-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VTly5tOsF4B3CjSryk8RfYMnmFDifKO1JVwJNQnDQB6cS24Iatp3MT446Jr6H7mM SqYG9JaAlHMvSk5Ylons2g== 0000889812-97-002088.txt : 19971001 0000889812-97-002088.hdr.sgml : 19971001 ACCESSION NUMBER: 0000889812-97-002088 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970930 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AFP IMAGING CORP CENTRAL INDEX KEY: 0000319126 STANDARD INDUSTRIAL CLASSIFICATION: PHOTOGRAPHIC EQUIPMENT & SUPPLIES [3861] IRS NUMBER: 132956272 STATE OF INCORPORATION: NY FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 000-10832 FILM NUMBER: 97688576 BUSINESS ADDRESS: STREET 1: 250 CLEARBROOK RD CITY: ELMSFORD STATE: NY ZIP: 10523 BUSINESS PHONE: 9145926100 MAIL ADDRESS: STREET 1: 250 CLEARBROOK RD CITY: ELMSFORD STATE: NY ZIP: 10523 FORMER COMPANY: FORMER CONFORMED NAME: AUTOMATIC FILM PROCESSOR CORP DATE OF NAME CHANGE: 19821122 10-K405/A 1 AMENDMENT NO. 1 TO ANNUAL REPORT Securities and Exchange Commission Washington, D.C. 20549 Form 10-K/A No. 1 [X] Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 for the Fiscal Year Ended June 30, 1997 ------------- or [ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 Commission File Number: 0-10832 ------- AFP Imaging Corporation ------------------------------------------------------ (Exact name of registrant as specified in its charter) New York 13-2956272 ------------------------------- ------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 250 Clearbrook Road, Elmsford, NY 10523 ---------------------------------------- (Address of principal executive offices) Registrant's telephone number: (914)592-6100 Securities registered pursuant Section 12 (b) of the Act: None Securities registered pursuant to Section 12 (g) of the Act: Common Stock, par value .01 per share ------------------------------------- (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] --- --- Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( X ) The aggregate market value of the Registrant's Common stock held by non-affiliates of the Registrant as of August 29, 1997 was approximately $9,208,065. On such date, the averages of the closing bid and asked prices of the Common Stock, as quoted by the Nasdaq SmallCap Market, was $2 7/16. The registrant had 7,471,185 shares of Common Stock outstanding as of August 29, 1997, The Company's Proxy Statement for the 1997 Annual Meeting of Shareholders tentatively scheduled for December 18, 1997 is hereby incorporated by reference into Part III of this Form 10K. Part I Item 1. Business a) General Development of Business AFP Imaging Corporation (the "Company") was organized on September 20, 1978, under the laws of the State of New York. Since its inception, the Company has been engaged in the business of designing, developing, manufacturing and distributing equipment for producing "hard copy" images by chemical processing photosensitive materials as well as manufacturing other electro/optical imaging equipment. These products have been adapted to medical, industrial, dental and graphic arts applications. The Company's products are distributed to worldwide markets through a network of dealers. On July 14, 1997, the Company completed the renegotiation of its credit facility with its senior secured lender. The general terms, conditions and covenants are substantially the same as prior to such negotiation, except that the Company renegotiated a lower interest rate and a broader borrowing base. On April 17, 1997, the Company expanded its dental imaging business by the acquisition of Regam Medical Systems International AB ("Regam"), a Swedish company. Regam is a manufacturer of a filmless digital dental radiography system, with an installed base of over 3,500 units in Europe and Asia. The purchase price of $2.9 million consisted of cash, notes payable and a contingent royalty. The Company financed the cash portion of the purchase price from available cash on hand. On August 6, 1996, the Company sold its fluoroscopic imaging inventories located in Richmond, Virginia. The Company realized a loss of approximately $60,000 on this transaction which loss had been accrued as of June 30, 1996. The assets of this division were not material to the total assets of the Company. As discussed in "Competition", the Company's products are subject to competition from the development of new technologies, products and services by well established competitors who may have greater financial resources, facilities and organization than the Company. Accordingly, the Company's product lines are susceptible to relatively short life cycles. b) Financial Information about Industry Segments The Company is engaged in only one industry segment and management believes that all of its products and services fall within one class of similar or related products and services. 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 free-standing and table top medical, dental and industrial x-ray film processors. Various models of these machines are capable of processing or developing up to 400 films per hour. 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, self-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. Digital Dental Imaging Systems The Company manufactures and distributes a filmless digital dental radiography system, based on electronic imaging technology. Such technology creates dental images on a computer screen that operates in a Windows based software environment. Currently, these products are being sold in Europe, Latin America and Asia. The Company will introduce these products into North American markets in fiscal 1998. Diagnostic Imagers and Viewers The Company manufactures a line of digital and analog multiformat compact cameras to permanently record and document the images produced during diagnostic examinations from several different applications. The cameras can produce anywhere from one to six images on films that can be processed and developed in Company manufactured film processors. The Company has the distribution rights to a line of European monitors specifically designed for the high resolution needs of the medical display market. X-Ray Systems The Company has the distribution rights to a European dental x-ray machine for the North American market. The x-ray film exposed by each of these units is then developed in the Company's processors. This x-ray product is also compatible with the Company's digital x-ray unit. Graphic Arts Processors The Company manufactures and distributes various sized graphic arts processors which develop different photosensitive materials such as rapid access film and papers. These processors are intended for use with phototypesetting, graphics and other pre-printing press applications. Newspapers, publishers and commercial printers are primary customers for these products. Competition The Company's product lines are subject to both foreign and domestic competition and is characterized by research and development of new technologies, products and services. Competitors are well established in the film manufacturing and distribution businesses and may have greater financial resources, facilities and organization than the Company. The Company is also an Original Equipment Manufacturer (OEM) supplier to others. With respect to all of its products, the Company competes on the basis of price, features, product quality, applications, engineering, promptness of delivery and customer service. The Company believes it is one of the largest domestic equipment manufacturers in its class of products. Customers No customer accounted for 10% or more of net sales in fiscal 1997 or 1996. Management does not believe the loss of any one customer would have a materially adverse effect on the Company's consolidated business. Foreign markets and sales are pursued by various international dealers. Backlog Orders As of June 30, 1997, the Company's backlog of orders for its products was approximately $4,174,052 as compared to $3,654,700 as of June 30, 1996. All of the orders included in the backlog at June 30, 1997 are scheduled for delivery by June 30, 1998. OEM purchase commitments are typically negotiated for 12 month periods but are not based on a calendar or fiscal year. Spare part sales are not part of the Company's backlog calculations. In the opinion of the Company, fluctuations in the backlog and its size at any given time are not necessarily indicative of intermediate or long-term trends in the Company's business. Much of the Company's backlog can be canceled or the delivery dates extended without penalty. Delivery of capital equipment is frequently subject to changing budget conditions of consumers. Government Contracts The Company has no current contracts with the federal government that are material to the consolidated business. The Company's policy is to be responsive to all governmental Request for Quotations (RFQ) which can be fulfilled within the scope of the Company's product lines. Patents and Trademarks The Company presently owns many domestic and foreign utility patents which it believes are material to the technology used in its products. The Company is not aware of any patents held by others that conflict with its current domestic product designs. The Company is evaluating whether its recently acquired foreign technology infringes on any domestic patents held by others. The principal technology applied to the construction of the Company's other products is state-of-the-art but not considered proprietary. The Company owns several domestic and foreign trademarks which it uses in connection with the marketing of its products. Research and Development The amount spent during each of the 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, is as follows: 1997 1996 1995 ---- ---- ---- $776,423 $1,273,032 $750,818 The Company's level of spending is discussed further in "Management's Discussion and Analysis of Financial Condition and Results of Operation". Raw Materials The Company does not utilize any unique raw materials or processes in the design and manufacture of its products. The Company anticipates that an adequate commercial supply of all raw materials will be available from multiple sources. Employees As of June 30, 1997, the Company employed 190 persons worldwide on a full-time basis. The Company has no collective bargaining agreements and considers its relationship with its employees to be satisfactory. Sales, Marketing and Distribution All of the Company's products are manufactured and distributed domestically and internationally in two configurations. Certain products are custom engineered and brand labeled for other large OEM's. The balance of the Company's products are brand labeled by the Company with its own trade names and are distributed through an extensive network of independent medical, dental and graphic arts dealers who install and service the equipment. The Company maintains a significant marketing and regional sales management effort to promote and support all its products. The Company advertises in trade journals (domestic and international), 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 utilizes various domestic and international forms of trademarks, including AFP Imaging, DENT-X, Sens-A-Ray 2000 and LOGE, among others. Government Regulation The United States Food and Drug Administration ("FDA"), Bureau of Medical Devices regulates the distribution of all equipment used as medical devices. The Company has registered all of its medical apparatus with this agency. The Bureau of Medical Devices has the right to disapprove the marketing of any medical device that it believes is unfit for the purposes intended. The Company believes that its products and procedures satisfy all the criteria necessary to comply with the regulations of the FDA's Bureau of Medical Devices. The Company's primary manufacturing facility is ISO 9001 (International Standards Organization) certified. Seasonal Nature The Company's business is not considered seasonal. Working Capital Practices The Company engages in no unusual practices regarding inventories, receivables or other items of working capital. The Company renegotiated its credit facility with its existing lender in July 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for further discussion. Environmental Impact The Company believes it is in compliance with laws and regulations governing the protection of the environment and that continued compliance will not have a material effect on its business or require any material capital expenditures. The Company does not use any controlled or regulated materials or processes in its operation. Compliance with local codes for the installation and operation of the Company's products is the responsibility of the end user. d) Financial Information about Foreign and Domestic Operations and Export Sales With respect to the Company's last three fiscal years, domestic sales were $23,527,612 (1997), $26,368,729 (1996), and $20,818,704 (1995) representing 64%, 72%, and 78% respectively of the