-----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, KRMwYCvqk48eQqbwXg+Bz/2lDydsY9zKFURYUi2XOQhcPQsF/Pjnq6NMX5B9jssn zeaTCNrFVxTQouEiRgwwsw== 0000889812-99-002759.txt : 19990923 0000889812-99-002759.hdr.sgml : 19990923 ACCESSION NUMBER: 0000889812-99-002759 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990922 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-K SEC ACT: SEC FILE NUMBER: 000-10832 FILM NUMBER: 99715113 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-K 1 ANNUAL REPORT =============================================================================== Securities and Exchange Commission Washington, D.C. 20549 Form 10-K |X| Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 for the Fiscal Year Ended June 30, 1999 ------------- 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. YES ( ) NO ( X ) The aggregate market value of the Registrant's Common stock held by non-affiliates of the Registrant as of August 31, 1999 was approximately $1,845,788. On such date, the averages of the closing bid and asked prices of the Common Stock, as quoted by the OTC Bulletin Board, was $.33. The registrant had 9,271,057 shares of Common Stock outstanding as of August 31, 1999. The Company's Proxy Statement for the 1999 Annual Meeting of Shareholders tentatively scheduled for November 10, 1999 is hereby incorporated by reference into Part III of this Form 10K. The index of exhibits for Part IV have been filed with the original compete 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 closely related 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 August 11, 1999, the Company successfully reduced and restructured, by $1.75 million, both of its Subordinated Promissory Notes, which were issued in 1997, as part of the financing of two independent acquisitions. The restructuring was accomplished by means of negotiation or mediation between the Company and each of the parties. No additional equity, warrants or options were issued in conjunction with the reduction and restructuring of these Subordinated Promissory Notes. (See Management Discussion and Analysis for further discussion). b) Financial Information about Industry Segments The Company is engaged in two industry segments: medical/dental and graphic arts. The Company's business segments are based on differences in the nature of their operations including distribution channels and customers. The composition of the segments is consistent with that used in making strategic decisions. See Consolidated Financial Statements, Footnote 7, for further discussion of the Company's industry segments. c) Narrative Description of Business Principal Products and Services Medical, Dental and Industrial X-Ray Processors & Accessories - ------------------------------------------------------------- The Company manufactures and distributes a line of freestanding and table top medical, dental and industrial x-ray film processors. These machines are capable of processing or developing films of various sizes. The exposed film is inserted into equipment and returned to the operator developed, fixed, washed and dried. The equipment can be located either in a dark room site or adapted to a daylight, loading system. These units are used for diagnostic x-ray imaging and industrial, non-destructive testing applications. The Company's products are distributed worldwide through an unaffiliated dealer network to doctors, dentists, hospitals, medical clinics, and other facilities. Digital Dental Imaging Systems - ------------------------------ The Company manufactures and distributes a filmless digital dental radiography system, based on x-rays and electronic imaging technology. Such technology generates a patient's dental images on a computer screen that operates in a Windows based software environment. The Company manufactures and distributes intraoral video dental cameras. This product allows users to capture up to four intraoral dental images on a computer screen and features the mobility of the camera between operatories by "docking" (plug in) directly into another chairside location. This system can be networked and is compatible with the Company's digital dental radiography system. A proprietary Windows based software suite provides for selection, transmission and manipulation of the desired images by the dentist. 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 Company has also obtained the distribution rights to a Japanese panoramic dental x-ray machine for the North and South American markets. The x-ray film exposed by each of these units is then developed in the Company's processors. These x-ray products are also compatible with the Company's digital x-ray unit. Graphic Arts Processors - ----------------------- The Company 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. 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's intellectual property includes several patents acquired as part of Regam's digital dental technology. The Company is not aware of any patents held by others that conflict with its current product designs. The Company has agreed to pay a nominal royalty on the domestic sales of its digital dental systems to an unrelated independent third party for the use of a format in their software. Such amount is not material to the operations of the Company. 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. The Company utilizes various domestic and international forms of trademarks, including AFP Imaging, DENT-X, Sens-A-Ray 2000 and LOGE, among others. The Company believes that these foreign utility patents and trademarks are important, and is current on their filings worldwide. 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: 1999 1998 1997 ---- ---- ---- $1,205,461 $910,861 $776,423 The Company conducts Research and Development activities internally as well as contracts certain projects to qualified vendors and expert consultants. The Company's Research and Development efforts and technologies have been increased by business acquisitions completed in Fiscal Years 1997 and 1998. In each transaction, the Company has added new product lines, proprietary technologies and access to future research and development benefits. The Company's participation (through its Swedish subsidiary) in a European Union (EU) Contract to develop new x-ray imaging sensors was established in June 1996. This includes but is not limited to CCD and CMOS type sensors. Research and Development costs for Fiscal 1997, 1998 and 1999 do not include the EU grants towards this project. All dental applications resulting from the developed technology are assigned exclusively to the Company. This contract expires in May 2000. 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 or difficult to obtain 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. Sales, Marketing and Distribution All of the Company's products are manufactured and distributed domestically and internationally in two basic configurations. Certain products are custom engineered and brand labeled for large OEMs. 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 of its products, in its worldwide markets. 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. 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 products 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 manufacturing facility is ISO (International Standards Organization) 9001 certified. Where applicable, the Company's products are CE certified for European sales in the Common Market. 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. Such credit facility was amended in August 1999 and is subject to more restrictive terms and conditions. See Items 7 "Capital Resources and Liquidity" for further discussion. This facility expires in July 2000. The Company hopes to enter into a comparable facility with similar terms and conditions prior to such time. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for further discussion. Customers No customer accounted for 10% or more of net sales in fiscal 1999, 1998 or 1997. 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, 1999, the Company's backlog of orders for its products was approximately $4,335,617 as compared to $2,302,590 as of June 30, 1998. All of the orders included in the backlog at June 30, 1999 are scheduled for delivery by June 30, 2000. OEM bulk 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 of orders can be accelerated or extended without penalty. Delivery of capital equipment is frequently subject to changing budget conditions of medical institutions or end user clinical practitioners. 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. Competition The Company's products utilize mechanical as well as analog and digital electronic technologies. The Company is subject to both foreign and domestic competition. The competition is characterized by significant investment in research and development of new technologies, products and services. Some competitors are well established in the film processor manufacturing and distribution businesses and may have greater financial and distribution resources and facilities than the Company. Other competitors have significant resources and revenues in electronic digital imaging technologies and expertise in software development. The Company relies on internal R&D personnel as well as subcontracted vendors. With respect to all of its products, the Company competes on the basis of price, features, product quality, applications, engineering, promptness of delivery and customer service. The Company also manufacturers and provides to other Original Equipment Manufacturer (OEM) customers different product versions under each OEM brand label which may compete with each other as well as the Company's products. The Company purchases certain products, from others, for resale on a non-exclusive basis which may be subject to competition from other independent distributors. The Company competes in the dental imaging market on the basis of its proprietary and patented technologies and its participation in a multi-year European Union (EU) Research and Development contract. The Company will have the exclusive rights to any dental applications as a result of this project. See "Research and Development" for further discussion. Environmental Impact The Company believes it is in compliance with the 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, or dealer who independently provides such services. Employees As of June 30, 1999, the Company (and its wholly owned subsidiaries) employed 135 persons worldwide on a full-time basis. The Company has no collective bargaining agreements and considers its relationship with its employees to be satisfactory. d) Financial Information about Foreign and Domestic Operations and Export Sales With respect to the Company's last three fiscal years, domestic sales were $20,736,264 (1999), $22,106,153 (1998) and $23,527,612 (1997) representing 71%, 65% and 64%, respectively, of the Company's sales during such periods. Domestic operating income (loss) was ($1,413,688), ($2,481,513) and $2,283,895 for the years ended June 30, 1999, 1998 and 1997, respectively. Export and foreign sales during such periods were $8,634,074 (1999), $11,666,554 (1998) and $13,520,898 (1997) or 29%, 35% and 36% of total Company sales for each period, respectively. The Company's Swedish subsidiary, Regam, incurred operating losses of $268,200 and $108,900 for fiscal 1999 and 1998 and $154,600 for the period April 17, 1997 (acquisition date) through June 30, 1997. 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 principal manufacturing facility are located in Elmsford, New York. This property is under a renegotiated lease expiring on December 31, 2008 at a current rental of $506,235 per year, with increments through the lease term to $525,085, plus increases in real estate taxes, utility costs and common area charges. The Company rents a small sales and marketing facility in Springfield, Virginia, and a small office at a University in Sweden. The cost of each facility are not material to the consolidated property costs. Item 3. Legal Proceedings - ------------------------- The Company is currently defending a civil complaint filed on December 19, 1995, in Worcester, Massachusetts, in the Superior Court of the Commonwealth of Massachusetts. Such complaint was instituted by Tufts Electronics Group, Inc. a former vendor of Visiplex Instruments Ltd., for breach of New York Bulk Sales Notice, alleging that no notice of the bulk transfer of assets was given in July 1995. The Company had acquired selected assets and liabilities of Visiplex Instruments Ltd. in July 1995. In addition, the plaintiff alleges a claim concerning certain inventories and disputed invoices. The Company's defense maintains these matters were settled by the parties prior to the acquisition, and the Company did not assume such liabilities. Visiplex Instruments Ltd. provided the Company with an Indemnification and Hold Harmless Agreement, which has a $500,000 limit. The amended complaint seeks damages in the sum of $443,500 for unpaid material invoices and $19.9 million in consequential damages, treble damages, interest and attorney fees. The Company's current motion for summary dismissal of the amended claim was filed in July 1999. The Company and its attorneys have concluded the discovery process and vigorously deny there are any merits to the amended claim. At this time, the Company does not believe that the final outcome of this matter will have a material adverse effect on the consolidated financial statements. The Company is also a party to other claims and litigation arising in the ordinary course of business. The Company intends to vigorously defend all such claims and does not expect the outcome of these matters individually or in the aggregate to have a material adverse effect on the Company's financial position or results of operations. The Company's insurance policies cover certain claims and allegations, as such, the underwriter is vigorously assisting in the Company's defense. 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, 1999. ------- Item 5. Market for the Registrant's Common Equity and Related Stockholder - --------------------------------------------------------------------------- Matters - ------- a) Market Information The Common Stock of the Company is the only class of common equity outstanding and is traded on the OTC Bulletin Board (Symbol "AFPC"). The following table shows the range of the high and low bid information for the Company's Common Stock for each quarterly period during the Company's last two fiscal years. These prices reflect inter-dealer prices and do not include retail mark-ups, markdowns or commissions, and may not represent actual transactions. Quarter ended High Bid Low Bid ------------- -------- ------- September 30, 1997 $2.88 $1.81 December 31, 1997 2.69 1.81 March 31, 1998 2.75 1.88 June 30, 1998 2.63 .72 September 30, 1998 2.75 .75 December 31, 1998 .84 .41 March 31, 1999 .75 .31 June 30, 1999 .44 .19 b) Holders As of August 31, 1999, the Closing bid price for the Common Stock, par value $.01 per share, as reported on the OTC Bulletin Board Market was $.33, and there were 503 stockholders of record of the Common Stock. The Company estimates, based on surveys conducted by its transfer agent in connection with the Company's 1999 Annual Meeting of Stockholders, that there are approximately two thousand two hundred (2,200) beneficial stockholders. c) Dividends No cash dividends have been declared on the Company's Common Stock to date and the Company anticipates that for the foreseeable future any earnings will be retained for use in its business. The Company does not currently have a set policy with respect to payment of dividends. Any future determination to pay cash dividends will be at the discretion of the Board of Directors and will be dependent upon the Company's financial condition, results of operations, capital requirements and other relevant factors. Item 6. AFP Imaging Corporation and Subsidiaries Selected Financial Data - ------------------------------------------------------------------------- as of and for The Years Ended June 30, 1999, 1998, 1997, 1996, and 1995 - -------------------------------------------------------------------------
1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- NET SALES $29,370,338 $33,772,707 $37,048,510 $36,528,879 $26,588,912 =========== =========== =========== =========== =========== OPERATING INCOME (LOSS) $(1,681,888)(a) $(2,799,245)(b) $2,129,295 $1,537,291 $1,524,181 ============ ============ ========== ========== ========== NET INCOME (LOSS) $(2,206,942)(a) $(3,327,565)(b) $1,548,597 $700,528 $923,999 ============ ============ ========== ======== ======== NET EARNINGS (LOSS) PER SHARE BASIC $(.24) $(.34) $.21 $.10 $.14 DILUTED $(.24) $(.34) $.16 $.08 $.12 TOTAL ASSETS $13,986,084 $18,660,909 $20,516,028 $20,258,093 $11,789,582 =========== =========== =========== =========== =========== LONG-TERM DEBT $5,974,216 $6,968,609 $4,412,116 $7,278,072 $1,935,638 ========== ========== ========== ========== ========== SHAREHOLDERS' EQUITY $5,208,299 $7,793,985 $10,873,384 $9,316,087 $5,538,068 ========== ========== =========== ========== ========== SHAREHOLDERS' EQUITY PER COMMON SHARE $.56 $.80 $1.06 $.83 $.66 ==== ==== ===== ==== ==== COMMON SHARES OUTSTANDING, at end of period 9,271,057 9,767,949 7,432,714 7,077,767 6,449,394 ========= ========= ========= ========= ========= CASH DIVIDENDS PER COMMON SHARE none none none none none
