the Sarbanes - Oxley Act of 2002.
b) Reports on Form 8-K:
No Company Reports on Form 8-K were filed by the Company during the three months ended June 30, 2004.
(1) Incorporated by reference from the exhibits filed with Registration Statement file #2-G8980 of the Company, as amended, on file with the Securities and Exchange Commission.
(2) See Note 1 to "Notes to Financial Statements".
(3) Incorporated by reference from the Exhibits filed with Registrant's Current Report on Form 8-K, dated August 12, 1982.
(4) Incorporated herein by reference from the Exhibits filed with the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1982.
(5) Incorporated by reference from the Exhibits filed with Registrant's Current Report on Form 8-K, dated July 31, 1995.
(6) Incorporated by reference from the Exhibits filed with Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1994.
(7) Incorporated by reference from the Exhibits filed with Registrant's Current report on Form 8-K, dated October 12, 1995.
(8) Incorporated by reference from the Exhibits filed with Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1996.
(9) Incorporated by reference from the Exhibits filed with the Registrant's Current Report on Form 8-K, dated May 1, 1997.
(10) Incorporated by reference from the Exhibits filed with Registrant's Current Report on Form 8-K, dated January 8, 1998.
(11) Incorporated by reference from the Exhibits filed with the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1999.
(12) Incorporated by reference from the Exhibits filed with the Registrant's Annual Report on Form 10K for the fiscal year ended June 30, 2001.
(13) Incorporated by reference from the Exhibits filed with the Registrant's Current Report on Form 8-K, dated June 14, 2002.
(14) Incorporated by reference from the Exhibits filed with the Registrant's Current Report on Form 8-K, dated October 3, 2003.
SIGNATURES ------------
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
AFP IMAGING CORPORATION
By: __________/s/_________________ Elise Nissen, Chief Financial Officer Date: September 27, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By: _____________/s/___________ Donald Rabinovitch, President & Director (Principal Executive Officer) Date: September 27, 2004
By: ____________/s/_____________ David Vozick, Chairman of the Board, Secretary and Treasurer Date: September 27, 2004
By: __________/s/_______________ Robert Blatt, Director Date: September 27, 2004
By: _________ /s/________________ Jack Becker, Director Date: September 27, 2004
By: _________ /s/________________ Elise Nissen, Chief Financial Officer (Principal Financial and Accounting Officer) Date: September 27, 2004