Company's sales during such periods. Domestic operating income was $2,283,895, $1,537,291 and $1,524,181 for the years ended June 30, 1997, 1996, and 1995, respectively. Export and foreign sales during such periods were $13,520,898 (1997) $10,160,150 (1996) and $5,770,208 (1995) or 36%, 28% and 22% of total Company sales for each period, respectively. The Company's Swedish subsidiary, Regam, incurred an operating loss of $154,600 from April 17, 1997 (acquisition date) through June 30, 1997. The Company had no foreign operating income or losses for the years ended June 1996 and 1995. Assets used in the manufacture of export sales are integrated with the other assets of the Company. Item 2. Properties The Company's manufacturing facility is well maintained, is in good operating condition, and has a productive capacity sufficient to meet the Company's present and anticipated needs. The Company's executive offices and its manufacturing facility are located in Elmsford, New York. This property is under a renegotiated lease expiring on December 31, 2000 at a rental of $598,574 through the lease term for the last three years plus increases in real estate taxes, utility costs and common area charges. The Company leases a sales and marketing facility in Springfield, Virginia for $140,000 per annum. This lease expires on March 31, 1998. The Company leases a small facility in Sweden for approximately $28,000 per annum. The lease expires December 31, 1997. Item 3. Legal Proceedings The Company is currently defending a civil complaint instituted by a former vendor of Visiplex Instruments Ltd., for breach of Bulk Sales Notice, alleging that no notice of the bulk transfer of assets was given in July 1995. The Company did not assume such liability. Visiplex Instrument Ltd. provided the Company with an Indemnification and Hold Harmless Agreement, which has a $500,000 limit. The complaint does not specify the amount of damages, however, at this time, the Company does not believe that the outcome of this matter will have a material adverse effect on the consolidated financial statements. The Company is not aware of any other litigation which could have a material adverse effect on its financial condition. 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 the fiscal year ended June 30, 1997. Part II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters a) Market Information The Common Stock of the Company is traded on the Nasdaq SmallCap Market (Symbol "AFPC"). The following table shows the high and low bid quotations for the Company's Common Stock for each quarterly period during the Company's last two fiscal years. These prices do not represent actual transactions and do not include retail mark-ups, mark-downs or commissions. Quarter ended High Low ------------- ---- --- September 30, 1995 2 1/2 5/8 December 31, 1995 2 1/4 1 1/8 March 31, 1996 1 9/16 7/8 June 30, 1996 1 7/16 15/16 September 30, 1996 1 13/16 1 December 31, 1996 1 7/8 1 March 31, 1997 2 5/16 1 11/16 June 30, 1997 2 1/8 1 1/2 b) Holders The following table sets forth the approximate number of holders of record of Common Stock of the Company at September 1, 1997. Title of Class Number of Holders of Record ---------------------------- --------------------------- Common Stock, $.01 par value 531 c) Dividends No cash dividends have been declared on the Company's shares to date and the Company anticipates that for the foreseeable future any earnings will be retained for use in its business. Pursuant to the terms of the Company's 12% Convertible Subordinated Debentures, repaid in full in June 1997, the Company was not permitted to declare or pay any dividend on any shares of its capital stock, other than cash dividends on its Preferred Stock, Series A and Series B, until the entire principal amount of the Debentures was paid in full or converted into Common Stock. Item 6. AFP Imaging Corporation and Subsidiaries Selected Financial Data as of and for The Years Ended June 30, 1997, 1996, 1995, 1994, and 1993
1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- NET SALES $37,048,510 $36,528,879 $26,588,912 $30,505,249 $38,257,479 =========== =========== =========== =========== =========== OPERATING INCOME (LOSS) $2,129,295 $1,537,291 $1,524,181 $(3,383,100)(c) $(355,372)(d) ========== ========== ========== ============ ========== NET INCOME (LOSS) $1,548,597 $700,528 $923,999 $(4,184,156)(c) $(1,255,668)(d) ========== ======== ======== ============ ============ NET PRIMARY EARNINGS (LOSS) PER COMMON SHARE AND EQUIVALENTS $.16(a) $.08(a) $.13(a) $(.71) $(.26) ==== ==== ==== ====== ====== NET FULLY DILUTED EARNINGS (LOSS) PER COMMON SHARE AND EQUIVALENTS $.15(a) $.08(a) $.12(a) $(.71) $(.26) ==== ==== ==== ====== ====== TOTAL ASSETS $20,516,028 $20,258,093 $11,789,582 $15,074,720 $22,547,342 =========== =========== =========== ========== ========== LONG-TERM DEBT $4,412,116(b) $7,278,072(b) $1,935,638(b) $17,235(e) $48,052(e) ========== ========== ========== ====== ======= SHAREHOLDERS' EQUITY $10,873,384 $9,316,087 $5,538,068 $4,595,319 $7,675,882 =========== ========== ========== ========= ========= SHAREHOLDERS' EQUITY PER COMMON SHARE $1.06 $.83 $.66 $.52 $1.20 ===== ==== ==== ==== ===== COMMON SHARES OUTSTANDING, at end of period 7,432,698 7,077,767 6,449,394 6,423,074 5,332,036 ========= ========= ========= ========= ========= CASH DIVIDENDS PER COMMON SHARE none none none none none
(a) In 1997, the weighted average number of common shares used in calculating primary and fully diluted earnings per share reflects the assumed conversion of the convertible preferred stock and the assumed exercise of in-the-money stock options and warrants. In 1996 and 1995, primary and fully diluted earnings per share reflects the assumed conversion of the convertible preferred stock. For all years, in calculating fully diluted earnings per share, the weighted average number of common shares includes the assumed conversion of the convertible subordinated debentures. (b) In 1997, 1996 and 1995, the Company has classified revolver borrowings as long-term as the facility was extended for two years on July 14,1995 and July 14, 1997. (c) This amount includes provisions of approximately $1.2 million to write-down the Company's Virginia facility to its estimated fair value, $1.0 million to write-down the Company's sales office in Frankfurt, Germany to its estimated fair value, and $1.3 million to discard inventory from discontinued product lines. (d) This amount includes a provision of $1.5 million to write-down the Company's Virginia facility to its estimated fair value, and a write-off of $426,096 for receivables from a bankrupt customer. (e) This amount excludes $3,603,583 and $3,331,830 for fiscal years 1994 and 1993, respectively, of debt classified as short-term. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation Capital Resources and Liquidity The Company's working capital decreased $4.3 million between fiscal 1997 and fiscal 1996 due to a $1.5 million decrease in inventories, a $1.3 million decrease in cash and equivalents, and a $1.7 million increase in accounts payable and other short term accruals. The Company generated net income of $1.55 million in fiscal 1997. The Company acquired a digital dental imaging company in April 1997. The cash portion of the purchase price was funded from available cash. The Company renegotiated its credit facility of a $9.85 million revolver and term loan facility with its present lender effective July 14, 1997 for a three year period. The credit line provides working capital for the Company. The Company believes that this revised credit facility is sufficient to finance its ongoing operations. The revolver loan is secured by available and eligible inventory, accounts receivable, equipment, life insurance policies and proceeds thereof, trademarks, licenses, patents and general intangibles. The Company renegotiated a lower interest rate and increased availability based on stated terms and asset amounts. Other terms, conditions and covenants of the new facility are similar to those of the previous facility See Notes to Consolidated Financial Statements for further information regarding this credit facility. As of June 30, 1997, the Company had $3,506,000 of unused credit available and is in compliance with all financial ratios and covenants as stated in its loan documents. During the 1997 fiscal year, the Company loaned an unaffiliated dental manufacturing company an aggregate of $300,000. The borrower executed notes evidencing such obligation with an extended maturity date of October 1, 1997. The notes are secured by the stock and assets of the borrower. The borrower is currently negotiating with the Company for an extended repayment of such loan. In August 1993, the Company was required to begin annual sinking fund payments on its subordinated debentures. The Company repaid in full the Subordinate Debentures as of June 30, 1997. The Company's historical operating cash flows have been positive; however, the Company is dependent upon its existing credit facilities to finance its ongoing operations. During fiscal 1997, the Company reduced its borrowings on its credit facility by approximately $4.6 million with internally generated funds from operations. Capital expenditures for fiscal 1997 consisted of individual computer workstation upgrades, production tooling, molds and other appropriate replacements in the normal course of operations. The Company has committed approximately $350,000 to the purchase of a new Business Information System including the upgrade of existing computer hardware and a new fully integrated manufacturing software package. The Company has committed to a three year lease for the hardware and software costs, which is recorded as a capital lease. The Company expects to continue to finance any future capital requirements principally from internally generated funds. The Company is presently unaware of any other demands, commitments or contingencies which are reasonably likely to result in a material increase or decrease in its liquidity in the foreseeable future. Results of Operation - Fiscal 1997 vs. Fiscal 1996 On April 17, 1997 the Company acquired the stock of Regam Medical Systems International AB ("Regam"), a Swedish digital imaging company. The acquisition was accounted for under the purchase method of accounting and has been fully consolidated in the Company's consolidated financial statements. Regam's operations from the date of acquisition through fiscal year end are not significant to the Company's consolidated results. Sales increased $520,000 or 1% between the two fiscal years. The Company experienced a 20% growth in sales of its dental imaging business offset by a 5% decline in graphic art sales due to changing customer demands and market technology. Medical imaging sales stayed constant through the two periods. Gross profit as a percent of sales decreased .5% due to increased sales of exclusive distributor goods, which sales generally have lower gross margins. Selling, general and administrative costs decreased $96,000 or 1%. Fiscal 1996 expenses included a provision of $60,000 for the loss incurred on the sale of the fluoroscopic imaging assets. The composition of these expenses shifted slightly with more costs to promote the dental and medical products worldwide and less administrative overhead costs, due to ongoing management expense reduction programs. Research and development costs decreased $497,000 or 39%. The Company completed several in-house engineering projects and continues to re-evaluate the market potential of investment in product engineering versus the distribution of alternative outsourced products. The Company continues to invest in sustaining engineering and related costs to maintain their technical advantage. Interest expense net decreased $325,000 or 42%. The Company reduced its borrowings with its senior secured lender by $4 million, offset by the lost interest income resulting from the use of available cash to partially fund the Regam acquisition. The income tax provision primarily represents nominal state capital taxes due, as in the prior fiscal year. The Company realized net operating losses previously subject to valuation allowances to offset any federal and state income tax provision. Results of Operation - Fiscal 1996 vs. Fiscal 1995 On July 14, 1995, the Company acquired most of the assets and selected liabilities of Visiplex Instruments Ltd., a medical diagnostic imaging equipment manufacturer and distributor. Visiplex had been a tenant in the Company's New York facility since November 1994. Management felt that this acquisition presented the Company with an opportunity to broaden its medical diagnostic market penetration while potentially achieving efficiencies with the consolidation of the two operations. Visiplex was fully consolidated into the Company's operations for substantially all of fiscal 1996. Sales increased approximately $9.9 million or 37.4%. $9.1 million was due to the sales generated from the