(a) This amount includes provisions of approximately $750,000 net, related to the Company's ProDen operations, due to the recognized impairment in the value of this product line. See Footnote 9 to the Consolidated Financial Statements for further discussion of these Special Charges. (b) This amount includes provisions of approximately $1.3 million to reduce the original goodwill associated with the acquisition of Regam Medical Systems AB for a recognized impairment in the carrying value of this asset, $1.7 million for the portion of the purchase price of ProDen Systems, Inc. related to in-process research and development expenditures, and approximately $329,000 of non-recurring costs to close down the Swedish plant and transfer all the manufacturing activities to the US. Item 7. Management's Discussion and Analysis of Financial Condition and Results - ------------------------------------------------------------------------------- of Operation - ------------ The following should be read in conjunction with the Consolidated Financial Statements included elsewhere herein. Capital Resources and Liquidity The Company's working capital decreased $1,400,000 between fiscal 1999 and fiscal 1998. The decrease is mainly due to a $1.1 million reduction in inventory and a $800,000 reduction in accounts receivable resulting from the decline in sales this year. The Company restructured and significantly lowered the balance on its two outstanding subordinate notes payable, in August 1999, resulting in payments totaling $250,000 in August 1999, which are classified as a current liability. Additionally, the subordinate notes payable were classified as long-term in fiscal 1998 (and fiscal 1999) so the debt restructuring did not reduce working capital. The Company also utilized available cash funds to finance the repurchase of its common stock from a former director. The Company successfully reduced and restructured both of its Subordinated Notes which were issued in 1997, as part of two independent acquisitions. The net result of the settlements is a combined debt reduction of $1.75 million. No additional Common Stock, warrants or options were issued in conjunction with the reduction of these Subordinated Notes Payable. The Company's Balance Sheet and financial condition were greatly strengthened by the complete elimination, for the next several years, of large principal payments. In December 1997, the Company acquired the assets of a Vancouver, WA manufacturer of intraoral (dental) video cameras and related products. The purchase price was $3.5 million of which $1.1 million cash was paid at closing, and the Company issued a Subordinated Promissory Note for $2.5 million to be paid in semi-annual payments beginning January 1, 1999. The Company did not make the required $500,000 payments due January 1, 1999 and July 1, 1999, and invoked the provision for negotiation and mediation. On August 11, 1999, the Company and the Note Holder agreed to an immediate, significant reduction and restructuring of the $2.5 million Note. The Company will not be obligated to pay the two $500,000 installments which were past due and in dispute. The Note was reduced from $2.5 million to $850,000 in total, to be paid over a six year period and the Company agreed and paid $150,000 to the Note Holder. Interest only will be paid for the first three years; then, the Company will make thirty-six equal monthly payments of $23,611.11 plus interest, on the unpaid balance. Interest was fixed at 7.75% per annum for the six year period. There are no other debt to equity conversions, contingent payments or further amendments to the arrangement. The benefit to the Company by the reduced value of the $2.5 million Note was recorded in the quarter ended June 30, 1999. While this restructuring resulted in a gain, the amount was offset by impairment charges associated with the book value of the acquired assets. In April 1997, the Company acquired all of the shares of a Swedish manufacturer of digital, dental imaging systems. The initial purchase price was $2.9 million of which $1.5 million, in cash, was paid at closing, plus, the Company issued a Subordinated Note for $1.0 million due April 17, 2000, with interest at the London Rate (LIBOR) plus 2% which is approximately 7.226%. On August 11, 1999, the Company and this Note Holder agreed to an immediate reduction and restructuring of this Note, which will be recorded in the first quarter Fiscal 2000. The principal amount of the Note was reduced to $800,000 in total. This will also be paid over a six year period. Interest only will be paid for the first three years, followed in 2003 by thirty-six equal monthly payments of $22,222.22 plus interest, on the unpaid balance. Interest will remain at LIBOR + 2% for the six year period. The Company paid $100,000 plus accrued interest from April 17, 1999 to August 10, 1999 to the Note Holder. A final royalty payment, which is contingent on sales, is due on April 17, 2000 but has been capped at a maximum of $30,000. There are no other debt to equity conversions, contingent payments or further amendments to this acquisition. The Company has a senior credit facility consisting of a $9.85 million revolver and term loan facility (the "Revolving Credit Loan"). This credit line is sufficient to finance ongoing working capital requirements assuming that the Company's losses from operations do not continue for a material period of time. The Revolving Credit Loan is secured by available and eligible inventory, accounts receivable, equipment, life insurance policies and proceeds thereof, trademarks, licenses, patents and general intangibles. This facility requires that certain financial ratios and net worth amounts be maintained. The Company is currently in compliance with all of its covenants and terms, with the exception of the debt service coverage ratio. Its senior lender has waived compliance with such coverage ratio for the period ended June 30, 1999. Such waiver is subject to more restrictive terms and conditions relating to certain areas, including documentation and reporting, revised formula borrowing, and limitations on payments to subordinated note holders. The lender agreed to this waiver after noting that fiscal 1999 operations were negatively impacted by the significant operating expenses associated with the Company's new digital dental product lines. This facility was renewed in July 1997 and expires in July 2000. The Company expects to renew this facility with similar terms and conditions prior to its expiration. The Company is dependent upon its existing credit facilities to finance its overall operations. At June 30, 1999, the Company currently had available $1.2 million of unused lines of credit for short-term financing needs plus cash and cash equivalents of $249,000. 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. The Company expects its need for working capital will continue to be financed by operations and from borrowings on its credit facility. The Company is presently unaware of any other trends, demands, commitments or contingencies which are reasonably likely to result in a material increase or decrease in its liquidity or Capital Resources in the foreseeable future, except for any ongoing losses from its operations. No assurances can be given that the Company will have favorable cash flow in the near term or that the senior lender will grant further waivers to the Company. Capital expenditures for fiscal 1999 of approximately $169,000, consisted of individual computer workstation upgrades, production tooling, molds and other appropriate replacements in the normal course of operations. In fiscal 1998, the Company acquired a new Business Information System including the upgrade and replacement of existing computer hardware and a new fully integrated manufacturing software package. The Company committed to a three year lease for the hardware and software costs, which has been recorded as a capital lease. All implementation costs have been capitalized and are being amortized over three years in accordance with generally accepted accounting principles. This system was fully implemented during the third quarter of fiscal 1998 and was designed to satisfy all Year 2000 compliance issues. The Company expects to continue to finance any future capital requirements principally from internally generated funds. Year 2000 Compliance The Company has developed and substantially implemented a plan to ensure that all of its manufactured and developed products as well as internal systems are compliant with the requirements to process transactions and function properly in the year 2000. As described above, all of the Company's internal information systems have been replaced with fully compliant new software and systems. The total cost of the software, implementation and hardware were capitalized as incurred. The Company continues to test and upgrade its internal information systems as part of an overall operational plan to replace older systems with more efficient current technology. The Company believes that all significant costs related to the Year 2000 compliance issue have been incurred. The Company also consulted with its processing banks and payroll service provider to ensure that their services are Year 2000 compliant. The Company has been advised by these service providers that all of these external information services and systems are Year 2000 compliant. The Company is in the process of contacting its vendors, on whom it relies, to assure that their systems are or will be Year 2000 compliant. The Company will evaluate these responses to ensure that critical vendors are Year 2000 compliant, or review alternate sourcing of these materials to Year 2000 compliant vendors. The Company has reviewed their own plant equipment and has determined that such equipment is either Year 2000 compliant or not affected by the Year 2000 issues. The Company is in the process of developing contingency plans to address the most reasonably likely worst case scenarios from the potential Year 2000 disruption. The Company's Year 2000 efforts are ongoing and will continue to evolve as new information becomes available. The Company does not anticipate a major interruption of its business activities, however, this will be dependent in part upon the ability of third party vendors to be Year 2000 compliant. Although the Company has implemented the actions described above to address these third party issues, it has no direct ability to influence compliance actions by such parties. The Company does not know, at this time, of any of its products, processes or systems which, if found to be non-Year 2000 Compliant, would have any significant impact. Accordingly, while the Company believes its actions should help reduce the possible effects of the Year 2000 risks, it is unable to eliminate the ultimate effects on the Company's operating results. Euro Conversion A single currency called the euro was introduced in Europe on January 1, 1999. Eleven of the fifteen member countries of the European Union agreed to adopt the euro as their common legal currency on that date. Fixed conversion rates between these participating countries' existing currencies and the euro were established as of that date, to remain legal tender as denominations until at least January 1, 2002. Beginning in January 2002, new euro-denominated bills and coins will be issued. The Company has addressed the issues raised by the euro currency conversion. All third-party computer and financial systems have the ability to process euro-denominated transactions. The Company has also addressed the issue of the impact of one common currency on pricing. Results of Operation - Fiscal 1999 vs. Fiscal 1998 - -------------------------------------------------- On January 4, 1999, $500,000 became due under the Company's $2.5 million promissory note issued to the former owner of ProDen. The Company withheld payment on that note as the Company believed that the former owner breached the terms of the Asset Purchase Agreement dated December 24, 1997 related to the acquisition of ProDen. During fiscal 1999, the Company and the former owner reached a commercial settlement whereby the $2.5 million note would be extinguished and replaced with a new $850,000 subordinated note, payable over six years and a payment of $150,000 in August 1999. During the fourth quarter 1999, the Company recorded special charges of approximately $2.1 million related to the Company's ProDen operations, due to the recognized impairment in the value of this product line. The components of these charges were as follows: o Approximately $1.3 million write down of goodwill, reducing the carrying amount of this asset to $0, o Approximately $140,000 reduction in the carrying value of other acquired long-lived assets, principally equipment, to fair market value, o Approximately $530,000 to establish reserves related to acquired accounts receivable and inventory, the value of which not having yet been realized through collection or sale, to reduce the carrying amounts of these assets to net realizable value, and, o Approximately $75,000 to establish a liability for the discontinuation of the former owner's consulting agreement with the Company, pursuant to the settlement arrangement described below. The special charges, which were recorded during the fiscal third and fourth quarters, were based on revised sales forecasts, historical operating results and the progression of the Company's dispute relating to the note payment due to the prior owner as described above. The amount of the charge related to the impairment of goodwill and long-lived assets was calculated using the anticipated future discounted cash flows, as a proxy for fair value, of this product line. On August 11, 1999, the Company and ACG Nystromgrupen AB ("Nystrom") of Sweden, agreed to an immediate reduction and restructuring of the Nystrom Subordinated Note Payable. The Company paid $100,000 plus accrued interest from April 17, 1999 to August 10, 1999 to Nystrom, and the principal amount of the amended Nystrom Subordinated Note Payable was reduce to $800,000 in total, to be paid over a six year period. A royalty payment, contingent on sales, as per the original Stock Purchase Agreement is due Nystrom in April 2000 but has been capped at a maximum of $30,000. The Nystrom Note has been reclassified as long-term in the accompanying consolidated financial statements to reflect the restructuring. The gain on the restructuring of the Note will be recorded in the first quarter of Fiscal 2000. Sales decreased $4.4 million between the two fiscal years or 13%. All of the Company's product lines experienced a decline in volume. The most significant was in the graphic arts products which have been adversely affected due to the evolving printing technology and changing customer demands. Fluctuating world markets, combined with the strong US dollar reduced the Company's export sales by approximately 27%. The dental products through the recent acquisitions and marketing/distribution agreements, showed the most growth. The Company continues to explore and develop potential distribution channels and new products through engineering efforts, aggressive marketing as well as repositioning its product pricing in the market place. Gross margin as a percent of sales showed a slight decreases of .9 percentage points. The Company has absorbed slight increases in material costs without any significant price increases in its products. A small price increase was implemented on some products in July 1999 which should help to improve the gross margin in Fiscal Year 2000. Selling, General and Administrative costs decreased $474,400 or 5.2% between the two fiscal years. Management instituted a financial restructuring plan this year to reduce and/or eliminate all non-essential expenses. As sales volume did not meet the original expectations, cost cutting and evaluation procedures were implemented to curb all departmental costs. Additionally, sales commissions were lower this year, as a direct relation to sales. Research and Development cost increased $295,000 or $32.4%. The Company has committed to the continued refinement of its digital dental products in order to reduce costs and maintain market share. Additionally, the Company continues to invest in sustaining engineering and related costs for its analog products. When applicable, the Company is acting as master import distributors for products developed by others. Interest expense net increased $194,000 or 42% between the two fiscal years. The Company's borrowing on its Revolving Credit Loan was higher in the current year due to production, development and distribution requirements for the digital product lines. Additionally, fiscal 1998 only had six months of the interest associated with the $2.5 million of debt related to the digital dental product line acquisition. The income tax benefit primarily reflects nominal state and foreign capital taxes due, offset by the resolution of previous contingencies that had been accrued for in prior years. The Company did not recognize a tax benefit for the net loss in fiscal 1999, as the Company does not meet the criteria described in Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes" for recording such benefit. Other On March 19, 1999, the Company's Common Stock was de-listed from the NASDAQ SmallCap Exchange as the Company's shares did not maintain a closing bid price greater than $1.00 for 30 consecutive days. The Company is now listed on the NASDAQ Over the Counter Bulletin Board. In June 1998, the Financial Accounting Standards for Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative and Hedging Activities. SFAS No. 133 establishes a comprehensive standard on accounting for derivative and hedging activities and is effective for periods beginning after June 15, 1999. Management does not believe that the future adoption of SFAS No. 133 will have a material effect on the Company's financial position and results of operations. This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of the Private Securities Reform Act of 1995. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those in any such forward-looking statements. Such factors include, but are not limited to, adverse changes in general economic conditions, the ability of the Company to repay its loans, including changes in the specific markets for the Company's services, the ability of the Company to successfully design, develop, manufacture and sell new products, adverse business conditions, increased competition, pricing pressures, risk associated with foreign operations, the ability to attract and retain key personnel, difficulties in obtaining adequate long-term financing to meet the Company's obligations, various regulatory requirements throughout the world, and other factors. Results of Operation - Fiscal 1998 vs. Fiscal 1997 - -------------------------------------------------- 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 cash and notes payables. The acquisition was accounted for under the purchase method of accounting and was fully consolidated in fiscal 1997. The goodwill associated with this acquisition was written-down to its net realizable value in the second quarter fiscal 1998, based on the recognized impairment in the value of the operations, resulting in a charge to earnings of $1.3 million. Such amount is included in Special Charges. The remaining goodwill is being amortized over fourteen years on a straight-line basis. Also included are $329,000 of non-recurring costs to shutdown and relocate the manufacturing operations, marketing, technical service and customer support operations from Sweden to the US. These costs also include severance and required social tax payments to former employees. In connection with the Company's acquisition of selected assets and liabilities of ProDen, the Company determined, based upon an independent appraisal, that a portion of the purchase price related to in-process research and development, resulting in a charge of $1.7 million. Such amount is also included in Special Charges. Sales decreased $3.27 million between the two fiscal years or 8.8%. There was a decrease in medical sales due to adjustments in OEM contracts and a decrease in the sale of graphic arts products due to changing customer demands and printing technology. The Company is repositioning its products in the graphic arts market. The decrease in sales was offset by a 21% increase in the Company's expanding dental product line, resulting mainly from the two recent dental acquisitions. Gross margin as a percent of sales decreased 1.4 percentage points due to a 15% increase in the sales of distributor goods, which have lower gross margins, and higher initial material costs on the newly acquired dental lines. As production and sales increase for these products, the Company expects to achieve improved unit production costs. Selling, general and administrative costs remained relatively consistent between the two fiscal years, decreasing $84,000 or 1%. Management continued its programs to reduce administrative overhead costs and restructure staffing with their related benefit costs. However, these costs were offset by additional costs to promote and service the dental and medical products worldwide. Included in these expenses in fiscal 1998 are the amortization costs of the two acquisitions exclusive of the specific adjustments mentioned above and included in Special Charges. Research and development costs increased $134,000 or 17% between the two fiscal years. The Company continues to invest in sustaining engineering and related costs. The Company has also increased its efforts to expand and develop its emerging digital dental products to increase market share. Interest expense, net increased $13,000 or 3% due to interest charges associated with the two notes related to the recent acquisitions, offset by a slightly lower average borrowing base during the year. The income tax provision primarily represents nominal state and foreign capital taxes due. The Company did not recognize a tax benefit for the net loss in fiscal 1998, as the Company does not meet the criteria described in Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes" for recording such benefit. Item 8. Financial Statements and Supplementary Data - --------------------------------------------------- Item 9. Changes in and Disagreements with Accountants and Financial Disclosure - ------------------------------------------------------------------------------ During the three years ended June 30, 1999, 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 November 10, 1999. AFP IMAGING CORPORATION ----------------------- AND SUBSIDIARIES ---------------- INDEX TO FINANCIAL STATEMENTS ----------------------------- Report of Independent Public Accountants F-1 Consolidated Balance Sheets -- June 30, 1999 and 1998 F-2 Consolidated Statements of Operations for the Years Ended F-3 June 30, 1999, 1998 and 1997 Consolidated Statements of Shareholders' Equity and F-4 to F-5 Comprehensive Income for the Years Ended June 30, 1999, 1998 and 1997 Consolidated Statements of Cash Flows for the Years Ended F-6 to F-7 June 30, 1999, 1998 and 1997 Notes to Consolidated Financial Statements F-8 to F-16 Schedule II -- Valuation and Qualifying Accounts for the F-17 Years Ended June 30, 1999, 1998 and 1997 [LETTERHEAD FOR ARTHUR ANDERSEN LLP] 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, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity and comprehensive income and cash flows for each of the three years in the period ended June 30, 1999. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with 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 financial statements referred to above present fairly, in all material respects, the financial position of AFP Imaging Corporation and subsidiaries as of June 30, 1999 and 1998 and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1999 in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II, Valuation and Qualifying Accounts, is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Arthur Andersen LLP New York, New York August 12, 1999 F-1 AFP IMAGING CORPORATION AND SUBSIDIARIES ---------------------------------------- CONSOLIDATED BALANCE SHEETS -- JUNE 30, 1999 AND 1998 -----------------------------------------------------
ASSETS 1999 1998 ------ ----------- ----------- CURRENT ASSETS: Cash and cash equivalents $ 249,053 $ 594,992 Accounts receivable, less allowance for doubtful accounts and sales returns of $427,000 and $422,203, respectively 3,923,514 4,755,093 Inventories 5,494,828 6,607,441 Prepaid expenses and other 89,958 293,989 ----------- ----------- Total current assets 9,757,353 12,251,515 PROPERTY, PLANT AND EQUIPMENT, at cost: Leasehold improvements 294,174 287,474 Machinery and equipment 7,741,808 7,825,247 ----------- ----------- 8,035,982 8,112,721 Less - Accumulated depreciation (6,810,006) (6,474,878) ----------- ----------- 1,225,976 1,637,843 GOODWILL, net of accumulated amortization of $792,593 and $698,642, respectively 2,804,822 4,390,461 OTHER ASSETS 197,933 381,090 ----------- ----------- $13,986,084 $18,660,909 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Current portion of long-term debt $ 427,958 $ 770,834 Accounts payable 965,945 1,266,127 Accrued expenses 701,149 1,345,015 Accrued payroll expenses 708,517 516,339 ----------- ----------- Total current liabilities 2,803,569 3,898,315 ----------- ----------- LONG-TERM DEBT 5,974,216 6,968,609 COMMITMENTS AND CONTINGENCIES - SHAREHOLDERS' EQUITY: Common Stock, $.01 par value, 30,000,000 shares authorized, 9,271,057 and 9,767,949 shares issued and outstanding at June 30, 1999 and 1998, respectively 92,710 97,679 Paid-in capital in excess of par 11,491,001 11,858,704 Accumulated deficit (6,360,831) (4,153,889) Cumulative translation adjustment (14,581) (8,509) ----------- ----------- Total shareholders' equity 5,208,299 7,793,985 ----------- ----------- $13,986,084 $18,660,909 =========== ===========
F-2 The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets. AFP IMAGING CORPORATION AND SUBSIDIARIES ----------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS ------------------------------------- FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997 -------------------------------------------------
1999 1998 1997 ----------- ----------- ----------- NET SALES $29,370,338 $33,772,707 $37,048,510 COST OF SALES 20,462,789 23,231,693 24,950,627 ------------ ------------ ----------- Gross profit 8,907,549 10,541,014 12,097,883 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 8,633,976 9,108,415 9,192,165 RESEARCH AND DEVELOPMENT EXPENSES 1,205,461 910,861 776,423 SPECIAL CHARGES 750,000 3,320,983 - ------------ ------------ ----------- Operating (loss) income (1,681,888) (2,799,245) 2,129,295 INTEREST EXPENSE, net 658,421 464,336 451,466 ------------ ------------ ----------- (Loss) income before provision for income taxes (2,340,309) (3,263,581) 1,677,829 PROVISION (BENEFIT) FOR INCOME TAXES (133,367) 63,984 129,232 ------------ ------------ ----------- NET (LOSS) INCOME $(2,206,942) $(3,327,565) $ 1,548,597 ============ ============ =========== NET (LOSS) EARNINGS PER COMMON SHARE Basic $(.24) $(.34) $.21 Diluted $(.24) $(.34) $.16
F-3 The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. AFP IMAGING CORPORATION AND SUBSIDIARIES ---------------------------------------- CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME ------------------------------------------------------------------------ FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997 ------------------------------------------------
Convertible Convertible Preferred Preferred Common Comprehensive Stock, Stock, Stock Common Income (Loss) Series A Series B Warrants Stock ------------- ----------- ----------- -------- ------ 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 (3,800) - - - - Net Income 1,548,597 - - - - ------------ Comprehensive income 1,544,797 - - - - ============ ----------- ---------- -------- -------- Balance June 30, 1997 2,171,071 854,247 25,314 74,327 Conversion of 1,396,814 shares of preferred stock, Series A, to 1,430,036 shares of common stock - (2,171,071) - - 14,300 Conversion of 711,872 shares of preferred stock, Series B, to 728,672 shares of common stock - - (854,247) - 7,287 Issuance of 24,500 shares of common stock in connection with the conversion of stock options - - - - 245 Issuance of 152,027 shares of common stock in connection with the conversion of 150,000 common stock warrants - - - (15,000) 1,520 Expiration of 103,138 warrants - - - (10,314) - Foreign currency translation adjustment (4,709) - - - - Net Loss (3,327,565) - - - - ------------ Comprehensive Loss (3,332,274) - - - - ============ ----------- ---------- -------- -------- Balance June 30, 1998 - - - - 97,679 Paid-in Foreign Capital Currency In Excess Accumulated Translation of Par Deficit Adjustment Total --------- ----------- ----------- ----------- 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 Comprehensive income - - - - ----------- ----------- -------- ----------- Balance June 30, 1997 8,578,549 (826,324) (3,800) 10,873,384 Conversion of 1,396,814 shares of preferred stock, Series A, to 1,430,036 shares of common stock 2,156,771 - - - Conversion of 711,872 shares of preferred stock, Series B, to 728,672 shares of common stock 846,960 - - - Issuance of 24,500 shares of common stock in connection with the conversion of stock options 27,630 - - 27,875 Issuance of 152,027 shares of common stock in connection with the conversion of 150,000 common stock warrants 238,480 - - 225,000 Expiration of 103,138 warrants 10,314 - - - Foreign currency translation adjustment - - (4,709) (4,709) Net Loss - (3,327,565) - (3,327,565) Comprehensive Loss - - - - ----------- ----------- -------- ----------- Balance June 30, 1998 11,858,704 (4,153,889) (8,509) 7,793,985
F-4 The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. AFP IMAGING CORPORATION AND SUBSIDIARIES ---------------------------------------- CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME ------------------------------------------------------------------------ FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997 ------------------------------------------------ (Continued)
Convertible Convertible Preferred Preferred Common Comprehensive Stock, Stock, Stock Common Income (Loss) Series A Series B Warrants Stock ------------- ----------- ----------- -------- ------ Retirement of 496,895 shares of common stock at $.75 per share - - - - (4,969) Foreign currency translation adjustment (6,072) - - - - Net loss (2,206,942) - - - - ----------- Comprehensive loss $(2,213,014) - - - - ============ ----------- --------- -------- -------- Balance June 30, 1999 $ - $ - $ - $ 92,710 =========== ========= ======== ======== Paid-in Foreign Capital Currency In Excess Accumulated Translation of Par Deficit Adjustment Total --------- ----------- ----------- ----------- Retirement of 496,895 shares of common stock at $.75 per share (367,703) - - (372,672) Foreign currency translation adjustment - - (6,072) (6,072) Net loss - (2,206,942) - (2,206,942) Comprehensive loss - - - - ----------- ----------- -------- ----------- Balance June 30, 1999 $11,491,001 $(6,360,831) $(14,581) $ 5,208,299 =========== =========== ======== ===========
F-5 The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. AFP IMAGING CORPORATION AND SUBSIDIARIES ---------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997 ------------------------------------------------
1999 1998 1997 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $(2,206,942) $(3,327,565) $ 1,548,597 Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities- Non-cash effect of special charges 750,000 2,991,983 - Accretion of imputed interest on note payable 154,927 82,451 - (Gain) loss on sale of equipment (60,037) - 3,396 Depreciation and amortization 707,635 869,304 891,370 Provision for losses on accounts receivable 260,506 215,797 93,463 Change in assets and liabilities: (Increase) decrease in accounts receivable 491,573 911,241 567,560 (Increase) decrease in inventories 664,573 (330,018) 1,859,800 (Increase) decrease in prepaid expenses and other 204,031 52,543 (167,221) (Increase) decrease in other assets 183,157 (357,637) (2,636) Increase (decrease) in accounts payable (300,182) (807,001) (302,565) Increase (decrease) in accrued expenses (718,866) (906,152) 955,898 Increase (decrease) in accrued payroll expenses 192,178 (52,806) 24,966 ----------- ----------- ----------- Total adjustments 2,529,495 2,669,705 3,924,031 ----------- ----------- ----------- Net cash provided by (used in) operating activities 322,553 (657,860) 5,472,628 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment in Regam Medical Systems International AB - - (1,561,293) Investment in ProDen Systems, Inc. - (1,030,100) - Issuance of notes receivable - - (310,000) Proceeds from collection of notes receivable - 310,000 - Capital expenditures (169,357) (479,971) (217,525) ----------- ----------- ----------- Net cash provided by (used in) investing activities (169,357) (1,200,071) (2,088,818) ----------- ----------- -----------
F-6 The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. AFP IMAGING CORPORATION AND SUBSIDIARIES ---------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997 ------------------------------------------------ (Continued)
1999 1998 1997 ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowing of debt 77,284 1,240,911 - Repayments of debt (197,675) (894,441) (4,667,421) Exercise of common stock options - 27,875 12,500 Exercise of common stock warrants - 225,000 - Retirement of common stock (372,672) - - ----------- ----------- ----------- Net cash provided by (used in) financing activities (493,063) 599,345 (4,654,921) EXCHANGE RATE EFFECTS ON CASH AND CASH EQUIVALENTS (6,072) (4,709) (3,800) ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents (345,939) (1,263,295) (1,274,911) CASH AND CASH EQUIVALENTS, at beginning of year 594,992 1,858,287 3,133,198 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS, at end of year $ 249,053 $ 594,992 $ 1,858,287 =========== =========== =========== SUPPLEMENTAL CASH FLOW DISCLOSURES: Cash paid during the year for- Interest $ 659,935 $ 465,466 $ 450,683 Income taxes $ 3,467 $ 161,585 $ 80,373 SUPPLEMENTAL NON-CASH INVESTING AND FINANCIAL ACTIVITIES DISCLOSURES: In fiscal 1998, common stock was issued upon the conversion of $2,171,071 of Series A convertible preferred stock and $854,247 of Series B preferred stock. In fiscal 1997, common stock was issued upon the conversion of $393,805 of Series A convertible preferred stock. In fiscal 1998, notes payable of $2.5 million were issued in lieu of cash payments made for the acquisition of ProDen. Approximately $1.4 million of these notes were subsequently forgiven in fiscal 1999 (see Note 9). In fiscal 1997, notes payable of $1.2 million were issued in lieu of cash payments made for the acquisition of Regam.