newly acquired Visiplex product line. $2.7 million is due to increased processor sales, offset by a $1.6 million decrease in graphic art sales due to changing customer demands and market technology. The Company's dental business had flat sales growth this year. The fluoroscopic imaging division experienced a decline in sales which resulted in the sale of this product line on August 6, 1996. Gross profit as a percent of sales declined 1.3% from the prior fiscal year. This was due to the acquisition of the Visiplex product line whose products have a smaller gross margin and a slight change in the product mix towards more distributed goods, which also have a lower gross margin. Selling, general, and administrative costs increased $2.4 million or 35%. Approximately 85% of the increase can be attributed to the Visiplex acquisition, including approximately $200,000 of additional amortization expense. Also included is a $60,000 provision for the estimated loss incurred on the sale of the fluoroscopic imaging assets on August 6, 1996. The balance of this increase was due to an increase in marketing expenditures for worldwide promotion of all Company products. Research and development costs increased $522,000 or 70%, which was primarily due to the added Visiplex staff. Visiplex has a highly trained engineering department whose resources were being utilized to research and develop new digital imaging products. The Company is currently re-evaluating the market demand for certain new products versus the distribution of alternative outsourced products with respect to their anticipated return on investment. Interest expense, net increased $201,000 or 35%. This represented the increased debt required to finance the Visiplex acquisition, offset by the interest earned on the private equity placement, and the convertible subordinated debt converted to equity earlier in the year. The income tax provision primarily represents nominal state capital taxes due. The Company realized net operating losses previously subject to valuation allowances to offset any federal and state income tax provision. AFP IMAGING CORPORATION AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS Report of Independent Public Accountants F-1 Consolidated Balance Sheets -- June 30, 1997 and 1996 F-2 to F-3 Consolidated Statements of Operations for the Years Ended June 30, 1997, 1996 and 1995 F-4 Consolidated Statements of Shareholders' Equity for the Years Ended June 30, 1997, 1996 and 1995 F-5 Consolidated Statements of Cash Flows for the Years Ended June 30, 1997, 1996 and 1995 F-6 to F-7 Notes to Consolidated Financial Statements F-8 to F-15 Schedule II - Valuation and Qualifying Accounts for the Years Ended June 30, 1997 and 1996 F-16 All other schedules called for under Regulation S-X are not submitted because they are not applicable or not required or because the required information is included in the consolidated financial statements and notes thereto. 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, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended June 30, 1997. These consolidated 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 consolidated financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of AFP Imaging Corporation and subsidiaries as of June 30, 1997 and 1996 and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1997 in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic consolidated 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 part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. Arthur Andersen LLP New York, New York August 13, 1997 AFP IMAGING CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS -- JUNE 30, 1997 AND 1996
ASSETS 1997 1996 ------ ------------ ------------ CURRENT ASSETS: Cash and cash equivalents $ 1,858,287 $ 3,133,198 Accounts receivable, less allowance for doubtful accounts and sales returns of $277,926 and $238,000, respectively 5,816,106 6,020,129 Inventories (Note 1) 6,016,528 7,530,128 Prepaid expenses and other 650,095 163,374 ------------ ------------ Total current assets 14,341,016 16,846,829 PROPERTY, PLANT AND EQUIPMENT, at cost: Leasehold improvements 287,474 263,378 Machinery and equipment 7,224,278 6,840,122 ------------ ------------ 7,511,752 7,103,500 Less - Accumulated depreciation (6,113,123) (5,833,067) ------------ ------------ 1,398,629 1,270,433 INTANGIBLE ASSETS, net of accumulated amortization of $681,363 and $666,968 respectively (Note 1) 4,441,453 1,907,112 OTHER ASSETS 334,930 233,719 ------------ ------------ $ 20,516,028 $ 20,258,093 ============ ============
The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets. F-2 AFP IMAGING CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS -- JUNE 30, 1997 AND 1996
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996 ------------------------------------ ------------ ------------ CURRENT LIABILITIES: Current portion of long-term debt (Note 2) $ 639,314 $ 214,620 Accounts payable 1,801,973 1,364,937 Accrued expenses 2,220,096 1,140,198 Accrued payroll expenses 569,145 544,179 Convertible subordinated debenture - 200,000 ------------ ------------ Total current liabilities 5,230,528 3,463,934 LONG-TERM DEBT (Note 2) 4,412,116 7,278,072 CONVERTIBLE SUBORDINATED DEBENTURE - 200,000 COMMITMENTS AND CONTINGENCIES (Note 7) - - SHAREHOLDERS' EQUITY (Notes 3 and 4): Convertible Preferred Stock, Series A, 1,750,000 authorized, 1,396,814 and 1,724,984 shares issued and outstanding at June 30, 1997 and 1996, respectively 2,171,071 2,564,876 Convertible Preferred Stock, Series B, 824,844 authorized, 711,872 shares issued and outstanding at June 30, 1997 and 1996 854,247 854,247 Common Stock warrants 25,314 25,314 Common Stock, $.01 par value, 30,000,000 shares authorized, 7,432,698 and 7,077,751 shares issued and outstanding at June 30, 1997 and 1996, respectively 74,327 70,778 Paid-in capital in excess of par 8,578,549 8,175,793 Accumulated deficit (826,324) (2,374,921) Cumulative translation adjustment (3,800) - ------------ ------------ Total shareholders' equity 10,873,384 9,316,087 ------------ ------------ $ 20,516,028 $ 20,258,093 ============ ============
The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets. F-3 AFP IMAGING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
1997 1996 1995 ----------- ----------- ----------- NET SALES $37,048,510 $36,528,879 $26,588,912 COST OF SALES 24,950,627 24,430,698 17,427,070 ----------- ----------- ----------- Gross profit 12,097,883 12,098,181 9,161,842 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 9,192,165 9,287,858 6,886,843 RESEARCH AND DEVELOPMENT EXPENSES (Note 1) 776,423 1,273,032 750,818 ----------- ----------- ----------- Operating income 2,129,295 1,537,291 1,524,181 INTEREST EXPENSE, net 451,466 776,763 575,182 ----------- ----------- ----------- Income before provision for income taxes 1,677,829 760,528 948,999 PROVISION FOR INCOME TAXES (Note 5) 129,232 60,000 25,000 ----------- ----------- ----------- NET INCOME $ 1,548,597 $ 700,528 $ 923,999 =========== =========== =========== NET EARNINGS PER COMMON SHARE (Note 1) Primary $.16 $.08 $.13 Fully diluted $.15 $.08 $.12
The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets. F-4 AFP IMAGING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
Convertible Convertible Preferred Preferred Common Stock, Stock, Stock Common Series A Series B Warrants Stock ------------ ------------ ------------ ------------ Balance June 30, 1994 $ 1,281,626 $ - $ 25,314 $ 64,230 Conversion of 1,320 shares of preferred stock to common stock (3,432) - - 13 Issuance of 25,000 shares of "restricted" common stock - - - 250 Net Income - - - - ------------ ------------ ------------ ------------ Balance June 30, 1995 1,278,194 - 25,314 64,493 Issuance of 2,083,333 shares of preferred stock 1,645,753 854,247 - - Conversion of subordinated debentures into common stock - - - 4,309 Conversion of 138,088 shares of preferred stock, Series A, to common stock (359,071) - - 1,381 Issuance of 59,880 shares of common stock in connection with the exercise of stock options - - - 599 Retirement of 444 shares of common stock - - - (4) Net Income - - - - ------------ ------------ ------------ ------------ Balance June 30, 1996 2,564,876 854,247 25,314 70,778 Issuance of 15,000 shares of common stock in connection with the exercise of stock options - - - 150 Conversion of 328,170 shares of preferred stock, Series A, to 339,947 shares of common stock (393,805) - - 3,399 Foreign currency translation adjustment - - - - Net Income - - - - ------------ ------------ ------------ ------------ Balance June 30, 1997 $ 2,171,071 $ 854,247 $ 25,314 $ 74,327 ============ ============ ============ ============ Paid-in Foreign Capital Currency In Excess of Accumulated Translation Par Deficit Adjustment Total ------------ ------------ ------------ ------------ Balance June 30, 1994 $ 7,223,597 $ (3,999,448) $ - $ 4,595,319 Conversion of 1,320 shares of preferred stock to common stock 3,419 - - - Issuance of 25,000 shares of "restricted" common stock 18,500 - - 18,750 Net Income - 923,999 - 923,999 ------------ ------------ ------------ ------------ Balance June 30, 1995 7,245,516 (3,075,449) - 5,538,068 Issuance of 2,083,333 shares of preferred stock - - - 2,500,000 Conversion of subordinated debentures into common stock 512,691 - - 517,000 Conversion of 138,088 shares of preferred stock, Series A, to common stock 357,690 - - - Issuance of 59,880 shares of common stock in connection with the exercise of stock options 60,531 - - 61,130 Retirement of 444 shares of common stock (635) - - (639) Net Income - 700,528 - 700,528 ------------ ------------ ------------ ------------ Balance June 30, 1996 8,175,793 (2,374,921) - 9,316,087 Issuance of 15,000 shares of common stock in connection with the exercise of stock options 12,350 - - 12,500 Conversion of 328,170 shares of preferred stock, Series A, to 339,947 shares of common stock 390,406 - - - Foreign currency translation adjustment - - (3,800) (3,800) Net Income - 1,548,597 - 1,548,597 ------------ ------------ ------------ ------------ Balance June 30, 1997 $ 8,578,549 $ (826,324) $ (3,800) $ 10,873,384 ============ ============ ============ ============
The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets. F-5 AFP IMAGING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 1997 1996 AND 1995
1997 1996 1995 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 1,548,597 $ 700,528 $ 923,999 Adjustments to reconcile net income to net cash provided by (used in) operating activities- (Gain) loss on sale of equipment 3,396 - (31,719) Depreciation and amortization 891,370 969,439 761,475 Provision for losses on accounts receivable 93,463 131,280 65,650 Change in assets and liabilities: (Increase) decrease in accounts receivable 567,560 (842,774) (539,008) (Increase) decrease in inventories 1,859,800 (26,956) 1,680,364 (Increase) decrease in prepaid expenses and other (167,221) 124,917 (12,723) Increase (decrease) in other assets (2,636) (223,877) (65,334) Increase (decrease) in accounts payable (302,565) (1,564,700) 97,127 Increase (decrease) in accrued expenses 955,898 (578,856) (64,860) Increase (decrease) in accrued payroll expenses 24,966 107,153 97,578 ----------- ----------- ----------- Total adjustments 3,924,031 (1,904,374) 1,988,550 ----------- ----------- ----------- Net cash provided by (used in) operating activities 5,472,628 (1,203,846) 2,912,549 CASH FLOWS FROM INVESTING ACTIVITIES: Investment in Regam Medical Systems International AB (1,561,293) - - Investment in Visiplex Instruments, Ltd. - (3,554,367) - Issuance of notes receivable (310,000) - - Acquisition of licensing agreement - (25,000) - Capital expenditures (217,525) (197,824) (131,221) Proceeds from sales of land, building and equipment - - 1,712,124 ----------- ----------- ----------- Net cash provided by (used in) investing activities (2,088,818) (3,777,191) 1,580,903
The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets. F-6 AFP IMAGING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 1997 1996 AND 1995 (Continued)
1997 1996 1995 ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowing of debt - 5,582,432 250,000 Repayments of debt (4,667,421) (552,278) (4,588,982) Exercise of common stock options 12,500 60,491 - Issuance of convertible preferred stock - 2,500,000 - ----------- ----------- ----------- Net cash provided by (used in) financing activities (4,654,921) 7,590,645 (4,338,982) EXCHANGE RATE EFFECTS ON CASH AND CASH EQUIVALENTS (3,800) - - ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents (1,274,911) 2,609,608 154,470 CASH AND CASH EQUIVALENTS, at beginning of year 3,133,198 523,590 369,120 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS, at end of year $ 1,858,287 $ 3,133,198 $ 523,590 =========== =========== =========== SUPPLEMENTAL CASH FLOW DISCLOSURES: Cash paid during the year for- Interest $ 450,683 $ 848,521 $ 598,028 Income taxes 80,373 47,648 11,929
SUPPLEMENTAL NON-CASH INVESTING AND FINANCIAL ACTIVITIES DISCLOSURES: In fiscal 1997, common stock was issued upon the conversion of $393,805 of Series A convertible preferred stock. In fiscal 1996, common stock was issued upon the conversion of $517,000 of convertible subordinated debentures and $359,071 of Series A convertible preferred stock. In fiscal 1995, common stock was issued upon the conversion of $3,432 of Series A convertible preferred stock. The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets. F-7 AFP IMAGING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 (1) Accounting Policies: The Company AFP Imaging Corporation (together with its subsidiaries, the "Company") was organized on September 20, 1978, under the laws of the State of New York. Since its inception, the Company has been engaged in the business of designing, developing, manufacturing and distributing equipment for producing "hard copy" images by chemical processing photosensitive materials. During fiscal 1996, the Company acquired most of the assets and selected liabilities of Visiplex Instruments Ltd. which manufactures electronic diagnostic imaging equipment. On April 17, 1997, the Company acquired all of the outstanding shares of Regam Medical Systems International AB, a Swedish manufacturer of advanced dental imaging devices. The Company's products are distributed to worldwide markets through a network of dealers and original equipment manufacturers. Principles of consolidation The consolidated financial statements include AFP Imaging Corporation and its wholly owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation. Revenue recognition Revenue is recognized by the Company when products are shipped and title passes to the customer. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and cash equivalents Cash and cash equivalents include deposits with original maturities of three months or less. Inventories Inventories, which include material, labor and manufacturing overhead, are stated at the lower of cost (first-in, first-out) or market (net realizable value). Inventories used in the determination of cost of sales were as follows:
1997 1996 ---------- ---------- Raw materials and sub-component parts $4,565,064 $5,576,116 Work-in-process and finished goods 1,451,464 1,954,012 ---------- ---------- $6,016,528 $7,530,128 ========== ==========
F-8 Depreciation Machinery and equipment is 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 40 years or their estimated useful lives. 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. Intangible assets Intangible assets are valued at their estimated fair value when acquired. These assets, which are amortized on a straight-line basis, consist of the following:
Amortization 1997 1996 Period ---------- ---------- ------------ Goodwill $5,097,816 $2,549,080 15-40 years Licensing Fees 25,000 25,000 2 years ---------- ---------- 5,122,816 2,574,080 Less - Accumulated amortization (681,363) (666,968) ---------- ---------- Intangible assets, net $4,441,453 $1,907,112 ========== ==========
The Company periodically reviews the carrying value of the goodwill and other long lived assets to determine whether an impairment may exist. The Company considers relevant cash flow, estimated future operating results, trends and other available information in assessing whether the carrying value of the asset can be recovered. The Company believes no such impairments exist as of June 30, 1997. Net earnings per common share The computation of net earnings per common share is based upon the weighted average number of common shares outstanding during the period plus (in periods in which they have a dilutive effect) the effect of common shares contingently issuable. Primary and fully diluted earnings per common share for the fiscal years ended 1997, 1996, and 1995 are presented below:
1997 1996 1995 ---------- ---------- ---------- Net Earnings Available for Common Shareholders $1,548,597 $700,528 $923,999 Total Common Stock and Equivalents 9,981,525 9,112,677 6,922,512 ---------- ---------- ---------- Primary Earnings Per Share $.16 $.08 $.13 ========== ========== ========== Net Earnings Available for Common Shareholders $1,560,541 $737,141 $1,009,785 Total Common Stock and Equivalents 10,245,336 9,628,992 8,297,512 ---------- ---------- ---------- Fully Diluted Earnings Per Share $.15 $.08 $.12 ========== ========== ==========
F-9 The primary earnings per share computation reflects the effects of common shares contingently issuable upon the exercise of warrants, options and convertible preferred stock (see Notes 3 and 4), in periods in which such exercise would cause dilution. The fully diluted earnings per share computation reflects the effect of the conversion of convertible subordinated debentures in periods in which such conversion would cause dilution. In fiscal 1997 and 1996, the conversion of certain warrants would be antidilutive while in fiscal 1995, the exercise of certain warrants and options would be antidilutive. In all years, net earnings available for common shareholders differs between primary and fully diluted earnings per share due to interest expense, net of taxes, associated with the convertible subordinated debentures, which would not have been incurred assuming conversion at the beginning of the period. (2) Debt: As of June 30, 1996, the Company had a $9.85 million revolver and term loan with its senior lender at an interest rate of 2% above prime. This facility expired on July 14, 1997 and was replaced by an $8.4 million revolver loan and a $1.45 million term loan at an interest rate of 3/4% above prime (the "Credit Facility"). The Credit Facility is collateralized by accounts receivable, eligible inventory, equipment, life insurance policies and proceeds thereof, trademarks, licenses, patents, and general intangibles. The arrangement provides for restrictions on borrowings, requires certain financial ratios related to total debt, unsubordinated debt to tangible net worth and current assets to current liabilities be maintained and requires minimum levels of working capital, net worth and cash flow. The Company has unused lines of credit available, subject to formula, of $3.50 million as of June 30, 1997 for short-term financing needs. As the Company extended its credit facility to mature on July 14, 2000, the balance of the original revolver has been classified as long-term as of June 30, 1997. As of June 30, 1997 and 1996, debt consisted of the following:
1997 1996 ---------- ---------- Revolver $2,956,399 $6,948,072 Term Loan (a) 330,000 440,000 Notes Payable (b) 1,200,000 - Capital leases and other 565,031 104,620 ---------- ---------- 5,051,430 7,492,696 Less - Current Portion 639,314 214,620 ---------- ---------- $4,412,116 $7,278,072 ========== ==========
(a) The term loan bears interest at prime plus 2% (10.25% at June 30,1997). Effective July 14, 1997, the term loan will bear interest at Citibank base rate for borrowing plus 3/4%. (b) The $1.2 million notes payable to ACG Nystromgruppen AB, the former parent of Regam Medical Systems International AB, consists of a $1 million promissory note and a $200,000 note payable backed by a letter of credit. The promissory note bears interest at LIBOR plus 2% (8.375% at June 30, 1997). This note is payable in full on April 17, 2000. The $200,000 note payable is due on March 31, 1998. The Company's weighted average borrowing rate was approximately 10.25% and 10.7% as of June 30, 1997 and 1996, respectively. The fair market value of all of the Company's debt approximates its carrying value. F-10 Maturities of debt by fiscal year ended June 30 are as follows: 1998 $ 639,314 1999 223,585 2000 1,175,301 2001 2,988,741 2002 24,489 At June 30, 1997 the Company had guarantees of $389,461 with foreign vendors. (3) Convertible Preferred Stock, Series A and B: The Company has two series of convertible preferred stock of which 1,396,814 Series A shares and 711,872 Series B shares are currently outstanding. Each Series A share is convertible into 1.03 shares of common stock while all Series B shares are convertible into one share of common stock. (4) Stock Purchase Plans and Common Stock Warrants: In November 1991, the Company reinstated its restricted stock purchase plan which had expired (the "Restricted Plan") under which 400,000 shares of Common Stock were reserved for issuance. 25,000 shares were issued during fiscal 1995. The Company has two employee incentive stock option plans, under which approximately 1,000,000 shares of Common Stock were authorized and available for issuance. Under the terms of the plans, options to purchase common stock of the Company may be granted at not less than 100% of the fair market value of the stock on the date of grant, or 110% of the fair market value if granted to persons owning more than 10% of the outstanding stock of the Company. Transactions for 1997, 1996 and 1995 are as follows:
Weighted Weighted Weighted Average Average Average 1997 Price 1996 Price 1995 Price -------- -------- -------- -------- -------- -------- Options outstanding July 1, 794,120 $0.79 238,000 $0.74 146,880 $1.33 Granted 63,500 1.23 626,000 0.83 127,120 0.51 Exercised (15,000) 0.83 (59,880) 1.02 - N/A Cancelled (20,000) 0.64 (10,000) 0.75 (36,000) 2.27 -------- -------- -------- -------- -------- -------- Options outstanding June 30, 822,620 $0.82 794,120 $0.79 238,000 $0.74 ======== ======== ======== ======== ======== ======== Options exercisable at June 30, 822,620 794,120 238,000 ======== ======== ======== Weighted average fair value of options granted during years ended June 30, $0.52 $0.35 $0.24 ======== ======== ========
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 1997, 1996, and 1995: dividend yield of 0%; expected volatility of 54%; expected life of four years and risk-free interest rate ranging from 5.86% to 7.35%. F-11 The Company accounts for these plans pursuant to Accounting Principles Board Opinion 25, "Accounting for Stock Issued to Employees," under which no compensation cost has been recognized. Had compensation cost for these plans been determined based on the fair value at the grant dates consistent with SFAS 123, "Accounting for Stock-Based Compensation", the Company's net income and earnings per share would have been reduced to the following pro forma amounts:
1997 1996 1995 ---------- ---------- ---------- Net Income As reported $1,548,597 $700,528 $923,999 Pro forma 1,515,477 483,642 893,160 Primary earning per share As reported .16 .08 .13 Pro forma .15 .05 .13 Fully diluted earnings per share As Reported .15 .08 .12 Pro Forma .15 .05 .11
As of June 30, 1997, there remained outstanding warrants to purchase 253,138 shares of common stock at prices ranging from $1.50 to $2.60 share. 5) Income Taxes: The income (loss) before provision for income taxes is comprised of the following:
1997 1996 1995 ---------- ---------- ---------- United States $1,832,429 $ 760,528 $948,999 Foreign (154,600) - - ---------- ---------- ---------- Total $1,677,829 $760,528 $948,999 ---------- ---------- ----------
The provision for income taxes is comprised of the following:
1997 1996 1995 ---------- ---------- ---------- Current: State $129,232 $60,000 $15,000 Foreign - - 10,000 ---------- ---------- ---------- $129,232 $60,000 $25,000 ========== ========== ==========
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:
1997 1996 1995 ---------- ---------- ---------- Tax Provision at Federal statutory rates $ 570,462 $ 258,580 $ 322,660 Increase (decrease) in tax provision resulting from: State income tax provision, net of 85,293 60,000 15,000 federal benefit Foreign loss not benefited 52,564 - - Amortization in excess of tax basis 103,467 69,548 123,819 Realization of deferred tax assets (699,672) (343,095) (437,897) Other 17,118 14,967 1,418 ---------- ---------- ---------- Provision for income taxes $ 129,232 $ 60,000 $ 25,000 ========== ========== ==========
F-12 The items which comprise the deferred tax balance are as follows:
1997 1996 ----------- ----------- Depreciation $ 26,507 $ 8,086 Accrued liabilities and reserves not currently deductible 428,477 617,828 Inventory 174,986 173,386 Net operating loss carryforwards 653,808 1,334,825 ----------- ----------- 1,283,778 2,134,125 Deferred tax asset valuation reserve (1,283,778) (2,134,125) ----------- ----------- Tax asset recognized on balance sheets $ - $ - =========== ===========