F-7 The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. AFP IMAGING CORPORATION AND SUBSIDIARIES ---------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ JUNE 30, 1999 ------------- (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 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 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). At June 30, 1999 and 1998, inventories consist of the following: 1999 1998 ---- ---- Raw materials and sub-component parts $4,109,073 $4,958,225 Work-in-process and finished goods 1,385,755 1,649,216 --------- --------- $5,494,828 $6,607,441 ========== ========== 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. F-8 Goodwill -------- Goodwill is recorded at its estimated fair value when acquired. Goodwill is amortized on a straight-line basis, over periods ranging for 15-40 years. The Company periodically reviews the carrying value of its 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. During both fiscal 1999 and 1998, the Company determined that the value of certain of its goodwill was impaired (See Note 9). Accordingly, the Company wrote-down the carrying value of its goodwill by approximately $1.3 million in 1999 and 1998, based upon management's best estimate of future cash flows associated with the related product lines, discounted for the time-value of money. These write-downs have been included in "Special Charges" in the accompanying financial statements. As of June 30, 1999, the Company believes that no impairment of any other long-lived assets exist. Basic and diluted earnings (loss) per common share -------------------------------------------------- The computation of net earnings per common share is based upon the weighted average number of common shares outstanding during the period plus, in periods in which they have a dilutive effect the effect of common shares contingently issuable. Basic and diluted earnings per common share for the fiscal years ended 1999, 1998 and 1997 are presented below:
1999 1998 1997 ---- ---- ---- Net (Loss) Earnings Available for Common Shareholders $(2,206,942) $(3,327,565) $1,548,597 Weighted Average Common Stock Outstanding 9,271,057 9,767,949 7,432,714 ----------- ----------- ---------- Basic Earnings Per Share $(.24) $(.34) $.21 ----------- ----------- ---------- Net (Loss) Earnings Available for Common Shareholders $(2,206,942) $(3,327,565) $1,560,541 Weighted Average Common Stock Outstanding 9,271,057 9,767,949 10,064,457 ----------- ----------- ---------- Diluted Earnings Per Share $(.24) $(.34) $.16 =========== =========== ==========
The diluted earnings per share computation reflects the effect of common shares contingently issuable upon the exercise of warrants, options and the conversion of convertible subordinated debentures and convertible preferred stock in periods in which such conversion would cause dilution. The diluted weighted average number of shares outstanding does not include the conversion of 1,147,620 and 974,120 stock options in fiscal 1999 and 1998, as such amounts are antidilutive when there is a loss. In fiscal 1997, the diluted weighted average number of shares outstanding does not include the conversion of 103,138 warrants as the exercise price of these warrants was greater than the average price of the Company's common stock during the year. In 1997, net earnings available for common shareholders differs between basic and 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. Adoption of new financial standards ----------------------------------- The Company has adopted SFAS No. 130, "Reporting Comprehensive Income", which establishes standards for reporting and display of comprehensive income and its components in the financial statements. Earlier periods have been restated to conform with the standards set forth in SFAS No. 130. The Company also adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for reporting certain information about each segment of the Company. The Company does not believe that pronouncements which have been issued but have not yet become effective will have a material impact on the Company's financial position or results of operations. F-9 (2) Debt: ----- As of June 30, 1999, the Company has an $8.4 million revolver loan and a $1.45 million term loan (together the "Credit Facility") at an interest rate of 3/4% above prime (8.5% at June 30, 1999). 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. As of June 30, 1999, the Company has exceeded maximum levels of the debt service coverage ratio covenant. The Company has obtained a waiver from its lender permitting the temporary non-compliance with the required financial ratios. The Company expects that it will remain in non-compliance through the quarter ended December 31, 1999, but will continue to be able to obtain waivers from its lenders. The Company has unused lines of credit available, subject to formula, of $5.2 million as of June 30, 1999 for short-term financing needs. The Credit Facility matures on July 14, 2000 and the Company expects to renegotiate this facility with similar terms and conditions. As of June 30, 1999 and 1998, debt consisted of the following: 1999 1998 ---- ---- Revolver $3,196,782 $3,077,310 Term Loan (a) 1,117,812 1,305,000 Nystom Subordinated Note Payable (b) 1,000,000 1,000,000 ProDen Subordinated Note Payable (c) 1,000,000 2,143,719 Capital Leases and Other 87,580 213,414 ---------- ---------- 6,402,174 7,739,443 Less - Current Portion 427,958 770,834 ---------- ---------- $5,974,216 $6,968,609 ========== ========== (a) The term loan will be paid in monthly payments of $12,083 for the period through and including July 2000, with the residual balance of $1,015,000 due on July 14, 2000. (b) This note payable consists of a $1.0 million promissory note, which was subsequently reduced and restructured (see Note 11) to ACG Nystromgruppen AB ("Nystrom"), the former parent of Regam Medical Systems International AB. The Nystrom promissory note bears interest at a rate of LIBOR plus 2% (8.375% at June 30, 1999) and, prior to being restructured, was payable in full on April 17, 2000. (c) This note represents a promissory note payable to the former owner of ProDen Systems, Inc. ("ProDen"), in connection with the Company's acquisition of ProDen in December 1997. Under the terms of this note, as amended (see Note 9), $150,000 is due and payable on August 10, 1999 and the residual balance of $850,000 will be paid in 36 equal installments beginning in January 2002. The note bears interest at a fixed rate of 7.75%. The fair market value of all of the Company's debt approximates its carrying value. Maturities of debt by fiscal year ended June 30 are as follows: 2000 $ 427,958 2001 4,224,216 2002 185,000 2003 550,000 2004 and thereafter 1,015,000 F-10 (3) Common Stock Options and Stock Purchase Plan: --------------------------------------------- The Company has two employee incentive stock option plans, under which approximately 1,500,000 shares of Common Stock are authorized and available for issuance. Under the terms of the plans, options to purchase common stock of the Company may be granted at not less than 100% of the fair market value of the stock on the date of grant, or 110% of the fair market value if granted to persons owning more than 10% of the outstanding stock of the Company. Transactions for 1999, 1998 and 1997 are as follows:
Weighted Weighted Weighted Average Average Average 1999 Price 1998 Price 1997 Price ---- ----- ---- ----- ---- ----- Options outstanding, beginning 974,120 $1.10 822,620 $0.82 794,120 $0.79 of fiscal year, Granted 426,000 0.82 187,000 2.29 63,500 1.23 Exercised - - (24,500) 1.14 (15,000) 0.83 Cancelled (252,500) 1.91 (11,000) 0.64 (20,000) 0.64 --------- ----- ------- ----- ------- ----- Options outstanding, end of 1,147,620 $0.82 974,120 $1.10 822,620 $0.82 ========= ===== ======= ===== ======= ===== fiscal year, Options exercisable at June 30, 1,147,620 974,120 822,620 ========= ======= ======= Weighted average fair value of options granted during years ended June 30, $0.62 $1.02 $0.52 ========= ======= =======
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 1999, 1998 and 1997: dividend yield of 0%; expected volatility ranging from 54% to 145%; expected life of five years and risk-free interest rate ranging from 4.38% to 7.35%. At June 30, 1999, outstanding options had exercise prices ranging from $.25 to $2.36 with a weighted - average remaining contractual life of 4 years. 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:
1999 1998 1997 ---- ---- ---- Net Income As reported $(2,206,942) $(3,327,565) $1,548,597 Pro forma (2,471,869) (3,518,588) 1,515,477 Basic earning per share As reported (.24) (.34) .21 Pro forma (.27) (.36) .20 Diluted earnings per share As Reported (.24) (.34) .16 Pro Forma (.27) (.36) .15
The Company has a restricted stock purchase plan under which 400,000 shares have been reserved for issuance. No grants have been made under this plan in fiscal 1999, 1998 and 1997. (4) Income Taxes: ------------- The (loss) income before provision for income taxes is comprised of the following: 1999 1998 1997 ---- ---- ---- United States $(1,938,702) $(3,075,481) $1,832,429 Foreign (268,240) (188,100) (154,600) ----------- ----------- ---------- Total $(2,206,942) $(3,263,581) $1,677,829 =========== =========== ========== F-11 The provision for income taxes is comprised of the following: 1999 1998 1997 ---- ---- ---- Current: State $(133,367) $53,984 $129,232 Foreign - 10,000 - --------- ------- -------- $(133,367) $63,984 $129,232 ========= ======= ======== The difference between the (benefit) provision for income taxes at the effective federal statutory rates and the amounts provided in the financial statements is summarized as follows:
1999 1998 1997 ---- ---- ---- Tax (benefit) provision at Federal statutory rates $(750,360) $(1,109,618) $ 570,462 Increase (decrease) in tax provision resulting from: State income tax provision (benefit), net of federal benefit (33,367) 53,984 85,293 Foreign tax provision - 10,000 - Foreign losses not benefited 107,296 75,240 52,564 Amortization in excess of tax basis 3,206 96,000 103,467 Realization of deferred tax assets - - (699,672) Domestic losses not benefited 628,779 921,113 - Resolution of previous contingencies (100,000) - - Other 11,079 17,265 17,118 --------- ----------- --------- Provision for income taxes $(133,367) $ 63,984 $ 129,232 ========= =========== =========
The items which comprise the deferred tax balance are as follows:
1999 1998 ---- ---- Depreciation and amortization $1,500,075 $1,097,803 Accrued liabilities and reserves not currently deductible 463,233 469,783 Inventory 211,150 159,223 Net operating loss carryforwards 810,169 635,169 ----------- ----------- 2,984,627 2,361,978 Deferred tax asset valuation reserve (2,984,627) (2,361,978) ----------- ----------- Tax asset recognized on balance sheets $ - $ - =========== ===========
Net operating loss carryforwards will expire beginning in 2009. (5) 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 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 $0, $0, and $50,000 was recorded for the years ended June 30, 1999, 1998 and 1997, respectively. F-12 (6) Commitments and Contingencies: ------------------------------ The Company and its subsidiaries are defendants (together with other third parties) in a legal claim alleging that the Company violated bulk sales laws upon the acquisition of Visiplex Instruments Ltd. ("Visiplex") in July 1995. The Company believes that this claim is without merit and continues to vigorously defend the litigation. While substantial monetary damages have been alleged in the lawsuit, the Company believes the actual outcome of this matter would not have a material adverse 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 is also a party to claims and litigation arising in the ordinary course of business. The Company intends to vigorously defend all such claims and does not expect the outcome of these matters individually or in the aggregate to have a material adverse effect on the Company's financial position or results of operations. The Company's insurance policies cover certain claims and allegations, as such, the underwriter is vigorously assisting in the Company's defense. The Company has leases for office and manufacturing facilities for periods expiring through fiscal year 2008. Approximate minimum annual rental payments under these leases as of the fiscal year ended June 30 are as follows: 2000 $ 506,000 2001 492,000 2002 477,000 2003 477,000 2004 and thereafter 2,864,000 Rent expense was approximately $708,000, $733,000 and $719,000 for the years ended June 30, 1999, 1998 and 1997, respectively. (7) Segment Information: -------------------- The Company operates in two distinct industry segments: medical/dental and graphic arts. The Company's business segments are based on differences in the nature of their operations, including distribution channels and customers. The composition of the segments and measure of segment profit is consistent with that used in making strategic decisions. Medical/dental segment operations are conducted under the Dent-X and AFP tradenames and consists of the design, development, manufacturing and marketing of medical and dental image systems and all related accessories. The graphic arts segment operates under the LogE tradename and includes products such as paper and film developers. The segment information for the years 1999, 1998 and 1997 is shown below. Segment information related to operating income (loss) include costs directly attributable to each segment's operations.
Operating Depreciation Net Income & Capital Interest Net Sales (Loss) Assets Amortization Expenditures Expense --------- ------ ------ ------------ ------------ ------- 1999 Medical/Dental $24,767,670 $(1,526,766) $12,282,372 $736,346 $238,013 $525,724 Graphic Arts 4,602,668 (155,122) 1,703,712 8,166 3,240 132,697 ----------- ---------- ----------- -------- -------- -------- Consolidated $29,370,338 $(1,681,888) $13,986,084 $744,512 $241,253 $658,421 =========== ========== =========== ======== ======== ======== 1998 Medical/Dental $27,074,131 $(3,216,829) $16,515,971 $845,976 $479,971 $368,865 Graphic Arts 6,698,576 417,584 2,144,938 23,328 - 95,471 ----------- ---------- ----------- -------- -------- -------- Consolidated $33,772,707 $(2,799,245) $18,660,909 $869,304 $479,971 $464,336 =========== ========== =========== ======== ======== ======== 1997 Medical/Dental $29,032,909 $1,801,266 $17,299,574 $818,870 $213,486 $285,948 Graphic Arts 8,015,601 328,029 3,216,454 72,500 4,039 165,518 ----------- ---------- ----------- -------- -------- -------- Consolidated $37,048,510 $2,129,295 $20,516,028 $891,370 $217,525 $451,466 =========== ========== =========== ======== ======== ========
F-13 Geographic financial information for the years ended June 30,1999, 1998 and 1997 are as follows:
1999 1998 1997 ---- ---- ---- Sales ----- United States $20,736,264 $22,106,153 $23,527,612 Europe - 1,167,200 529,100 Domestic export sales 8,634,074 10,499,354 12,991,798 ----------- ----------- ----------- Total $29,370,338 $33,772,707 $37,048,510 =========== =========== =========== Net (Loss) Income ----------------- United States $(1,938,742) $ (3,139,565) $ 1,702,497 Europe (268,200) (188,000) (153,900) ----------- ----------- ----------- Total $(2,206,942) $ (3,327,565) $ 1,548,597 =========== =========== =========== Identifiable Assets ------------------- United States $13,926,364 $18,521,609 $19,630,528 Europe 59,720 139,300 885,500 ----------- ----------- ----------- Total $13,986,084 $18,660,909 $20,516,028 =========== =========== ===========
There were no sales to any one customer in excess of 10% of net sales in fiscal 1999, 1998 and 1997. (8) Acquisitions: ------------- On December 24, 1997, the Company acquired, through its wholly owned subsidiary, Dent-X International, Inc., selected assets and liabilities of ProDen Systems, Inc., a Vancouver, Washington manufacturer of intraoral dental camera systems for approximately $3.5 million in cash and notes. As discussed further in Note 9, the purchase price was subsequently reduced by approximately $1.4 million. The acquisition was accounted for under the purchase method. Accordingly, a portion of the purchase price was allocated to the net assets acquired based on their estimated fair values. The Company also allocated a portion of the purchase price to in-process research and development expenditures, which reduced fiscal 1998 operating income by $1.7 million. Such allocation was recorded based on a third party appraisal of the value of the in-process research and development projects acquired as of the acquisition date. The balance of the purchase price was recorded as the excess of cost over net assets acquired ("goodwill"). As discussed in Note 9, no goodwill resulting from this acquisition remains as of June 30, 1999 due to the purchase price adjustment discussed above and the write-off of $750,000 of goodwill which became impaired during 1999. 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), of which $200,000 was paid during fiscal 1998. The acquisition was accounted for using the purchase method of accounting. Goodwill of approximately $2.8 million was originally recorded associated with this acquisition. A portion of this goodwill was deemed to be impaired during 1998 and, accordingly, was written-off in accordance with the provisions of Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and For Long-Lived Assets to be Disposed Of" (See Notes 1 and 9). The following table reflects unaudited pro forma combined results of operations of the Company, ProDen and Regam on the basis that the acquisitions had taken place at the beginning of fiscal 1997: F-14 (Unaudited) (Unaudited) 1998 1997 ---- ---- Revenues $34,674,883 $40,399,691 Net (loss) income (3,240,136) 793,581 (Loss) income per common share: Basic $(.33) $.11 Diluted $(.33) $.08 Shares used in computation: Basic 9,767,949 7,432,714 Diluted 9,767,949 10,064,457 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 of future operations of the combined companies under the ownership and management of the Company. (9) Special Charges: ---------------- On January 4, 1999, $500,000 became due under the Company's $2.5 million promissory note issued to the former owner of ProDen. The Company did not make payment on that note as the Company believed that the former owner breached the terms of the Asset Purchase Agreement dated December 24, 1997 related to the acquisition of ProDen. During fiscal 1999, the Company and the former owner reached a commercial settlement whereby the $2.5 million note would be extinguished and replaced with an $850,000 note and a payment of $150,000, the terms of which are discussed in Note 2. At the time the settlement was reached, the carrying value of the $2.5 million note was approximately $2.3 million, net of unamortized discount. The resulting $1.3 million reduction in the carrying value of the debt was recorded as a component of the special charges. During 1999, the Company recorded special charges of approximately $2.1 million related to the Company's ProDen operations, due to the recognized impairment in the value of this product line. The components of these charges are as follows: o Approximately $1.3 million write down of goodwill, reducing the carrying amount of this asset to $0, o Approximately $140,000 reduction in the carrying value of other acquired long-lived assets, principally equipment, to fair market value, o Approximately $530,000 to establish reserves related to acquired accounts receivable and inventory, the value of which not having yet been realized through collection or sale, to reduce the carrying amounts of these assets to net realizable value, and o Approximately $75,000 to establish a liability for the discontinuation of the former owner's consulting agreement with the Company, pursuant to the settlement arrangement described below. These special charges, which were recorded during the fiscal third and fourth quarters, were based on revised sales forecasts, historical operating results and the progression of the Company's dispute in regard to the note payment due to the prior owner as described below. The amount of the charge related to the impairment of goodwill and long-lived assets was calculated using the anticipated future discounted cash flows, as a proxy for fair value, of this product line. In addition, in connection with the acquisition of ProDen, the Company allocated approximately $1.7 million of the purchase price to in-process research and development (See Note 8) during 1998. During fiscal 1998, the Company implemented a restructuring and integration program associated with the relocation of the Regam operations which reduced operating income by approximately $1.6 million. These charges included $329,000 of non-recurring costs to close down the Swedish plant and transfer all the manufacturing activities to the U.S., such as severance and related social costs, production line set-up and training costs in the U.S., and costs to terminate various contracts in Sweden. This charge also includes an amount of $1.3 million to reduce the goodwill associated with the Company's acquisition of Regam, due to the recognized impairment in the value of the Swedish operations (See Note 1). F-15 (10) Common-Stock Retirement: ------------------------ On October 16, 1998, a director resigned his directorship of the Company. Effective with such resignation, the term of his one year consulting agreement, dated September 19, 1997, commenced. On October 19, 1998, the Company agreed to extend his consulting agreement through October 16, 2001, whereby he would receive cash compensation of $8,333.33 per month, for the period and his existing stock options granted pursuant to the consulting agreement were modified by increasing the term from three years to four years, increasing the number of shares underlying the option from 150,000 to 300,000 common shares, and reducing the exercise price from $2.636545 to $0.75 per share. On October 19, 1998, the Company repurchased (and subsequently retired) 496,895 shares of the Company's common stock owned by the former director for an aggregate consideration of $372,672. (11) Subsequent Event: ----------------- On August 11, 1999, the Company and ACG Nystromgruppen AB ("Nystrom") of Sweden, agreed to an immediate reduction and restructuring of the Nystrom Subordinated Note Payable. The Company paid $100,000 to Nystrom plus accrued interest from April 17, 1999 to August 10, 1999, and the principal amount of the amended Nystrom Subordinated Note Payable was reduced to $800,000 in total, to be paid over a six year period. Interest only will be paid quarterly for the first three years, followed by thirty-six equal monthly payments of $22,222.22 plus interest, paid quarterly, on the unpaid balance. Interest will remain at LIBOR + 2% for the six year period. A royalty payment, contingent on sales, as per the original Stock Purchase Agreement is due Nystrom on April 17, 2000 but has been capped at a maximum of $30,000. There are no other contingent payments or further amendments to the Stock Purchase Agreement. F-16 AFP IMAGING CORPORATION AND SUBSIDIARIES ---------------------------------------- SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS ----------------------------------------------- FOR THE YEARS ENDED JUNE 30, 1999, 1998 and 1997 ------------------------------------------------
Balance at Charged to Charged to Beginning Costs and Other Balance at Description of Period Expenses Accounts Deductions End of Period ----------- --------- -------- -------- ---------- ------------- June 30, 1999 - ------------- Allowance for doubtful accounts and sales returns $ 422,203 $260,805 - $(256,008) $ 427,000 Accumulated depreciation 6,474,878 335,128 - - 6,810,006 Accumulated amortization 698,642 332,316 - (238,365) 792,593 Deferred tax asset valuation reserve 2,361,978 - 622,649(1) - 2,984,627 June 30, 1998 - ------------- Allowance for doubtful accounts and sales returns $ 277,926 $234,571 $ - $ (90,294) $ 422,203 Accumulated depreciation 6,113,123 361,755 - - 6,474,878 Accumulated amortization 681,363 475,546 - (458,267) 698,642 Deferred tax asset valuation reserve 1,283,778 - 1,078,200(1) - 2,361,978 June 30, 1997 - ------------- Allowance for doubtful accounts and sales returns $ 238,000 $ 93,463 $ 67,926(2) $(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) - 1,283,778
(1) Represents corresponding increase (decrease) in the related deferred tax asset. (2) Represents amounts acquired from Regam Medical Systems International AB. F-17 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) -- Asset Purchase Agreement between AFP Imaging and ProDen Systems, Inc., dated December 24, 1997. (13) (d) -- Promissory Note between ProDen Systems, Inc. and AFP Imaging Corporation, dated August 10, 1999 (e) -- Amended Promissory Note between ACG Nystromgruppen AB and AFP Imaging Corporation, dated August 11, 1999. 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) -- Specimen of Preferred Stock, Series A Certificate. (5) (f) -- Restated Certificate of Incorporation. (4) (g) -- Subscription Agreement, dated October 11, 1995 of New Ballantrae Partners, L.P. (10) (h) -- Registration Rights Agreement, dated as of October 12, 1995 by and between AFP Imaging Corporation and New Ballantrae Partners, L.P. (10) (i) -- Shareholders Agreement, dated as of October 12, 1995 by and among New Ballantrae Partners, L.P., Donald Rabinovitch and David Vozick. (10) (j) -- Registration Statement dated December 31, 1997 to register the Common Stock issuable upon exercise of options granted under the Employee Stock Option Plans. (15) (k) -- Settlement and Standstill Agreement dated October 13, 1998, by and among AFP Imaging, David Vozick, Donald Rabinovitch, and Robert Rosen (16) 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) -- Greyhound Financial Capital Corporation Loan and Security Agreement (8) (d) -- Finova Capital Corporation (formerly Greyhound Financial Capital Corporation) Amendment No. 3 to Loan and Security Agreement and Replacement Secured Promissory Note. (14) (e) -- Profit Sharing Plan of the Registrant, as supplemented. (2) (f) -- Registrant's 1992 Stock Option Plan. (9) (g) -- Registrant's 1995 Stock Option Plan. (11) (h) -- Registrants' 1999 Incentive Stock Option Plan (i) -- Mediation Resolution Agreement dated August 10, 1999 (j) -- Finova Capital Corporation Amendment No. 4 to Loan and Security Agreement 11.-- Statement re computation per share earnings. (3) 21.-- Subsidiaries of the Registrant (Exhibit 21). 27.-- Financial Data Schedule b) Reports on Form 8-K: A Report on Form 8-K was filed on August 13, 1999, to report that the Registrant had successfully re-negotiated and restructured the terms of both of its subordinated notes payable issued in 1997. (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 file #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. (13) Incorporated by reference from the Exhibits filed with Registrant's Report on Form 8-K, dated January 8, 1998. (14) Incorporated by reference from the Exhibits filed with Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1997. (15) Incorporated by reference from the Exhibits filed with the Registrant's Registration Statement on Form S-8, dated December 31, 1997. (16) Incorporated by reference from the Exhibits filed with the Registrants Report on Form 8-K, dated October 28, 1998. SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AFP IMAGING CORPORATION By: /s/ Elise Nissen ------------------------------------- Elise Nissen, Chief Financial Officer Date: September 22, 1999 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 22, 1999 By: /s/ David Vozick ----------------------------- David Vozick, Chairman of the Board Secretary and Treasurer Date: September 22, 1999 By: /s/ Robert Blatt ----------------------------- Robert Blatt, Director Date: September 22, 1999 By: /s/ Jack Becker ----------------------------- Jack Becker, Director Date: September 22, 1999 By: /s/ Elise Nissen ----------------------------- Elise Nissen, Chief Financial Officer (Principal Financial and Accounting Officer) Date: September 22, 1999 EX-2.(D) 2 PROMISSORY NOTE Exhibit 2(d) PROMISSORY NOTE $850,000 August 10, 1999 Vancouver, Washington FOR VALUE RECEIVED, the undersigned AFP Imaging Corporation., a New Yolk corporation (the "Company) promises to pay to the order of Cade Adams ("Holders), at Vancouver, Washington or to such other person and at such other place as Holder may designate, the principal sum of Eight Hundred Fifty Thousand Dollars ($850,000.00), together with interest thereon, payable in the manner and on the terms set forth in this Note: 1. Interest Rate. This Note shall bear interest at a rate of 7.75 percent per annum from the January 1, 2000, until this Note is fully paid. 2. Payment. No payments shall be due under this Note until January l, 2000; nor shall this Note bear interest until that time. From and after January 1, 2000, this Note shall bear interest at the rate of 7.75 percent per annum which Interest shall be payable monthly on the last day of the month (in the amount of $5,489.58) through December 31, 2001. Beginning on January 1, 2002, this Note Hall be payable in 36 equal monthly installments of $26,537.99 (principal and interest at 7.75 percent per annum) payable on the last day of each month. 3. Prepayments. the Company shall have the right to prepay this Note, in whole or in part at any time with no prepayment penalties. 4. Subordination. Holder hereby agrees to subordinate and does hereby subordinate payment by the Company of all payments due pursuant to this Note to the payment in accordance with its terms} of any bank or institutional debt of Company, whether now owed or hereafter incurred, or any continuation, renewal or replacement thereof ("Senior Indebtedness"). Provided however, Company may pay to Holder and Holder may accept regularly scheduled payments of principal or interest under this Promissory Note if there is no event of default in respect to such Senior Indebtedness at the time of such payment and if such payment would not cause such an event of default. Notwithstanding the foregoing, any indebtedness incurred after the date of this Promissory Note shall be deemed Senior Indebtedness only if it is incurred in good faith for value in arm's length transaction. 5. Default and Acceleration. Time is of the essence of this Note. Notwithstanding the foregoing, in the event the Company defaults in the performance of, or compliance with, any of the terms and provisions of this Note, after not less tom 20 days' written notice to the Company specifying with reasonable particularity the nonperformance or noncompliance and the Company's failure to correct the default within such time period, or in the event of the bankruptcy or insolvency of the Company or any assignment for the benefit of creditors or the commencement of an action for the appointment of a receiver for the properties of the Company or other action or proceedings under the federal bankruptcy laws which is not dismissed within 75 days after the date of filing, the Holder may declare the principal of this Note, together with interest thereon, to be due and payable. Any forbearance or failure to exercise this right shall not constitute a waiver of the Holder's right to exercise the right with respect to such default and any subsequent default. 6. Attorneys' Fees Costs In the event this Note is placed in the hands of an attorney for collection, the Company promises and agrees to pay the Holder's reasonable attorney fees and collection costs, even though no suit or action is filed hereon. If any litigation is instituted to enforce payment of this Note, the prevailing party shall recover from the other party, in addition to costs and disbursements allowed by law, such sums as the court may allow as attorney fees in the litigation, including any appeals therefrom. 7. Govening Law. This Note shall be governed and construed in accordance with the laws of the State of New York IN WITNESS WHEREOF, the undersigned caused this Note to be duly execute on the day and year first written above. AFP Imaging Corporation By: _______________________ Chairman EX-2.(E) 3 AMENDED PROMISSORY NOTE Exhibit 2(e) AMENDED PROMISSORY NOTE DATED AUGUST 11, 1999 1. FOR VALUE RECEIVED, the undersigned AFP Imaging Corporation, a New York corporation, (hereinafter referred to as "Maker"), promises to pay to the order of ACG Nystromgruppen AB (reg. No 556030-0914), a Swedish corporation, or any successor Holder(s) hereof from time to time, (being hereinafter referred to as "Holder"), the principal sum of USD $800,000 with interest thereon, or on so much thereof as is from time to time outstanding and unpaid, at the rate hereinafter set forth, such principal and interest to be paid as follows: 2. From and after the date hereof interest on the unpaid balance shall be at a rate per annum (rounded downwards to the nearest 1/16 of 1%) appearing on Reuters Screen LIBO Page as the London interbank offered rate for one year deposits in US dollars at approximately 11:00 am (London Time) (the "Libor Rate") on April 17, 1999 plus two percent, payable quarterly, beginning on the following date of September 30, 1999. The interest shall be calculated on the basis of a 365 day year and the actual number of days elapsed. The interest rate shall be reset annually in accordance with the above using the Labor Rate on April 17, 2000 and each April 17th thereafter for the following 360 day period. 3. The principal sum shall be repaid in 36 equal monthly installments beginning on May 17, 2003 and the final payment on April 17, 2006. 4. Each payment by Maker under this Promissory Note shall be made by 4:00 pm Swedish time on the date that payment is due, to the Holder by deposit to such bank account as the Holder have designated by notice to Maker. Each payment under this Promissory Note shall be made in USD. 5. This Promissory Note may be prepaid in whole or in part at any time or from time to time without penalty or premium. 6. Payments due on Saturdays, Sundays or legal holidays shall be due on the next business day. 7. Holder shall have the right to terminate this Promissory Note immediately and demand payment of principal sum and interest if Maker should not perform its obligations under this Promissory Note. 8. Protest and notice of demand, notice of dishonor and notice of non-payment and all other notices are hereby waived by Maker, provided, however, that Maker shall be entitled to have all payments made under this Promissory Note noted on the original of the Promissory Note and provided further that Maker shall be entitled to receive the canceled original Promissory Note upon payment in full of all amounts due hereunder. 9. No failure to accelerate the debt evidenced hereby by reason of default hereunder, nor indulgences granted from time to time, shall be construed as a novation of this Promissory Note or as a reinstatement of the indebtedness evidenced hereby or as a waiver of such right of acceleration or of the right of Holder thereafter to insist upon strict compliance with the terms of this Promissory Note. 10. This Promissory Note may not be changed orally, but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification or discharge is sought. 11. As used herein, the term "Holder" shall be deemed to include its respective heirs, successors, legal representatives and assigns, whether by voluntary action of the parties or by operation of law. 12. The Maker hereby agrees to reimburse the Holder for all expenses (including reasonable attorney's fees) incurred by the Holder in enforcing this Promissory Note. 13. Maker's obligations under this Promissory Note are no longer subject to set off or deduction in accordance with Section 9 of Stock Purchase Agreement, dated April 17, 1997, between the Maker and the Holder. 14. The indebtedness evidenced by this instrument is subordinated to any and all obligations of Maker, both secured and unsecured, including but not limited to unsecured cash flow-based loans from a bank or other institutional lender ("Senior Debt"). Holder shall execute and deliver such further instruments and shall take such further action as may from time to time be necessary in order to carry out the provisions and intent of this subordination, and Holder shall not act or permit any action prejudicial or inconsistent with the priority position of Senior Debt over the indebtedness created by this instrument. 15. This Promissory Note shall be governed by, construed and interpreted as to validity, enforcement and in all other respects in accordance with the laws of Sweden. Any dispute, controversy or claim arising out of or relating to this Promissory Note shall be referred to and finally settled by arbitration in accordance with the rules of the Swedish Act of Arbitration (1929:145) as the law shall from time to time be in effect; provided, however, that the Beneficiary shall always be free to commence proceedings and actions against us before the courts of any other country having or claiming jurisdiction in respect of the Guarantee. The Beneficiary may claim execution of any judgment, award or order in any court or appropriate authority of any country where we have any assets. 16. THE MAKER HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY OR RIGHT TO REQUEST A TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS PROMISSORY NOTE. 17. This Note shall replace in its entirety the Maker's original Promissory Note dated April 17, 1997 which shall be returned forthwith by the Holder to the Maker and said Note shall be marked canceled by the Holder and Maker. IN WITNESS WHEREOF, Maker has executed this Note on August 11, 1999. AFP IMAGING CORPORATION ____________________________ By:_________________________ Title:______________________ EX-10.