Net operating loss carryforwards will expire beginning in 2009. (6) Profit Sharing Plan: The Company maintains a 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 current 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. Profit sharing expense of $50,000, $40,000 and $50,000 was recorded for the years ended June 30, 1997, 1996 and 1995, respectively. (7) Commitments and Contingencies: The Company and its subsidiaries are defendants (together with other third parties) in a legal claim alleging that the Company violated bulksales laws upon the acquisition of Visiplex Instruments Ltd. ("Visiplex") in July 1995. The Company believes that this claim is without merit and intends to vigorously defend the litigation. While no monetary damages have been specified in the lawsuit, the Company believes that any potential loss resulting from this claim would not have any material effect on the company's financial position or results of operations. Furthermore, the Company has filed a cross claim against the former owners of Visiplex under an indemnification clause contained in the asset purchase agreement between the two parties. The Company has leases for office and manufacturing facilities for periods expiring through fiscal year 2001. Approximate minimum annual rental payments under these leases as of the fiscal year ended June 30 are as follows: 1998 $598,574 1999 598,574 2000 598,574 2001 299,287 Rent expense was approximately $719,000, $748,000 and $606,000 for the years ended June 30, 1997, 1996 and 1995, respectively. F-13 (8) Segment Information: The Company operates in one business segment which designs, develops, manufactures and markets medical, dental and graphic arts image systems and all related accessories. There were no sales to any one customer in excess of 10% of net sales in fiscal 1997, 1996, and 1995. Segment financial information:
1997 1996 1995 ----------- ----------- ----------- Sales United States $23,527,612 $26,368,729 $20,818,704 Europe 529,100 - - Domestic export sales 12,991,798 10,160,150 5,770,208 ----------- ----------- ----------- Total $37,048,510 $36,528,879 $26,588,912 =========== =========== =========== Net Income (loss) United States $ 1,702,497 $ 700,528 $ 923,999 Europe (153,900) - - ----------- ----------- ----------- Total $ 1,548,597 $ 700,528 $ 923,999 =========== =========== =========== Identifiable assets United States $19,630,528 $20,258,093 $11,789,582 Europe 885,500 - - ----------- ----------- ----------- Total $20,516,028 $20,258,093 $11,789,582 =========== =========== ===========
The net loss in Europe for the fiscal year ended June 30, 1997 was related to the acquisition of Regam Medical Systems International AB (See Note 9). (9) Acquisition of Regam Medical Systems International On April 17, 1997 the Company acquired all of the outstanding shares of Regam Medical Systems International AB ("Regam"), a Swedish manufacturer of electronic dental imaging equipment for $2.9 million in cash and notes payable. The notes payable, totaling $1.2 million, were issued to the former owner of Regam (See Note 2). The results of Regam's operations have been combined with those of the Company since the date of acquisition. The acquisition was accounted for using the purchase method of accounting. Accordingly, a portion of the purchase price was allocated to the net assets acquired based on their estimated fair values. The balance of the purchase price, $2.8 million, was recorded as the excess of cost over net assets acquired (goodwill) and is being amortized over fifteen years on a straight-line basis. The allocation of the purchase price will be finalized during fiscal 1998 upon completion of restructuring decisions and asset valuations. The following table reflects unaudited pro forma combined results of operations of the Company and Regam on the basis that the acquisition had taken place at the beginning of the latest fiscal year presented:
(Unaudited) (Unaudited) 1997 1996 ----------- ----------- Revenues $38,544,797 $38,006,591 Net income 770,183 191,668 Income per common share $.08 $.02 Shares used in computation 9,981,525 9,112,677
F-14 In management's opinion, the unaudited pro forma combined results of operations are not indicative of the actual results that would have occurred had the acquisition been consummated at the beginning of fiscal 1997 or 1996, or of future operations of the combined companies under the ownership and management of the Company. (10) Adoption of New Financial Standard In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 128, "Earnings Per Share" (SFAS 128). SFAS requires the replacement of primary and fully-diluted earnings per share with basic and diluted earnings per share, respectively. The statement also requires restatement of previously reported earnings per share information to ensure consistency with future reported amounts. The Company does not believe that the adoption of this standard will result in any significant differences from previously reported earnings per share. F-15 AFP IMAGING CORPORATION AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
Balance at Charged to Charged to Beginning Costs and Other Balance at End Description of Period Expenses Accounts(1) Deductions of Period - -------------------------------- ----------- ----------- ----------- ---------- -------------- June 30, 1997 - ------------- Allowance for doubtful accounts and sales returns $ 238,000 $ 93,463 $ 67,926 $ (121,463) $ 277,926 Accumulated depreciation 5,833,067 363,195 - (83,139) 6,113,123 Accumulated amortization 666,968 398,150 - (383,755) 681,363 Deferred tax asset valuation reserve 2,134,125 - (850,347) - 1,283,778 June 30, 1996 - ------------- Allowance for doubtful accounts and sales returns $ 179,998 $ 131,280 $ 88,728 $ (162,006) $ 238,000 Accumulated depreciation 5,450,566 382,501 - - 5,833,067 Accumulated amortization 1,272,973 586,938 - (1,192,943) 666,968 Deferred tax asset valuation reserve 1,974,402 - 159,723 - 2,134,125
(1) Represents amounts acquired from Visiplex Instruments Ltd. or Regam Medical Systems International AB, or corresponding increase (decrease) in the related deferred tax asset. F-16 Item 9. Disagreements on Accounting and Financial Disclosure During the three years ended June 30, 1997, there were no disagreements with the Company's independent accountants on any matters or accounting principles or practices or financial statement disclosure. Part III Items 10, 11, 12, and 13 are hereby incorporated by reference from the Company's Proxy Statement for the Annual Meeting of Shareholders, tentatively scheduled for December 18, 1997. Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K a) 1. The financial statements and schedules listed in the accompanying index to financial statements are filed as a part of this annual report. 2. See a)1. Above. 3. 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) -- Asset Purchase Agreement between Xenon Industries Inc., and Visiplex Instruments, Ltd., dated June 30, 1995. (6) (b) -- Stock Purchase Agreement between ACG Nystromgruppen AB and AFP Imaging Corporation, dated April 17, 1997. (12) (c) -- Promissory Note between ACG Nystromgruppen AB and AFP Imaging Corporation, dated April 17, 1997. (12) 3. (a) -- Certificate of Incorporation of Registrant as amended. (2) (b) -- Restated Certificate of Incorporation of Registrant. (4) (c) -- Certificate of Amendment to Certificate of Incorporation of Registrant. (8) (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. (10) (e) -- By-Laws of Registrant. (2) (f) -- Excerpt from minutes of Board of Directors meeting of August 12, 1982, amending the By-Laws of Registrant. (5) 4. (a) -- Specimen of Common Stock Certificates. (2) (b) -- Form of Common Stock Purchase Warrant. (2) (c) -- 1980 Restricted Stock Purchase Plan of the Registrant. (2) (d) -- Form of Restricted Stock Purchase Agreement. (2) (e) -- Profit Sharing Plan of the Registrant, as supplemented. (2) (f) -- Specimen of Preferred Stock, Series A. Certificate. (5) (g) -- Form of Preferred Stock and Debenture Purchase Agreement, dated as of August 12, 1982, between Registrant and each of the persons listed on the schedule of purchasers annexed thereto. (4) (h) -- Form of Registrant's 12% Convertible Subordinated Debenture due 1997. (4) (i) -- Restated Certificate of Incorporation. (4) (j) -- Registration Right Agreement, dated August 12, 1982 between Registrant and Pako Corporation. (4) (k) -- Warrant Certificate, dated August 12, 1982, issued to Frederick R. Adler. (4) (l) -- Warrant Certificate, dated October 22, 1982 issued to 61 Broadway Associates Partnership. (1) (m) -- Registrant's 1992 Stock Option Plan. (9) (n) -- Subscription Agreement, dated October 11, 1995 of New Ballantrae Partners, L.P. (10) (o) -- Registration Rights Agreement, dated as of October 12, 1995 by and between AFP Imaging Corporation and New Ballantrae Partners, L.P. (10) (p) -- Shareholders Agreement, dated as of October 12, 1995 by and among New Ballantrae Partners, L.P., Donald Rabinovitch and David Vozick. (10) (q) -- Registrant's 1995 Stock Option Plan. (11) 10.(a) -- Health and Medical Reimbursement Plan. (2) (b) -- Lease Agreement dated September 1, 1985, for premises at 250 Clearbrook Road, Elmsford, NY. (7) (c) -- Letter Amendment dated May 1992, to Registrant's 12% Convertible Subordinated Debenture due 1997. (9) (d) -- Greyhound Financial Capital Corporation Loan and Security Agreement (8) (e) -- Finova Capital Corporation (formerly Greyhound Financial Capital Corporation) Amendment No. 3 to Loan and Security Agreement and Replacement Secured Promissory Note. 11. -- Statement re computation per share earnings. (3) 21. -- Subsidiaries of the Registrant. 27. -- Financial Data Schedule b) Reports on Form 8-K: A current Report on Form 8K/A was filed on June 30, 1997, to present the Financial Statements of Regam Medical Systems International AB for the year ended August 31, 1996, and the required pro-forma financial information (1) Incorporated by reference from the Exhibits filed with Registrant's Report on Form 10-K, dated June 30, 1984, filed with the Securities and Exchange Commission. (2) Incorporated by reference from the exhibits filed with Registration Statement #2-G8980 of the Company, as amended, on file with the Securities and Exchange Commission. (3) See Note 1 to "Notes to Financial Statements". (4) Incorporated by reference from the Exhibits filed with Registrant's Report on Form 8-K, dated August 12, 1982. (5) 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. (6) Incorporated by reference from the Exhibits filed with Registrant's Report on Form 8-K, dated July 31, 1995. (7) Incorporated by reference from the Exhibits filed with Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1986. (8) Incorporated by reference from the Exhibits filed with Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1994. (9) Incorporated by reference from the Exhibits filed with Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1993. (10) Incorporated by reference from the Exhibits filed with Registrant's current report on Form 8-K, dated October 12, 1995. (11) Incorporated by reference from the Exhibits filed with Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1996. (12) Incorporated by reference from the Exhibits filed with the Registrant's Report on form 8-K, dated May 1, 1997. 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. By: /s/ Donald Rabinovitch ------------------------------ Donald Rabinovitch, President Date: September 24, 1997 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 ------------------------------ Donald Rabinovitch, President & Director (Principal Executive Officer) Date: September 24, 1997 By: /s/ David Vozick ------------------------------ David Vozick, Chairman of the Board Secretary and Treasurer (Principal Financial and Accounting Officer) Date: September 24, 1997 By: /s/ Robert Rosen ------------------------------ Robert Rosen, Director Date: September 24, 1997 By: /s/ Robert Blatt ------------------------------ Robert Blatt, Director Date: September 24, 1997 By: /s/ Frank O'Bryan ------------------------------ Frank O'Bryan, Director Date: September 24, 1997 EX-10.(E) 2 THIRD AMENDMENT TO LOAN AND SECURITY AGREEMENT DATED AS OF JULY 14, 1997 THIRD AMENDMENT TO LOAN AND SECURITY AGREEMENT This Third Amendment to Loan and Security Agreement (this "Amendment"), dated as of July 14, 1997, is entered into by and among AFP IMAGING CORPORATION, a New York corporation, successor by merger to AFP Technologies Corporation, formerly known as Kenro Corporation, a New Jersey corporation ("AFP"), LOGETRONICS CORPORATION, a New York corporation ("LogE"), VISIPLEX INSTRUMENTS CORPORATION, a New York corporation formerly known as Xenon Industries, Inc. ("Visiplex") and REGAM MEDICAL SYSTEMS INTERNATIONAL AB, a Swedish corporation ("Regam") (AFP, LogE, Visiplex and Regam are hereinafter jointly and severally, referred to as "Borrower"), and FINOVA CAPITAL CORPORATION, a Delaware corporation ("Lender") formerly known as Greyhound Financial Corporation, successor-by-merger to Greyhound Financial Capital Corporation, an Oregon corporation ("Original Lender"). W I T N E S S E T H: WHEREAS, Borrower, AFP Technologies Corporation, formerly known as Kenro Corporation, a New Jersey corporation and Original Lender are parties to that certain Loan and Security Agreement dated as of November 22, 1993, as the same was amended by (i) that certain First Amendment to Loan and Security Agreement dated as of December 7, 1993 and (ii) that certain Second Amendment to Loan and Security Agreement dated as of July 14, 1995 (as so amended, the "Loan Agreement") setting forth the terms and conditions under which Original Lender would make loans and other advances to Borrower; and WHEREAS, effective as of December 31, 1994, Original Lender was merged with and into Lender (then known as Greyhound Financial Corporation), with Lender being the surviving corporation of such merger, and Lender succeeded to all the rights and obligations of Original Lender under the Loan Agreement and the Loan Documents; and WHEREAS, effective on April 17, 1997 AFP acquired all of the issued and outstanding stock of Regam; and WHEREAS, Borrower has requested that Lender make certain amendments to the Loan Agreement, which Lender is willing to do but only upon the terms and subject to the conditions herein set forth; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Definitions. Unless otherwise defined in this Amendment, all capitalized terms used herein shall have the same meaning as set forth in the Loan Agreement. 2. Amendments. The Loan Agreement is hereby amended as follows: (a) Paragraph 1(A) is hereby amended by adding or substituting, as the case may be, the following definitions: "this Agreement' shall mean this Loan and Security Agreement dated as of November 22, 1993, as amended by the First Amendment, the Second Amendment and the Third Amendment, and as the same may hereafter be amended, restated, renewed, extended or modified from time to time." "'Borrower' means, individually and collectively, jointly and severally, each of AFP, LogE, Visiplex and Regam." "'Collateral' shall have the meaning given to it in Section 3 of the Third Amendment." "'Eligible Backed Foreign Receivable' shall mean an otherwise Eligible Receivable of an account debtor not located in the United States, where such Receivable is fully supported by a letter of credit or other form of guaranty or security, in each case in form and substance satisfactory to Lender." "'Eligible Named Foreign Receivable' shall mean an otherwise Eligible Receivable of any of Siemens AG, Phillips Medical Systems, GE Belgium or AGFA Gaevert." "'Eligible Foreign Receivable' shall mean an Eligible Receivable of an account debtor not located in the United States, but excluding (A) Eligible Backed Foreign Receivables and (B) Eligible Named Foreign Receivables." "'Loan Documents' means, collectively, this Agreement, the Intellectual Property Security Agreement, the Subordination Agreement, the Environmental Certificate, the Assignment of Contract, Term Note C, any other note or notes executed by Borrower and payable to Lender, and any other agreements entered into in connection with this Agreement, together with all alterations, amendments, changes, extensions, modifications, refinancings, refundings, renewals, -2- replacements, restatements, or supplements, of or to any of the foregoing." "'Regam' means Regam Medical Systems International AB, a Swedish corporation." "'Subordinating Creditor' means ACG Nystromgruppen AB, a Swedish corporation." "'Subsidiary' means any of LogE, Visiplex or Regam." "'Term Note C' shall mean that certain promissory note of Borrower, payable to Lender's order, dated as of the Third Amendment Effective Date, in the original principal amount of $1,450,000, and attached as Exhibit A to the Third Amendment, as the same may hereafter be amended, restated, renewed, extended or modified, or any new note issued in substitution therefor, from time to time." "'Third Amendment' shall mean that certain Third Amendment to Loan and Security Agreement dated as of July 14, 1997, between Lender and Borrower." "'Third Amendment Effective Date' shall mean July 14, 1997, the date upon which the Third Amendment became effective." (b) Clause (v) of the definition of "Eligible Receivables" is hereby amended in its entirety to read as follows: "(v) [Reserved];" (c) Paragraph 2(B)(i)(b) is hereby amended in its entirety to read as follows: "(b) an amount equal to (1) eighty percent (80%) of the net amount of Eligible Receivables other than Eligible Named Foreign Receivables or Eligible Foreign Receivables, plus (2) the lesser of (A) eighty percent (80%) of the net amount of Eligible Named Foreign Receivables or (B) $500,000, plus (3) the lesser of (A) fifty percent (50%) of the net amount of Eligible Foreign Receivables or (B) $500,000;" -3- (d) Paragraph 2(B)(iii) is hereby amended in its entirety to read as follows: "(iii) Fixed Asset Loan: a term loan in the outstanding principal amount of One Million Four Hundred and Fifty Thousand Dollars and No/100 ($1,450,000.00) (the "Fixed Asset Loan"); provided, that the Fixed Asset Loan shall be subject to such terms and conditions as are set forth on Term Note C. Lender shall disburse the Fixed Asset Loan in a single advance in accordance with the terms and subject to the conditions set forth in the Loan Agreement." (e) The first sentence of Paragraph 3(A) is hereby amended in its entirety to read as follows: "Borrower shall pay Lender interest on the daily outstanding balance of Borrower's loan account at a per annum rate of three-quarters of one percent (0.750%) in excess of the rate of interest announced publicly by Citibank, N.A., from time to time as its 'base rate' (or any successor thereto), which may not be such institution's lowest rate (the 'Base Rate')." (f) The final sentence of Paragraph 3(A) is hereby amended in its entirety to read as follows: "The foregoing notwithstanding, the principal balance of the Fixed Asset Loan shall bear interest at a per annum rate as set forth in Term Note C." (g) Paragraph 3(B), providing for a Minimum Interest Charge, is hereby deleted in its entirety. (h) Paragraph 3(G) is hereby amended in its entirety to read as follows: "(G) Examination Fees. Borrower agrees to pay to Lender an examination fee in the amount of Five Hundred and No/100 Dollars ($500.00) per day per auditor in connection with each audit or examination of Borrower performed by Lender prior to or after the date hereof, plus all costs and expenses incurred in connection therewith (the "Examination Fee"). Notwithstanding the foregoing, so long as there exists no Event of Default or any act or event which with notice, passage of time, or both would constitute an Event of Default, Borrower shall pay only Lender's actual fees and expenses incurred during Lender's field examinations and audits, based upon a cycle of -4- one hundred and eighty (180) days between such field examinations/audits and a limit of five (5) business days per such field examination/audit; provided, however, that nothing herein shall be deemed to limit the frequency or the duration of Lender's field examinations/audits." (i) Paragraph 17(A) is hereby amended and restated in its entirety to read as follows: "Term. The initial term of this Agreement shall be for three (3) years from the Third Amendment Effective Date (the 'Initial Term') and shall be automatically renewed for successive periods of one (1) year (each, a 'Renewal Term'), at the discretion of Lender, unless earlier terminated as provided herein. All loans and all credit facilities shall be coterminous." (j) Paragraph 17(D) is hereby amended in its entirety to read as follows: "(D) Early Termination; Termination Fee. In addition to the procedure set forth in Paragraph 17(B), Borrower may terminate this Agreement at any time upon sixty (60) days' prior written notice and prepay the Obligations. Upon any such early termination by Borrower or any termination of this Agreement by Lender upon the occurrence of an Event of Default under Paragraph 18(A) hereof, then, and in any such event, Borrower shall pay to Lender upon the effective date of such termination a fee (the 'Termination Fee') in an amount equal to: (i) three percent (3%) of the average daily outstanding balance of the Obligations for the 180 day period (or lesser period if applicable) preceding the date of termination, if such early termination occurs on or prior to the first anniversary of the Third Amendment Effective Date; (i) two percent (2%) of the average daily outstanding balance of the Obligations for the 180 day period (or lesser period if applicable) preceding the date of termination, if such early termination occurs after the first anniversary of the Third Amendment Effective Date but on or prior to the second anniversary of the Third Amendment Effective Date; or (ii) one percent (1%) of the average daily outstanding balance of the Obligations for the 180-day period preceding the date of termination, if such early termination occurs after the second anniversary of the Third Amendment Effective Date. The Termination Fee shall be presumed to be the amount of damages sustained by Lender as a result of the early termination, and Borrower agrees that because it is difficult to calculate such damages, the Termination Fee provided for herein is reasonable under the circumstances." -5- (k) Notwithstanding anything to the contrary contained in the Loan Agreement, as long as (i) Borrower shall maintain excess borrowing availability of at least Five Hundred Thousand Dollars ($500,000), after giving effect to any requested but unfunded advance and payment in full of Borrower's suppliers to within sixty (60) days of such suppliers' respective written or agreed-upon terms, and (ii) there shall not then exist an Event of Default or any act or event which with notice, passage of time, or both would constitute an Event of Default, (1) Borrower shall report to Lender Collateral information on a monthly basis (in the form of a Borrowing Base Certificate to be prescribed by Lender), and (2) Borrower shall maintain dominion over its cash. (l) Lender's address for notice purposes in Exhibit B to the Loan Agreement is hereby amended in its entirety to read as follows: Lender's address for notices: FINOVA Capital Corporation 311 South Wacker Drive Suite 4400 Chicago, Illinois 60606 Att'n: Brian G. Rujawitz Fax: (312) 322-7250 with a copy to: FINOVA Capital Corporation 1850 North Central Avenue Phoenix, Arizona 85002 Attention: Joseph R. D'Amore, Esq. Fax: (602) 207-5036 with a copy to: Gammage & Burnham Two North Central Avenue Eighteenth Floor Phoenix, Arizona 85004 Att'n: Randall S. Dalton, Esq. Fax: (602) 256-4475 (m) The Validity and Support Agreement is hereby terminated and deemed to be of no further force or effect. (n) Within sixty (60) days after the Third Amendment Effective Date, Borrower shall cause to be delivered to Lender a Subordination Agreement from ACG Nystromgruppen AB (the Subordinating Creditor) with respect to that certain US$1,000,000 promissory note of AFP dated April 17, 1997. (o) Notwithstanding anything to the contrary contained in the Loan Agreement, "Eligible Receivables" shall exclude Receivables of Regam unless and -6- until Lender shall have satisfied itself in its sole determination that Lender has a first priority perfected security interest in such Receivables of Regam. (p) Notwithstanding anything to the contrary contained in the Loan Agreement, "Eligible Inventory" shall exclude Inventory of Regam unless and until Lender shall have satisfied itself in its sole determination that Lender has a first priority perfected security interest in such Inventory. (q) The following new Section 13(A)(v) is hereby added to read as follows: "(v) Regam is a corporation duly organized, validly existing and in good standing under the laws of the Country of Sweden, is qualified and authorized to do business and is in good standing in all jurisdictions in which such qualification and good standing are necessary in order for it to conduct its business and own its property (other than to the extent that such failure to qualify would not have a material adverse effect on the business or financial condition of Regam), and has all requisite power and authority to conduct its business as presently conducted, to own its property and to execute and deliver each of the Loan Documents to which it is a party and perform all of its Obligations thereunder;" (r) Section 15(L), which presently reads as follows: "(L) Affiliate Transactions. Except as set forth below, sell, transfer, distribute or pay any money or property to any Affiliate, or invest in (by capital contribution or otherwise) or purchase or repurchase any stock or Indebtedness, or any property, of any Affiliate, or become liable on any guaranty of the indebtedness, dividends or other obligations of any Affiliate. Notwithstanding the foregoing, Borrower may pay compensation permitted by Paragraph 15(J) to employees who are Affiliates, make loans or other advances permitted by Paragraph 15(B) to executives who are Affiliates and make payments to E-Ticket to the extent permitted under the Subordination Agreement between Lender and E-Ticket and, if no Event of Default has occurred, Borrower may engage in transactions with Affiliates in the normal course of business, in amounts and upon terms which are fully disclosed to Lender and which are no less favorable to Borrower than would be obtainable in a comparable arm's length transaction with a Person who is not an Affiliate;" is