(H) 4 1999 STOCK OPTION PLAN Exhibit 10(h) AFP IMAGING CORPORATION 1999 STOCK OPTION PLAN 1. Purposes. The AFP IMAGING CORPORATION 1999 INCENTIVE STOCK OPTION PLAN (the "Plan") is intended to provide the employees, directors, independent contractors and consultants of AFP Imaging Corporation (the "Company") and/or any subsidiary thereof with an added incentive to commence and/or continue their services to the Company and to induce them to exert their maximum efforts toward the Company's success. By thus encouraging employees, directors, independent contractors and consultants and promoting their continued association with the Company, the Plan may be expected to benefit the Company and its stockholders. The Plan allows the Company to grant Incentive Stock Options ("ISOs") (as defined in Section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code"), Non-Qualified Stock Options ("NQSOs") not intended to qualify under Section 422(b) of the Code and Stock Appreciation Rights ("SARs") (collectively the "Options"). The vesting of one or more Options granted hereunder may be based on the attainment of specified performance goals of the participant or the performance of the Company, one or more subsidiaries, or division of one or more of the above. 2. Shares Subject to the Plan. The total number of shares of Common Stock of the Company, $.01 par value per share (the "Common Stock"), that may be subject to Options granted under the Plan shall be five hundred thousand (500,000) in the aggregate, subject to adjustment as provided in Paragraph 8 of the Plan; however, the grant of an ISO to an employee together with a tandem SAR or any NQSO to an employee together with a tandem SAR shall only require one share of Common Stock available subject to the Plan to satisfy such joint Option. The Company shall at all times while the Plan is in force reserve such number of shares of Common Stock as will be sufficient to satisfy the requirement of outstanding Options granted under the Plan. In the event any Option granted under the Plan shall expire or terminate for any reason without having been exercised in full or shall cease for any reason to be exercisable in whole or in part, the unpurchased shares subject thereto shall again be available for granting of Options under the Plan. 3. Eligibility. ISO's or ISO's in tandem with SAR's (provided the SAR meets the requirements set forth in Temp. Reg. Section 14a.422A-1, A-39 (a) through (e) inclusive) may be granted from time to time under the Plan to one or more employees of the Company or of a "subsidiary" or "parent" of the Company, as the quoted terms are defined within Section 424 of the Code. An Officer is an employee for such purposes. However, a director of the Company who is not otherwise an employee is not deemed an employee for such purposes. NQSOs and NQSOs in tandem SARs may be granted from time to time under the Plan to one or more employees of the Company, Officers, members of the Board of Directors, independent contractors, consultants and other individuals who are not employees of, but are involved in the continuing development and success of the Company and/or of a subsidiary of the Company, including persons who have previously been granted Options under the Plan. 4. Administration of the Plan. (a) The Plan shall be administered by the Board of Directors of the Company as such Board of Directors may be composed from time to time or by a Stock Option Committee (the "Compensation Committee") which shall be comprised of at least two Outside Directors (as such term is defined in regulations promulgated from time to time with respect to section 162(m)(4)(c)(i) of the Code) appointed by such Board of Directors of the Company and/or an Option Committee, comprised of such individual or individuals as the Board of Directors of the Company may designate from time to time (such Option Committee and the Compensation Committee are collectively hereinafter referred to as the "Committee"). As and to the extent authorized by the Board of Directors of the Company, a Committee may exercise the power and authority vested in the Board of Directors under the Plan. Within the limits of the express provisions of the Plan, the Board of Directors or Committee shall have the authority, in its discretion, to determine the individuals to whom, and the time or times at which, Options shall be granted, the character of such Options (whether ISOs, NQSOs, and/or SARs in tandem with NQSOs, and/or SARs in tandem with ISOs) and the number of shares of Common Stock to be subject to each Option, the manner and form in which the optionee can tender payment upon the exercise of his Option, and to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to the Plan, to determine the terms and provisions of Option agreements that may be entered into in connection with Options (which need not be identical), subject to the limitation that agreements granting ISOs must be consistent with the requirements for the ISOs being qualified as "incentive stock options" as provided in Section 422 of the Code, and to make all other determinations and take all other actions necessary or advisable for the administration of the Plan. In making such determinations, the Board of Directors and/or a Committee may take into account the nature of the services rendered by such individuals, their present and potential contributions to the Company's success, and such other factors as the Board of Directors and/or a Committee, in its discretion, shall deem relevant. The Board of Directors' and/or a Committee's determinations (to the extent authorized by the Company's Board of Directors) on the matters referred to in this Paragraph shall be conclusive. (b) Notwithstanding anything contained herein to the contrary, at anytime during the period the Company's Common Stock is registered pursuant to Section 12(g) of the Securities and Exchange Act of 1934, as amended (the "1934 Act"), the compensation Committee, if one has been appointed to administer all or part of the Plan, shall have the exclusive right to grant Options to Covered Empoyees as defined under Section 162(m)(3) of the Code, (generally persons subject to Section 16 of the 1934 Act) and set forth the terms and conditions thereof. With respect to persons subject to Section 16 of the 1934 Act, transactions under the Plan are intended, to the extent possible, comply with all applicable conditions of Rule 16b-3, as amended from time to time, (and its successor provisions, if any) under the 1934 Act and Section 162(m)(4)(C) of the Code, as amended. To the extent any provision of the Plan or action by the Board of Directors or Compensation Committee fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Board of Directors and/or such Compensation Committee. 5. Terms of Options. Within the limits of the express provisions of the Plan, the Board of Directors or a Committee may grant either ISOs or NQSOs or SARs in tandem with NQSOs or SARs in tandem with ISOs. An ISO or an NQSO enables the optionee to purchase from the Company, at any time during a specified exercise period, a specified number of shares of Common Stock at a specified price (the "Option Price"). The optionee, if granted a SAR in tandem with a NQSO or ISO, may receive from the Company, in lieu of exercising his option to purchase shares pursuant to his NQSO or ISO, at one of the certain specified times during the exercise period of the NQSO or ISO as set by the Board of Directors or a Committee, the excess of the fair market value upon such exercise (as determined in accordance with subparagraph (b) of this Paragraph 5) of one share of Common Stock over the Option Price per share specified upon grant of the NQSO or ISO/SAR multiplied by the number of shares of Common Stock covered by the SAR so exercised. The character and terms of each Option granted under the Plan shall be determined by the Board of Directors and/or a Committee consistent with the provisions of the Plan, including the following: (a) An Option granted under the Plan must be granted within 10 years from the date the Plan is adopted, or the date the Plan is approved by the stockholders of the Company, whichever is earlier. (b) The Option Price of the shares of Common Stock subject to each ISO and each SAR issued in tandem with an ISO shall not be less than the fair market value of such shares of Common Stock at the time such ISO is granted. Such fair market value shall be determined by the Board of Directors and, if the shares of Common Stock are listed on a national securities exchange or traded on the over-the-counter market, the fair market value shall be the closing price on such exchange, or the mean of the closing bid and asked prices of the shares of Common Stock on the over-the-counter market, as reported by the Nasdaq Stock Market, the National Association of Securities Dealers OTC Bulletin Board or the National Quotation Bureau, Inc., as the case may be, on the day on which the Option is granted or, if there is no closing price or bid or asked price on that day, the closing price or mean of the closing bid and asked prices on the most recent day preceding the day on which the Option is granted for which such prices are available. If an ISO or SAR in tandem with an ISO is granted to any individual who, immediately before the ISO is to be granted, owns (directly or through attribution) more than 10% of the total combined voting power of all classes of capital stock of the Company or a subsidiary or parent of the Company, the Option Price of the shares of Common Stock subject to such ISO shall not be less than 110% of the fair market value per share of the shares of Common Stock at the time such ISO is granted. (c) The Option Price of the shares of Common Stock subject to an NQSO or an SAR in tandem with a NQSO granted pursuant to the Plan shall be determined by the Board of Directors or a Committee, in its sole discretion, subject to a minimum option price established from time to time under any state securities laws with respect to grants in such state. (d) In no event shall any Option granted under the Plan have an expiration date later than 10 years from the date of its grant, and all Options granted under the Plan shall be subject to earlier termination as expressly provided in Paragraph 6 hereof. If an ISO or an SAR in tandem with an ISO is granted to any individual who, immediately before the ISO is granted, owns (directly or through attribution) more that 10% of the total combined voting power of all classes of capital stock of the Company or of a subsidiary or parent of the Company, such ISO shall by its terms expire and shall not be exercisable after the expiration of five (5) years from the date of its grant. (e) An SAR may be exercised at any time during the exercise period of the ISO or NQSO with which it is granted in tandem and prior to the exercise of such ISO or NQSO. Notwithstanding the foregoing, the Board of Directors and/or a Committee shall in their discretion determine from time to time the terms and conditions of SAR's to be granted, which terms may vary from the afore-described conditions, and which terms shall be set forth in a written stock option agreement evidencing the SAR granted in tandem with the ISO or NQSO. The exercise of an SAR granted in tandem with an ISO or NQSO shall be deemed to cancel such number of shares subject to the unexercised Option as were subject to the exercised SAR. The Board of Directors or a Committee has the discretion to alter the terms of the SARS if necessary to comply with Federal or state securities law. Amounts to be paid by the Company in connection with an SAR may, in the Board of Director's or a Committee's discretion, be made in cash, Common Stock or a combination thereof. (f) An Option granted under the Plan shall become exercisable, in whole at any time or in part from time to time, but in no event may an Option (i) be exercised as to less than one hundred (100) shares of Common Stock at any one time, or the remaining shares of Common Stock covered by the Option if less than one hundred (100), and (ii) except with respect to performance based Options, or performance based options which vest at a certain date in the future irrespective of whether or not performance is achieved become fully exercisable more than five years from the date of its grant nor shall less than 20% of the Option become exercisable in any of the first five years of the Option, if not terminated as provided in Section 6 hereof. The Board of Directors or a Committee, if applicable, shall, in the event it so elects in its sole discretion, set one or more performance standards with respect to one or more Options upon which vesting is conditioned (which performance standards may vary among the Options). (g) An Option granted under the Plan shall be exercised by the delivery by the holder thereof to the Company at its principal office (to the attention of the Secretary) of written notice of the number of full shares of Common Stock with respect to which the Option is being exercised, accompanied by payment in full, which payment at the option of the optionee shall be in the form of (i) cash or certified or bank check payable to the order of the Company, of the Option Price of such shares of Common Stock, or, (ii) if permitted by a Committee or the Board of Directors, as determined by a Committee or the Board of Directors in its sole discretion at the time of the grant of the Option with respect to an ISO and at or prior to the time of exercise with respect to a NQSO, by the delivery of shares of Common Stock having a fair market value equal to the Option Price or the delivery of an interest-bearing promissory note having an original principal balance equal to the Option Price and an interest rate not below the rate which would result in imputed interest under the Code (provided, in order to qualify as an ISO, more than one year shall have passed since the date of grant and one year from the date of exercise), or (iii) at the option of a Committee or the Board of Directors, determined by a Committee or the Board of Directors in its sole discretion at the time of the grant of the Option with respect to an ISO and at or prior to the time of exercise with respect to a NQSO, by a combination of cash, promissory note and/or such shares of Common Stock (subject to the restriction above) held by the employee that have a fair market value together with such cash and principal amount of any promissory note that shall equal the Option Price, and, in the case of a NQSO, at the discretion of a Committee or Board of Directors by having the Company withhold from the shares of Common Stock to be issued upon exercise of the Option that number of shares having a fair market value of the Common Stock equal to the exercise price and/or the tax withholding amount due. Furthermore, a Committee of the Board of Directors in its sole discretion may provide for withholding as set forth in Paragraph 9(c) hereof. In the event an employee is granted an ISO or NQSO in tandem with an SAR and desires to exercise such SAR, such written notice shall so state such intention. To the extent allowed by applicable Federal and state securities laws, the Option Price may also be paid in full by a broker-dealer to whom the Optionee has submitted an exercise notice consisting of a fully endorsed Option, or through any other medium of payment as the Board of Directors and/or a Committee, in its discretion, shall authorize. (h) The holder of an Option shall have none of the rights of a stockholder with respect to the shares of Common Stock covered by such holder's Option until such shares of Common Stock shall be issued to such holder upon the exercise of the Option. (i) All ISOs or SARs in tandem with ISOs granted under the Plan shall not be transferable otherwise than by will or the laws of descent and distribution and may be exercised during the lifetime of the holder thereof only by the holder. The Board or a Committee, in its sole discretion, shall determine whether an Option other than an ISO or SAR in tandem with an ISO shall be transferable. No Option granted under the Plan shall be subject to execution, attachment or other process. (j) The aggregate fair market value, determined as of the time any ISO or SAR in tandem with an ISO is granted and in the manner provided for by Subparagraph (b) of this Paragraph 5, of the shares of Common Stock with respect to which ISOs granted under the Plan are exercisable for the first time during any calendar year and under incentive stock options qualifying as such in accordance with Section 422 of the Code granted under any other incentive stock option plan maintained by the Company or its parent or subsidiary corporations, shall not exceed $100,000. Any grant of Options in excess of such amount shall be deemed a grant of a NQSO. (k) Notwithstanding anything contained herein to the contrary, an SAR which was granted in tandem with an ISO shall (i) expire no later than the expiration of the underlying ISO; (ii) be for no more than 100% of the spread at the time the SAR is exercised; (iii) shall only be transferable when the underlying ISO is transferable; (iv) only be exercised when the underlying ISO is eligible to be exercised; and (v) only be exercisable when there is a positive spread. (l) In no event shall an employee be granted Options for more than 200,000 shares of Common Stock during any calendar year period; provided, however, that the limitation set forth in this Section 5(l) shall be subject to adjustment as provided in Section 8 herein. 