hereby amended in its entirety to read as follows: -7- "(L) Affiliate Transactions. (i) sell, transfer, distribute or pay any money or property to any Affiliate other than Regam, or invest in (by capital contribution or otherwise) or purchase or repurchase any stock or Indebtedness, or any property, of any Affiliate other than Regam, or become liable on any guaranty of the indebtedness, dividends or other obligations of any Affiliate other than Regam; provided, however, that if (A) no Event of Default exists and (B) no act or event has occurred which, with the passing of time or the giving of notice, or both, would constitute an Event of Default, then Borrower may engage in transactions with any Affiliate other than Regam in the normal course of business, in amounts and upon terms which are fully disclosed to Lender and which are no less favorable to Borrower than would be obtainable in a comparable arm's length transaction with a Person who is not an Affiliate; (ii) sell, transfer, distribute or pay any money or property to Regam, except on the following terms and subject to the following conditions: (A) both before and after having given effect to such sale, transfer, distribution or payment , no Event of Default exists and no act or event has occurred which, with the passing of time or the giving of notice, or both, would constitute an Event of Default and (B) either (1) Lender shall continue to have a first priority perfected security interest in such money or property, or (2) both before and after having given effect to such sale, transfer, distribution or payment, Borrower shall have excess borrowing availability of at least One Million Five Hundred Thousand Dollars ($1,500,000) after giving effect to any requested but unfunded advance and payment in full of Borrower's suppliers to within sixty (60) days of such suppliers' respective written or agreed-upon terms, or (3) FINOVA shall have given its prior written approval for such sale, transfer, distribution or payment; (iii) notwithstanding the provisions of Section 15(L)(i) or Section 15(L)(ii), Borrower may pay compensation permitted by Paragraph 15(J) to employees who are Affiliates, make loans or other advances permitted by Paragraph 15(B) to executives who are Affiliates and make payments to Subordinated Creditor to the extent permitted under the Subordination Agreement between Lender and Subordinated Creditor;". -8- 3. Reaffirmation and Grant of Security Interest. Without in any way limiting the provisions of Section 4(A) of the Loan Agreement, and to secure the prompt payment and performance of the Obligations (other than those Obligations arising out of the Environmental Certificate), and notwithstanding which entity constituting Borrower receives a particular advance of the Total Facility, each entity constituting Borrower hereby reaffirms the grant to Lender of or grants to Lender, as the case may be, a security interest in all of such Borrower's now owned or hereafter acquired or arising Inventory, Equipment, Receivables, the Life Insurance Policies and the proceeds thereof, Trademarks, Licenses and Patents, and General Intangibles, including, without limitation, all of such Borrower's Deposit Accounts, money, any and all property now or at any time hereafter in Lender's possession (including claims and credit balances), and all proceeds (including proceeds of any insurance policies, proceeds of proceeds and claims against third parties), all products and all books and records related to any of the foregoing (all of the foregoing, together with all other property in which Lender may be granted a lien or security interest, is referred to herein, collectively, as the "Collateral"; provided, however, that, with respect solely to Collateral of Regam, such Collateral of Regam shall in all events include only property of Regam located in the United States of America as of the Third Amendment Effective Date together with such Collateral of Regam as thereafter may be located therein from time to time. 4. Conditions Precedent. The amendments described in this Amendment and the obligations of Lender set forth in this Amendment will not be effective unless and until each of the following conditions precedent have been satisfied, in form, manner and substance satisfactory to Lender: (a) Borrower shall have delivered or caused to be delivered to Lender the following documents, all of which shall be properly completed, executed and otherwise satisfactory to Lender: (i) this Third Amendment; (ii) Term Note C (as described in Section 2(a) hereof), in form and substance set forth in Exhibit A attached hereto and incorporated herein by this reference, which Term Note C shall be issued in substitution for, but not in payment of or satisfaction of, (A) that certain First Amended Secured Promissory Note (Term Note A) in the original principal amount of $550,000 and (B) that certain Secured Promissory Note (Term Note B); (iii) Any other consents deemed necessary by Lender; (iv) A corporate resolution from the Board of Directors of each entity constituting Borrower (and from the Shareholders, if -9- necessary) approving the transactions contemplated hereby and the execution and delivery of this Amendment and Term Note C; (v) A certificate of Borrower's president and corporate assistant secretary attesting to the facts that (A) the corporate resolutions set forth in Section 3(a)(vi) above have not been modified or revoked and remain in full force and effect; and (B) the by-laws of such Borrower have not changed from the date of the last such certification, or attaching any amendments thereto. (vi) Such amendments to Lender's existing financing statements and such new financing statements in Lender's favor as Lender deems necessary; and (vii) Such other items as Lender may require; (b) Lender shall have received a certificate of corporate status with respect to each Borrower, dated within ten (10) days of the date hereof, from the Secretary of State or other appropriate governmental authority of the state or country of incorporation of each Borrower, which certificate shall indicate that each Borrower is in good standing in such jurisdiction, together in each case with a certified copy of the articles of incorporation of each Borrower from such governmental authority; (c) There shall not then exist an Event of Default or any act or event which with notice, passage of time, or both would constitute an Event of Default; (d) All the representations and warranties of the Loan Parties in the Loan Documents (as defined in Section 2(a) hereof) as amended hereby shall be true and correct, in all material respects, before and after giving effect to the making of this Amendment; (e) Lender shall have reviewed and approved a current UCC search on Borrower; and (f) Borrower shall have paid all closing costs, recording fees and taxes, appraisal fees and expenses, travel expenses, fees and expenses of Lender's counsel, and all other costs and expenses incurred by Lender in connection with the preparation of, closing of and disbursement of the advances pursuant to this Amendment, which costs, fees and expenses may be payable from the first advance made pursuant to this Amendment. 5. Indebtedness Acknowledged. Borrower acknowledges that the indebtedness evidenced by the Loan Documents is just and owing and agrees to pay the indebtedness in accordance with the terms of the Loan Documents. Borrower -10- further acknowledges and represents that no event has occurred and no condition presently exists that would constitute a default or event of default by Lender under the Loan Agreement as amended hereby or any of the other Loan Documents, with or without notice or lapse of time. 6. Validity of Documents. Borrower hereby ratifies, reaffirms, acknowledges and agrees that the Loan Agreement as amended hereby and the other Loan Documents represent valid, enforceable and collectable obligations of Borrower, and that Borrower presently has no existing claims, defenses (personal or otherwise) or rights of setoff whatsoever with respect to the Obligations of Borrower under the Loan Agreement as amended hereby or any of the other Loan Documents. Borrower furthermore agrees that it has no defense, counterclaim, offset, cross-complaint, claim or demand of any nature whatsoever which can be asserted as a basis to seek affirmative relief or damages from Lender. 7. Reaffirmation of Warranties. Borrower hereby reaffirms to Lender each of the representations, warranties, covenants and agreements of Borrower as set forth in each of the Loan Documents as amended hereby with the same force and effect as if each were separately stated herein and made as of the date hereof. Borrower represents and warrants to Lender that with respect to the financing transaction herein contemplated, no Person is entitled to any brokerage fee or other commission and Borrower agrees to indemnify and hold Lender harmless against any and all such claims. 8. Ratification of Terms and Conditions. All terms, conditions and provisions of the Loan Agreement as amended hereby, and of each of the other Loan Documents shall continue in full force and effect and shall remain unaffected and unchanged except as specifically amended hereby. In the event of any conflict between the terms and conditions of this Amendment and any of the other Loan Documents, the provisions of this Amendment shall control. 9. Other Writings. Lender and Borrower will execute such other writings as may be necessary to confirm or carry out the intentions of Lender and Borrower evidenced by this Amendment. 10. Benefit of this Amendment. The terms and provisions of this Amendment and the other Loan Documents shall be binding upon and inure to the benefit of Lender and Borrower and their respective successors and assigns, except that Borrower shall not have any right to assign its rights under this Amendment or any of the Loan Documents or any interest therein without the prior written consent of Lender. 11. Choice of Law. The Loan Documents and this Amendment shall be performed and construed in accordance with the laws of the State of Arizona. -11- 12. Entire Agreement. Except as modified by this Amendment, the Loan Documents remain in full force and effect. The Loan Documents as modified by this Amendment embody the entire agreement and understanding between Borrower and Lender, and supersede all prior agreements and understandings between said parties relating to the subject matter thereof. 13. Counterparts; Telecopy Execution. This Amendment may be executed in any number of separate counterparts, all of which when taken together shall constitute one and the same instrument, admissible into evidence, notwithstanding the fact that all parties have not signed the same counterpart. Delivery of an executed counterpart of this Amendment by telefacsimile shall be equally as effective as delivery of a manually executed counterpart of this Amendment. Any party delivering an executed counterpart of this Amendment by telefacsimile shall also deliver a manually executed counterpart of this Amendment, but the failure to deliver a manually executed counterpart shall not affect the validity, enforceability, and binding affect of this Amendment. 14. Effectiveness of Amendment. This Amendment shall not be effective until the same is executed and delivered by the parties hereto and all conditions set forth in Section 4 hereof have been satisfied. 15. Reaffirmation. All of the terms and provisions of the Loan Agreement are hereby confirmed and ratified. However, in the event of a conflict between the Loan Agreement and this Amendment, the provisions of this Amendment shall prevail. [SIGNATURE PAGE FOLLOWS] -12- IN WITNESS WHEREOF, the parties have executed this Amendment on the date and year first written above. AFP IMAGING CORPORATION, a New York LOGETRONICS CORPORATION, a New corporation, successor by merger to York corporation AFP Technologies Corporation, formerly known as Kenro Corporation, a New Jersey corporation By: _______________________________ By: _______________________________ Name: Name: Title: Title: VISIPLEX INSTRUMENTS CORPORATION, a REGAM MEDICAL SYSTEMS INTERNATIONAL New York Corporation formerly known AB, a Swedish corporation as Xenon Industries, Inc. By: _______________________________ By: _______________________________ Name: Name: Title: Title: FINOVA CAPITAL CORPORATION, a Delaware corporation formerly known as Greyhound Financial Corporation, successor-by-merger to Greyhound Financial Capital Corporation, an Oregon corporation By: __________________________________ Name: Title: -13- EXHIBIT A TO FIRST AMENDMENT Form of Term Note C (to be attached) REPLACEMENT SECURED PROMISSORY NOTE (TERM NOTE C) $1,450,000 Phoenix, Arizona July 14, 1997 FOR VALUE RECEIVED, AFP IMAGING CORPORATION, a New York corporation, successor by merger to AFP Technologies Corporation, formerly known as Kenro Corporation, a New Jersey corporation, LOGETRONICS CORPORATION, a New York corporation, VISIPLEX INSTRUMENTS CORPORATION, a New York corporation formerly known as Xenon Industries, Inc. and REGAM MEDICAL SYSTEMS INTERNATIONAL AB, a Swedish corporation ("Regam") (all of the foregoing, individually and collectively "Debtor"), jointly and severally promise to pay to the order of FINOVA CAPITAL CORPORATION ("Secured Party"), formerly known as Greyhound Financial Corporation and successor-by-merger to Greyhound Financial Capital Corporation, an Oregon corporation, at its offices at 355 South Grand Avenue, Suite 2400, Los Angeles, California 90071, or at such other place or places as Secured Party may from time to time designate in writing, the principal sum of One Million Four Hundred Fifty Thousand Dollars ($1,450,000), payable as follows: a. Thirty-Six (36) equal successive monthly installments of principal of Twelve Thousand Eighty-Three and 33/100 Dollars ($12,083.33) each on the first day of each month, beginning August 1, 1997, and continuing through and including July 1, 2000; and b. A final installment of One Million Fifteen Thousand and 12/100 Dollars ($1,015,000.12) on the 14th day of July, 2000, together with accrued interest on the principal balance from time to time remaining unpaid, payable monthly on the first day of each and every month, beginning August 1, 1997. Notwithstanding anything herein to the contrary, in the event that certain Loan and Security Agreement, dated as of November 22, 1993 by and among Debtor (other than Regam), AFP Technologies Corporation, formerly known as Kenro Corporation, a New Jersey corporation and Secured Party (the "Original Agreement"), as amended by that certain First Amendment to Loan and Security Agreement dated as of December 7, 1993 (the "First Amendment") that certain Second Amendment to Loan and Security Agreement dated as of July 14, 1995 (the "Second Amendment") and that certain Third Amendment to Loan and Security Agreement of even date herewith (the "Third Amendment"; and collectively with the Second Amendment, the First Amendment and the Original Agreement, and as the same may hereafter be amended, restated, renewed, extended or modified from time to time, the "Loan Agreement") is terminated by Debtor, by Secured Party or by any other person at any time, then the entire unpaid principal balance of this Note, together with all accrued and unpaid interest hereon, shall become immediately due and payable in full on the effective date of such termination, without presentment, notice or demand of any kind. Interest shall be computed on the basis of a 360-day year for the actual number of days elapsed, and shall be at the rate of three-quarters of one percent (0.750%) in excess of the Base Rate (as hereinafter defined), computed on the basis of a 360-day year; provided, however, upon the occurrence and during the continuance of an event of default (as hereinafter defined), interest shall accrue on the outstanding principal balance of this Note at a default rate (the "Default Rate") of two and three-quarters percent (2.750%) in excess of the Base Rate, and shall be payable on demand. "Base Rate" means, for any day, the rate of interest per annum (over a year of 360 days) announced by Citibank, N.A. (the "Bank"), from time to time, as its "base rate" (or any successor thereto) in effect on such day. The Base Rate is not necessarily the lowest rate charged by the Bank. The applicable rate of interest assessed hereunder will be increased or decreased from time to time hereafter in an amount equal to any increase or decrease hereafter made by the Bank in the Base Rate. A change in the Base Rate shall be effective on the first day following such change, provided that a cumulative change of less than one fourth of one percent (0.25%) shall not be considered. Debtor warrants and represents to Secured Party that Debtor has used and will continue to use the loans and advances represented by this Note solely for proper business purposes, and consistent with all applicable laws and statutes. Debtor further warrants and represents to Secured Party and covenants with Secured Party that Debtor is not in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation G issued by the Board of Governors of the Federal Reserve System), and no part of the loan represented by this Note has been or will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock. This Note is secured by the Collateral described in the Loan Agreement. The occurrence of any one of the following events shall constitute a default by Debtor under this Note (hereinafter an "Event of Default"): (a) if Debtor fails to pay to Secured Party an installment of principal or interest hereunder when due; (b) if Debtor fails to pay any of its Obligations (as defined in the Loan Agreement) to Secured Party when due and payable or declared due and payable; (c) if Debtor fails or neglects to perform, keep or observe any term, provision, covenant, warranty or representation contained in this Note or the Loan Agreement (other than as referred to in (a) or (b) of this paragraph), which is required to be performed, kept or observed by Debtor or if a default occurs under the Loan Agreement; (d) an Event of Default under and as defined in the Loan Agreement shall exist; or (e) the -2- occurrence of a default or an event of default under any agreement, instrument or document heretofore, now or at any time or times hereafter delivered to Secured Party by Debtor or by any guarantor of part or all of Debtor's obligations to Secured Party. Upon the occurrence of any Event of Default hereunder, in addition to Secured Party's right to charge interest on the Obligations at the Default Rate: (a) at the option of Secured Party, the entire unpaid amount of all of the Obligations shall become immediately due and payable without demand, notice or legal process of any kind; (b) Secured Party may, at its option, without demand, notice or legal process of any kind, exercise any and all rights and remedies granted to it by the Loan Agreement or by any other agreement now or hereafter existing between Secured Party and Debtor or between Secured Party and any guarantor of part or all of Debtor's liabilities to Secured Party; and (c) Secured Party may at its option exercise from time to time any other rights and remedies available to it under the Uniform Commercial Code or other law of the State of Arizona. The remedies of Secured Party as provided herein and in the Loan Agreement shall be cumulative and concurrent, and may be pursued singularly, successively, or together, at the sole discretion of Secured Party. No act of omission or commission of Secured Party, including specifically any failure to exercise any right, remedy or recourse, shall be deemed to be a waiver or release of the same, such waiver or release to be effected only through a written document executed by Secured Party and then only to the extent specifically recited therein. A waiver or release with reference to any one event shall not be construed as continuing, as a bar to, or as a waiver or release of, any subsequent right, remedy or recourse as to a subsequent event. Debtor waives presentment, demand and protest, notice of protest, notice of presentment and all other notices and demands in connection with the enforcement of Secured Party's rights hereunder, except as specifically provided and called for by this Note, and hereby consents to, and waives notice of, the release, addition, or substitution, with or without consideration, of any collateral or of any person liable for payment of this Note. Any failure of Secured Party to exercise any right available hereunder or otherwise shall not be construed as a waiver of the right to exercise the same or as a waiver of any other right at any other time. If legal action is necessary to enforce any provision of this Note, the prevailing party to such action shall be entitled to recover payment of its costs and attorneys' fees, paralegals' fees and expert witnesses' fees from the losing party. Secured Party may at any time transfer this Note and Secured Party's rights in any or all collateral securing this Note, and Secured Party thereafter shall be relieved from all liability with respect to such collateral arising after the date of such transfer. -3- This Note shall be binding upon Debtor and its legal representatives, successors and assigns. Wherever possible, each provision of this Note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of the Note shall be prohibited by or invalid under such law, such provision shall be severable, and be ineffective to the extent of such prohibition or invalidity, without invalidating the remaining provision of this Note. The representations, warranties, covenants, liabilities and obligations of Debtor contained herein constitute the joint and several representations, warranties, covenants, liabilities and obligations of each of the parties constituting Debtor. This Note is issued in substitution for, but not in payment for or satisfaction of (i) that certain First Amended Secured Promissory Note (Term Loan A) dated July 14, 1995 in the original principal amount of $550,000, which itself was issued in amendment and restatement of, but not in payment for or satisfaction of, that certain Secured Promissory Note dated as of November 22, 1993 in the original principal amount of $250,000.00 and (ii) that certain Secured Promissory Note (Term Loan B) dated as of July 14, 1995 in the original principal amount of $900,000.00 (collectively, the "Original Note"). Upon execution and delivery hereof and satisfaction of the conditions precedent set forth in the Third Amendment, the terms and provisions of this Note shall govern and control all matters formerly governed by the Original Note. This Note is Term Note C as defined in the Loan Agreement. THIS NOTE HAS BEEN DELIVERED FOR ACCEPTANCE BY SECURED PARTY IN PHOENIX, ARIZONA AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AS OPPOSED TO THE CONFLICTS OF LAW PROVISIONS) OF THE STATE OF ARIZONA, AS THE SAME MAY FROM TIME TO TIME BE IN EFFECT, INCLUDING, WITHOUT LIMITATION, THE UNIFORM COMMERCIAL CODE AS ADOPTED IN ARIZONA. DEBTOR HEREBY (i) IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED IN MARICOPA COUNTY, ARIZONA OVER ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY MATTER ARISING FROM OR RELATED TO THIS NOTE; (ii) WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS UPON DEBTOR, AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS BE MADE BY MESSENGER, CERTIFIED MAIL OR REGISTERED MAIL DIRECTED TO DEBTOR AT THE ADDRESS SET FORTH BELOW AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED UPON THE EARLIER OF ACTUAL RECEIPT OR THREE (3) DAYS AFTER THE SAME SHALL HAVE BEEN POSTED TO DEBTOR'S ADDRESS; (iii) IRREVOCABLY WAIVES, TO THE FULLEST EXTENT DEBTOR MAY EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF ANY SUCH ACTION OR PROCEEDING; (iv) AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE -4- CONCLUSIVE AND MAY BE ENFORCED IN ANY OTHER JURISDICTION BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW; (v) AGREES NOT TO INSTITUTE ANY LEGAL ACTION OR PROCEEDING AGAINST SECURED PARTY OR ANY OF SECURED PARTY'S DIRECTORS, OFFICERS, EMPLOYEES, AGENTS OR PROPERTY, CONCERNING ANY MATTER ARISING OUT OF OR RELATING TO THIS NOTE IN ANY COURT OTHER THAN ONE LOCATED IN MARICOPA COUNTY, ARIZONA; AND (vi) IRREVOCABLY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION ARISING UNDER OR IN CONNECTION WITH THIS NOTE. NOTHING IN THIS PARAGRAPH SHALL AFFECT OR IMPAIR SECURED PARTY'S RIGHT TO SERVE LEGAL PROCESS IN ANY MANNER PERMITTED BY LAW OR SECURED PARTY'S RIGHT TO BRING ANY ACTION OR PROCEEDING AGAINST DEBTOR OR DEBTOR'S PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION. AFP IMAGING CORPORATION, a New York LOGETRONICS CORPORATION, a New corporation, successor by merger to York corporation AFP Technologies Corporation, formerly known as Kenro Corporation, a New Jersey corporation By: _______________________________ By: _______________________________ Name: Name: Title: Title: Employer ID No.: 13-2956272 Employer ID No.: 22-2825090 VISIPLEX INSTRUMENTS CORPORATION, a REGAM MEDICAL SYSTEMS INTERNATIONAL New York corporation formerly known AB, a Swedish corporation as Xenon Industries, Inc. By: _______________________________ By: _______________________________ Name: Name: Title: Title: Employer ID No.: 11-2557539 Employer ID No.: ___________ Debtor's address: 250 Clearbrook Road Elmsford, New York 10523 Att'n: David Vozick -5- EX-21 3 SUBSIDIARIES OF THE REGISTRANT 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% AFP/LOGE International New York 100% Regam Medical Systems International AB Sweden 100% EX-27 4 FINANCIAL DATA SCHEDULE
5 YEAR JUN-30-1997 JUN-30-1997 1,858,287 0 6,094,032 277,926 6,016,528 14,341,016 7,511,752 6,113,123 20,516,028 5,230,527 0 0 3,025,318 74,327 7,773,739 20,516,028 37,048,510 37,048,510 24,950,627 9,968,588 0 0 451,466 1,677,829 129,232 1,548,597 0 0 0 1,548,597 .16 .15
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