6. Death or Termination of Employment/Consulting Relationship. (a) Except as provided herein, or otherwise determined by the Board of Directors or a Committee in its sole discretion, upon termination of employment with the Company voluntarily by the employee or termination of a consulting relationship with the Company prior to the termination of the term thereof, a holder of an Option under the Plan may exercise such Options to the extent such Options were exercisable as of the date of termination at any time within three (3) months after the date of such termination, subject to the provisions of Subparagraph (d) of this Paragraph 6. Notwithstanding anything contained herein to the contrary, unless otherwise determined by the Board of Directors or a Committee in its sole discretion, any options granted hereunder to an optionee and then outstanding shall immediately terminate in the event the optionee is terminated as a result of performing services for the Company in bad faith or has been convicted of a felony committed against the Company, or is terminated for cause, and the other provisions of this Section 6 shall not be applicable thereto. For purposes of this Section 6, termination for cause shall be deemed the decision of the Company, in its sole discretion. (b) If the holder of an Option granted under the Plan dies (i) while employed by the Company or a subsidiary or parent corporation or while providing consulting services to the Company or a subsidiary or parent corporation or (ii) within six (6) months after the termination of such holder's employment/consulting, such Options may, subject to the provisions of subparagraph (d) of this Paragraph 6, be exercised by a legatee or legatees of such Option under such individual's last will or by such individual's personal representatives or distributees at any time within such time as determined by the Board of Directors or a Committee in its sole discretion, but in any event within twelve months, less one (1) day after the individual's death, to the extent such Options were exercisable as of the date of death or date of termination of employment, whichever date is earlier. (c) If the holder of an Option under the Plan becomes disabled within the definition of section 22(e)(3) of the Code while employed by the Company or a subsidiary or parent corporation, such Option may, subject to the provisions of subparagraph (d) of this Paragraph 6, be exercised at any time within six months less one day after such holder's termination of employment due to the disability. (d) Except as otherwise determined by the Board of Directors or a Committee in its sole discretion, an Option may not be exercised pursuant to this Paragraph 6 except to the extent that the holder was entitled to exercise the Option at the time of termination of employment, consulting relationship or death, and in any event may not be exercised after the original expiration date of the Option. Notwithstanding anything contained herein which may be to the contrary, such termination or death prior to vesting shall, unless otherwise determined by the Board of Directors or Committee, in its sole discretion, be deemed to occur at a time the holder was not entitled to exercise the Option. (e) The Board of Directors or a Committee, in its sole discretion, may at such time or times as it deems appropriate, if ever, accelerate all or part of the vesting provisions with respect to one or more outstanding options. The acceleration of one Option shall not infer that any Option is or shall be accelerated. 7. Leave of Absence. For the purposes of the Plan, an individual who is on military or sick leave or other bona fide leave of absence (such as temporary employment by the Government) shall be considered as remaining in the employ of the Company or of a subsidiary or parent corporation for ninety (90) days or such longer period as such individual's right to reemployment is guaranteed either by statute or by contract. 8. Adjustment Upon Changes in Capitalization. (a) In the event that the outstanding shares of Common Stock are hereafter changed by reason of recapitalization, reclassification, stock split-up, combination or exchange of shares of Common Stock or the like, or by the issuance of dividends payable in shares of Common Stock, an appropriate adjustment shall be made by the Board of Directors, as determined by the Board of Directors and/or a Committee, in the aggregate number of shares of Common Stock available under the Plan, in the number of shares of Common Stock issuable upon exercise of outstanding Options, and the Option Price per share. In the event of any consolidation or merger of the Company with or into another company, or the conveyance of all or substantially all of the assets of the Company to another company for solely stock and/or securities, each then outstanding Option shall upon exercise thereafter entitle the holder thereof to such number of shares of Common Stock or other securities or property to which a holder of shares of Common Stock of the Company would have been entitled to upon such consolidation, merger or conveyance; and in any such case appropriate adjustment, as determined by the Board of Directors of the Company (or successor entity) shall be made as set forth above with respect to any future changes in the capitalization of the Company or its successor entity. In the event of the proposed dissolution or liquidation of the Company, or, except as provided in (b) below, the sale of substantially all the assets of the Company for other than stock and/or securities, all outstanding Options under the Plan will automatically terminate, unless otherwise provided by the Board of Directors of the Company or any authorized committee thereof. (b) Any Option granted under the Plan, may, at the discretion of the Board of Directors of the Company and said other corporation, be exchanged for options to purchase shares of capital stock of another corporation which the Company, and/or a subsidiary thereof is merged into, consolidated with, or all or a substantial portion of the property or stock of which is acquired by said other corporation or separated or reorganized into. The terms, provisions and benefits to the optionee of such substitute option(s) shall in all respects be identical to the terms, provisions and benefits of optionee under his Option(s) prior to said substitution. To the extent the above may be inconsistent with Sections 424(a)(1) and (2) of the Code, the above shall be deemed interpreted so as to comply therewith. (c) Any adjustment in the number of shares of Common Stock shall apply proportionately to only the unexercised portion of the Options granted hereunder. If fractions of shares of Common Stock would result from any such adjustment, the adjustment shall be revised to the next higher whole number of shares of Common Stock. No adjustment shall be made with respect to stock dividends or splits which do not exceed 5% on any fiscal year, cash dividends or the issuance to shareholders of the grantor of rights to subscribe for additional shares of Common Stock or other securities. (d) Notwithstanding anything contained in this Plan, including, but not limited to, Section 5 hereof, an option granted under the plan of another corporation which either (I) sells substantially all of its and or its subsidiaries assets to the Company and or a subsidiary thereof or (ii) is merged into, consolidated with, or all or a substantial portion of its stock is acquired by the Company and/or a subsidiary thereof may be exchanged for Options to purchase shares of the Company's Common Stock upon substantially the same terms and conditions of the acquired company's plan. To the extent the above may be inconsistent with Section 424(a)(1) and (2) of the Code, the above shall be deemed interpreted so as to comply therewith. 9. Further Conditions of Exercise. (a) Unless the shares of Common Stock issuable upon the exercise of an Option have been registered with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended, prior to the exercise of the Option, an optionee must represent in writing to the Company that such shares of Common Stock are being acquired for investment purposes only and not with a view towards the further resale or distribution thereof, and must supply to the Company such other documentation as may be required by the Company, unless in the opinion of counsel to the Company such representation, agreement or documentation is not necessary to comply with said Act. (b) The Company shall not be obligated to deliver any shares of Common Stock until they have been listed on each securities exchange on which the shares of Common Stock may then be listed or until there has been qualification under or compliance with such state or federal laws, rules or regulations as the Company may deem applicable. (c) The Board of Directors or Committee may make such provisions and take such steps as it may deem necessary or appropriate for the withholding of any taxes that the Company is required by any law or regulation of any governmental authority, whether federal, state or local, domestic or foreign, to withhold in connection with the exercise of any Option, including, but not limited to, (i) the withholding of payment of all or any portion of such Option and/or SAR until the holder reimburses the Company for the amount the Company is required to withhold with respect to such taxes, or (ii) the cancelling of any number of shares of Common Stock issuable upon exercise of such Option and/or SAR in an amount sufficient to reimburse the Company for the amount it is required to so withhold, (iii) the selling of any property contingently credited by the Company for the purpose of exercising such Option, in order to withhold or reimburse the Company for the amount it is required to so withhold, or (iv) withholding the amount due from such employee's wages if the employee is employed by the Company or any subsidiary thereof. 9. Termination, Modification and Amendment. (a) The Plan (but not Options previously granted under the Plan) shall terminate ten (10) years from the earliest of the date of its adoption by the Board of Directors, or the date the Plan is approved by the stockholders of the Company, or such date of termination, as hereinafter provided, and no Option shall be granted after termination of the Plan. (b) The Plan may from time to time be terminated, modified or amended by the affirmative vote of the holders of a majority of the outstanding shares of capital stock of the Company entitled to vote thereon. (c) The Board of Directors of the Company may at any time, prior to ten (10) years from the earlier of the date of the adoption of the Plan by such Board of Directors or the date the Plan is approved by the stockholders, terminate the Plan or from time to time make such modifications or amendments of the Plan as it may deem advisable; provided, however, that the Board of Directors shall not, without approval by the affirmative vote of the holders of a majority of the outstanding shares of capital stock of the Company entitled to vote thereon, increase (except as provided by Paragraph 8) the maximum number of shares of Common Stock as to which Options or shares may be granted under the Plan, or materially change the standards of eligibility under the Plan. Any amendment to the Plan which, in the opinion of counsel to the Company, will be deemed to result in the adoption of a new Plan, will not be effective until approved by the affirmative vote of the holders of a majority of the outstanding shares of capital stock of the Company entitled to vote thereon. (d) No termination, modification or amendment of the Plan may adversely affect the rights under any outstanding Option without the consent of the individual to whom such Option shall have been previously granted. 11. Effective Date of the Plan. The Plan shall become effective upon adoption by the Board of Directors of the Company. The Plan shall be subject to approval by the affirmative vote of the holders of a majority of the outstanding shares of capital stock of the Company entitled to vote thereon within one year before or after adoption of the Plan by the Board of Directors. 12. Not a Contract of Employment. Nothing contained in the Plan or in any option agreement executed pursuant hereto shall be deemed to confer upon any individual to whom an Option is or may be granted hereunder any right to remain in the employ of the Company or of a subsidiary or parent of the Company or in any way limit the right of the Company, or of any parent or subsidiary thereof, to terminate the employment of any employee. 13. Other Compensation Plans. The adoption of the Plan shall not affect any other stock option plan, incentive plan or any other compensation plan in effect for the Company, nor shall the Plan preclude the Company from establishing any other form of stock option plan, incentive plan or any other compensation plan. EX-10.(I) 5 MEDIATION RESOLUTION AGREEMENT EXHIBIT 10(i) Mediation Resolution Agreement August 10, 1999 Among: AFP Imaging Corporation ("AFP") DentX International Inc. ("Dent-X") ProDen Systems, Inc. ("ProDen") Cade Adams ("Adams") Pursuant to a written mediation agreement dated as of June 24, 1999 the parties, represented in the case of AFP and DentX by Paul C. Kurland of Snow Becker Krause, PC, and in the case of ProDen and Adams by Milton R. Stewart of Davis Wright Tremaine, LLP, met, in the offices of Davis Wright Tremaine LLP in New York City, New York to discuss, mediate and attempt to resolve the business dispute between the parties arising out of an Asset Purchase Agreement ("Asset Purchase Agreement") among the parties dated December 23, 1997, an Employment Agreement (Employment Agreement") between AFP and Adams dated December 23, 1997 and an Unsecured Non-Negotiable Promissory Note (Promissory Note") from DentX, guaranteed by AFP, payable to ProDen (and later assigned to Adams) in the form shown in Exhibit 3.1 to the Asset Purchase Agreement. The parties having reached, through mediation, agreement on all of the issues between them pertaining to the foregoing transactions and documents, each does thereby, in consideration of the mutual promises set forth herein, and for good and other consideration, the receipt and sufficiency of which is hereby, acknowledged, do thereby agree as follows: 1. Scope of Settlement The parties intend the settlement to be in full and complete satisfaction and compromise of any and all claims any of the parties may have or assert against the other, contingent or liquidated known, or unknown, arising out of the Asset Purchase Agreement, the Promissory Note and The Employment Agreement. To that end each of the parties shall separately execute the attached mutual release identified as Exhibit A. 2. Settlement Terms The parties agree to reduce the purchase price set forth in the Asset Purchase Agreement by substituting for the Promissory Note (which now bears a balance of approximately $2.4 million) the following payments, transfers and obligations to Adams: a. AFP will pay to Adams, on the "Closing Date" (as thereinafter defined), $150,000. b. On the Closing Date AFP will tender to Adams a new promissory note (in substitution for the Promissory Note) in the amount of $850,000 (the "New Promissory Note"). The New Promissory Note shall bear no interest through December 31, 1999. Thereafter interest shall accrue at the rate of 7.75% per annum and shall be payable monthly (interest only) through December 31, 2001. Beginning on January 1, 2002, The New Promissory Note will be payable in 36 equal monthly installments of principal and interest at 7.75% per annum. The New Promissory Note will be In the form set forth in Exhibit B (attached), which contains a 20 day notice and cure provision. c. AFP shall pay, provide or tender all pay and benefits (including options) due to Adams under the Employment Agreement, when and as due through its initial term. Adams will have no further obligations under the Employment Agreement except to be available to consult with AFP, from time to time, upon reasonable notice and request at times and frequencies convenient to Adams. d. The Non-Competition Agreement dated as of December 23, 1997 between AFP and Adams (the Non-Competition Agreement) shall remain in force and effect. e. All furniture, fixtures and equipment including inventory, currently owned by AFP or DentX and located in or about Vancouver, Washington shall become and remain the sole properly of Adams. All other assets transferred pursuant to the Asset Purchase Agreement shall remain the property of the purchaser thereunder. f. Simultaneous with the execution and delivery to Simeon H. Baum in escrow of this Agreement, the parties shall deliver to Simeon H. Baum in escrow the executed releases identified as Exhibit A, which are included among the term "documents" described in Paragraph 3 hereof. 3. Escrow and Closing Final documents shall be prepared, executed and delivered to the mediator, Simeon H. Baum, not later then the close of business on Wednesday, July 21, 1999. AFP shall transfer $150,000 in collected funds payable to Adams and shall further transfer the New Promissory Note to the mediator at the same time. The transaction shall close and documents and funds shall be delivered to the respective parties on Tuesday, August 10, 1999. There shall be no contingency to the closing other than the passage of time from July 21, 1999 to August 10, 1999 (the "Closing Date"). 4. Attorneys Fees and Costs In any litigation instituted by either party to enforce payment or the fulfillment of other obligations pursuant to this mediation Resolution Agreement, the prevailing party shall recover from the other party, in addition to costs and disbursements allowed by law, such sums as the court may allow as attorneys fees in the litigation, including any appeals therefrom. Signed and dated this _______day of ____________, 1999. AFP Imaging Corporation By:_____________________________________________________________________ David Vozick Dent-X International, Inc. By:_____________________________________________________________________ ProDen Systems, Inc. By:_____________________________________________________________________ Cade Adams, President Cade Adams By:_____________________________________________________________________ Cade Adams EX-10.(J) 6 LOAN AND SECURITY AGREEMENT Exhibit 10(j) FOURTH AMENDMENT TO LOAN AND SECURITY AGREEMENT This Fourth Amendment to Loan and Security Agreement (this "Amendment"), dated as of August 10, 1999, 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 thereinafter jointly and severally, referred to as "Original Borrowers"), DENT-X INTERNATIONAL, INC., a New York corporation ("DXI") 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. W I T N E S S E T H: WHEREAS, Original Borrowers, and 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 (ii) that certain Second Amendment to Loan and Security Agreement dated as of July 14, 1995 and (iii) that certain Third Amendment to Loan and Security Agreement dated as of July 14, 1997 (as so amended, the "Original Loan Agreement") setting forth the terms and conditions under which Lender would make loans and other advances to Borrower; and WHEREAS, DXl is a wholly owned subsidiary of AFP; WHEREAS, on December 23, 1997 DXI acquired certain specified assets of ProDen SYSTEMS, INC., a Washington corporation ("ProDen"), pursuant to the terms of a certain Asset Purchase Agreement, dated as of December 23, 1997, by and among AFP, DXI, ProDen and Cade Adams (the "ProDen Purchase Agreement"); and WHEREAS, Original Borrowers have 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 therein set forth: NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are thereby acknowledged, the parties agree as follows: 1. Definitions. Unless otherwise defined in this Amendment, all capitalized terms used therein shall have the same meaning as set forth in the Loan Agreement. 2. Amendments. On the Effective Date of this Amendment the Original Loan Agreement is thereby amended as follows: (a) Paragraph 1(A) is thereby amended by adding or substituting, as the case may be, the following definitions: "'ACG' shall refer to ACG Nystromgruppen AB, a Swedish corporation "'this Agreement' shall mean and collectively refer to the Loan and Security Agreement dated as of November 22, 1993, as amended by the First Amendment, the Second Amendment, the Third Amendment, and this Amendment, and as the same may thereafter be amended, restated, renewed, extended or modified from time to time." "'Borrower' means, individually and collectively, jointly and severally, each of AFP, LogE, Visiplex Regam and DXI." "'Collateral' shall have the meaning given to it in Section 7 of the Fourth Amendment." "'DXI Note' refers to those certain subordinated promissory notes dated December 23, 1997 in the aggregate face amount of $3,000,000 made by DXI, pursuant to the ProDen Purchase Agreement, and delivered to ProDen and Cade Adams, as amended by that certain mediation settlement evidenced by a new Promissory Note dated August 10, 1999, which results in the aggregate face amount of the DXI Note being $850,000, with interest at 7.75% per annum, and provides for interest only payments beginning January l, 2000 through December 31, 2001 and principal payments beginning January 1, 2002 based on a 36-month amortization." "'Excess Cash Flow' means Operating Cash Flow/Permitted less Total Contractual Debt Service." "'Operating Cash Flow/Permitted' means, for any period, Borrower's net income or loss (excluding the effect of any extraordinary gains or losses), determined in accordance with GAAP, ~ each of the following items, to the extent deducted from the revenue of Borrower in the calculation of net income or loss: (i) depreciation; (ii) amortization and other non-cash charges; (iii) interest expense paid or accrued; (iv)total federal and state income tax expense determined as the accrued liability of Borrower in respect of such period, regardless of what portion of such expense has actually been paid by Borrower during such period; and (v) management fees and other fees paid to Subordinating Creditors, to the extent permitted thereunder, and after deduction for each of (a) federal and state income taxes, to the extent actually paid during such period; (b) any non-cash income (but only to the extent such non-cash income was included in the revenues of Borrower in the calculation of net income or loss); and (c) all permitted Capital Expenditures (without regard to any waiver given by Lender with respect to any limitation on such Capital Expenditures) actually made during such period and not financed." "'Subordinating Creditor' shall mean and collectively refer to ProDen, ACG and the holder of the DXI Note." "'Subsidiary' means any of LogE, Visiplex, Regam or DXI." (b) Notwithstanding anything to the contrary contained in the Loan Agreement, "Eligible Receivables" shall exclude Receivables of DXI unless and until Lender shall have satisfied itself in its sole determination that Lender has a first priority perfected security interest in such Receivables of DXI (c) Notwithstanding anything to the contrary contained in the Loan Agreement, "Eligible Inventory" shall exclude Inventory of DXI unless and until Lender shall have satisfied itself in its sole determination that Lender has a first priority perfected security interest in such Inventory. (d) Paragraph 3(G) is thereby 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 and, from and after the Effective Date of the Fourth Amendment, all costs and expenses incurred by Lender in connection therewith (the "Examination Fee"). (e) Paragraph 9 is thereby amended by adding the following: "(g) Excess Cash Flow Prepayments. Within sixty (60) days following receipt by Lender of Borrower's annual audited financial statements, commencing with such financial statements for Borrower's fiscal year ending June 30, 1999, Lender may deliver a notice to Borrower requiring Borrower to prepay the Term Loans in an amount up to Fifty Percent (50%) of Borrower's Excess Cash Flow for such year. Any prepayments required under this section are strictly at the sole option of Lender, and are payable within thirty (30) days following the date of demand by Lender. All amounts paid pursuant to this section shall be applied to the Obligations in such order as Lender may elect. No Termination Fee or other form of prepayment premium shall be applied to any payment made under this Paragraph." (f) The following new Section 13(A)(vi) is thereby added to read as follows: "(vi) DXI is a corporation duly organized, validly existing and in good standing under the laws of the State of New York, 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 DXI), 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;" (g) The following is added as a new Section 13(B)(v): "(v) DXI has not, since its formation, been known by or used any other corporate or fictitious name, including, but not limited to names which were used by ProDen;" (h) The following is added at the end of Section 13(P): "In addition to the locations specified on Exhibit A, it is acknowledged that DXI, until July 30, 1999, will have offices at 13915 NW Third Court, Vancouver, Washington (the "Vancouver Location"). The Borrower represents and warrants that the Vancouver Location is used only until June 30, 1999 for office purposes and no Inventory is (or shall be) stored or located at the Vancouver Location." (i) Section l5(K) is deleted is in its entirety and replaced with the "(K) Indebtedness. Create, incur, assume or permit to exist any Indebtedness (including Indebtedness in connection with Capital Leases) in excess of $450,000 during any fiscal year, determined on a consolidated basis, other than (i) the Obligations, (ii) trade payables and other contractual obligations to suppliers and customers incurred in the ordinary course of business, (iii) other Indebtedness existing on the date of this Agreement and reflected in the Prepared Financials (other than Indebtedness paid on the date of this Agreement from proceeds of the initial advances thereunder), (iv) the Indebtedness owed to ACG evidenced by that certain US $1,000,000 promissory note of AFP dated April 17, 1997 (the "ACG Note"), and (v) the Indebtedness evidenced by the DXI Note." (j) Section l5(L) is deleted in its entirety and replaced with the following "(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; provided, however, that if (A) no Event of Default exists and (B) no act or e\vent 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, or invest in (by capital contribution- or otherwise) or purchase or repurchase any stock or Indebtedness or property of Regam, in excess of $50,000 each Fiscal Year, except on the following terms and subject to the following conditions: (A) both before and after having given effect to such sale, transfer, distribution, payment or purchase, 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) Lender shall have given its prior written approval for such sale, transfer, distribution of payment or purchase; (iii) notwithstanding the provisions of Section l5(L)(i) or Section 1 5(L)(ii), Borrower may pay compensation permitted by Paragraph l5(J) to employees who are Affiliates, and may make loans or other advances permitted by Paragraph l5(B) to executives who are Affiliates. The Borrower may not make any payment to any Subordinated Creditor (including, but not limiting the generality of the foregoing, any payments on either the DXI Note, or any indebtedness of Regam) except as permitted by Section l5(N)." (k) Paragraph 15 of the Original Loan Agreement is amended by adding the following as subparagraph (N): Notwithstanding anything to the contrary contained in the Loan Agreement, until all of the Obligations have been fully repaid to Lender, Borrower shall not make any direct or indirect payment or prepayment in cash, property or securities, by set-off or otherwise, with respect to the DXI Note or any indebtedness of Regam without the prior consent of Lender which consent shall not be withheld provided (a) that the Borrower, at least fifteen (15) days prior to the proposed payment, delivers to Lender a signed certification (which will be relied upon by Lender) in a form acceptable to Lender, certifying to the benefit of Lender that (i) no Event of Default has occurred or is continuing under the Loan Agreement, and no Event of Default would result from the making of such payment, and (ii) according to the monthly financial statements submitted to Lender by Borrower, Borrower will have a Total Debt Service Coverage Ratio of no less than 1.1 to 1.0 and will be in compliance after giving effect to the payment with all other financial covenants set forth in the Loan Agreement, (b) the Lender verifying the accuracy of the foregoing certification of Borrower, and (c) Borrower shall have at least $500,000 in excess borrowing availability under the Total Facility after giving effect to any reserves required by Lender." (l) The provisions of Section 2(k) of the Third Amendment are amended and restated in their entirety as follows: 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, Borrower shall report to Lender Collateral information on a monthly basis (in the form of a Borrowing Base Certificate to be prescribed by Lender). (m) The provisions of Section 2(N) of the Third Amendment provided within sixty (60) days after the Third Amendment Effective Date, Borrower shall cause to be delivered to Lender a Subordination Agreement from ACG with respect to the ACG Note (the "ACG Agreement"). The Borrower represents to the Lender that it has used good faith and diligent efforts to obtain the ACG Agreement but has not been able to obtain the same. Relying on the foregoing representation, the Lender waives the requirement that the Borrower obtain the ACG Agreement. The foregoing waiver shall not be constituted as a subordination by the Lender of all or any part of the Loan to the debt owed to ACG. 4. Waiver. (a) Based on the financial statements the Borrower has supplied for the calendar quarter ending March 31, 1999, the Borrower is in default of the covenants of Borrower contained in Section 14(Q) of the Original Loan Agreement. For so long as there is no other Event of Default by Borrower, the Lender agrees that the failure of the Borrower to conform, for the calendar quarter ending March 31, 1999, with the covenants contained in Section 14(Q) of the Loan Agreement shall not constitute an Event of Default. (b) The Lender acknowledges that the Borrower's execution of the ACG Note and DXI Note constitutes an Event of Default by Borrower of its covenants contained in Section 15(K) of the Loan Agreement. The default has been corrected, as of the Effective Date, by this Amendment. The Lender waives such default solely as it pertains to the ACG Note and DXI Note and solely for the periods prior to the Effective Date. (c) The Lender acknowledges that the Borrower has been in dispute with ProDen and Cade Adams regarding issues associated with the ProDen Purchase Agreement and that during the pendency of the dispute, the Borrower has not made payments under the DXI Note. The Lender waives any basis to claim that the failure of the Borrower, prior to the Effective Date, to make payments required under the DXI Note is an Event of Default or an Incipient Default. (d) The Borrower acknowledges that the foregoing waivers by Lender are limited to the specific periods, matters, and circumstances set forth in this Section. Nothing in this Section should be construed as a waiver by Lender of the Borrower's compliance with all other provisions of the Original Loan Agreement (as amended thereby in or as a waiver of the requirement that the Borrower observe all other financial covenants contained in the Original Loan Agreement and to conform with Sections 14(Q) and l5(K) of the Original Loan Agreement for all other periods other than those specifically set forth in this Section. 5. Reserve. From and after the date of this Amendment, in addition to any other rights under the Original Loan Agreement, the Lender will thereinafter reserve $600,000 from the borrowing availability under the Total Facility. 6. DXI Note. The Lender thereby consents to the Borrower (i) prior to the Effective Date, making a lump sum payment to ProDen of $150,000 in connection with the DXI Note and the settlement of the dispute amongst the parties; and (ii) after the Effective Date, making the payments contemplated by the DXI Note. The Borrower agrees to use good faith efforts, after the Effective Date, to deliver to Lender a Subordination and Standstill Agreement by ProDen and Cade Adams in a form and content acceptable to Lender. 7. Amendment Fee. In consideration of, among other things, Lender's consent to this Amendment, Borrower agrees to pay to Lender, upon Borrower's execution of this Amendment, the amount of Twenty-Five Thousand Dollars ($25,000) (the "Amendment Fee"). The Amendment Fee has been fully earned by Lender and is nonrefundable and may be disbursed by Lender from the Total Facility. 8. 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 thereby 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 thereafter 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 thereafter 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 therein, 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 Regain 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. 9. 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 Amendment; (ii) A corporate resolution from the Board of Directors of each entity constituting Borrower (and from the Shareholders, if necessary) approving the transactions contemplated thereby and the execution and delivery of this Amendment; (iii) A certificate of Borrower's president and corporate assistant secretary attesting to the facts that (A) the corporate resolutions set forth in Section 9(a)(ii) 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. (iv) Such amendments to Lender's existing financing statements and such new financing statements in Lender's favor as Lender deems necessary; and (v) 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 thereof, 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) After giving effect to this Amendment, there shall not then exist an Event of Default; (d) All the representations and warranties of the Loan Parties in the Loan Documents as amended thereby 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 and judgment search on each Borrower; (f) Borrower has paid to Lender the Amendment Fee or in lieu thereof the fee has been paid to Lender by an advance by Lender against the Total Facility; (g) Lender shall have received a recent orderly liquidation value appraisal of Borrower's Equipment calculated at the lower of cost or market value, on a first-in, first-out basis, performed by one or more appraisers acceptable to Lender; and (h) Borrower shall have paid all reasonable 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 this Amendment, which costs, fees and expenses may be paid to Lender by an advance by Lender against the Total Facility. 10. 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 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 thereby or any of the other Loan Documents, with or without notice or lapse of time. 11. Validity of Documents. Borrower thereby ratifies, reaffirms, acknowledges and agrees that the Loan Agreement as amended thereby 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 thereby 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. 12. Reaffirmation of Warranties. Borrower thereby reaffirms to Lender each of the representations, warranties, covenants and agreements of Borrower as set forth in each of the Loan Documents as amended thereby with the same force and effect as if each were separately stated therein and made as of the date thereof. Borrower represents and warrants to Lender that with respect to the financing transaction therein 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. 13. Ratification of Terms and Conditions. All terms, conditions and provisions of the Loan Agreement as amended thereby, 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 thereby. 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. 14. 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. 15. 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. 16. Choice of Law. The Loan Documents and this Amendment shall be performed and construed in accordance with the laws of the State of Arizona. 17. 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. 18. 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. 19. Effectiveness of Amendment. This Amendment shall not be effective until the same is executed and delivered by the parties thereto and all conditions set forth in Section 9 thereof have been satisfied. The date that all of the conditions set forth in Section 9 thereof have been satisfied is called the "Effective Date." 20. No Waiver. Except as specifically set forth therein, this Amendment in no way acts as a waiver by Lender of any breach, default, Event of Default or condition which, with the giving of notice or passing of time or both, would constitute an Event of Default, of Borrower (whether known or unknown to Lender) or as a release or relinquishment of any of the liens, security interests, rights or remedies securing payment and performance of the Obligations or the enforcement thereof. Nothing contained in this Amendment is intended to or shall be construed as relieving any person or entity, whether a party to this Amendment or not, of any of such person's or entity's obligations to Lender. [SIGNATURE PAGE FOLLOWS] 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 York corporation, successor by merger to AFP corporation Technologies Corporation, formerly known as Kenro Corporation, a New Jersey corporation By: ----------------------------------- Name: By: ----------------------------------- ----------------------------------- Title: Name: ----------------------------------- ----------------------------------- Title: ----------------------------------- REGAM MEDICAL SYSTEMS INTERNATIONAL AB, a Swedish corporation VISIPLEX INSTRUMENTS CORPORATION, a New York corporation formerly known as Xenon By: Industries, Inc. ----------------------------------- Name: By: ----------------------------------- ----------------------------------- Title: Name: ----------------------------------- ----------------------------------- Title: ----------------------------------- FINOVA CAPITAL CORPORATION, a Delaware corporation formerly known as Greyhound Financial Corporation, DENT-X INTERNATIONAL, INC., a New York successor-by-merger to Greyhound corporation Financial Capital Corporation, an Oregon corporation By: ----------------------------------- By: Name: ----------------------------------- ----------------------------------- Name: Title: ----------------------------------- ----------------------------------- Title: -----------------------------------
EX-21 7 SUBSIDIARIES OF REGISTRANT Exhibit 21 Subsidiaries of Registrant Country/State of % of Voting Name Incorporation Securities Owned ---- ------------- ---------------- 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% Dent-X International Inc. New York 100% EX-27 8 FINANCIAL DATA SCHEDULE
5 1 US DOLLARS YEAR JUN-30-1999 JUN-30-1998 JUN-30-1999 1.000 249,053 0 4,350,514 427,000 5,494,828 9,757,353 8,035,982 6,810,006 13,986,084 2,803,569 0 0 0 92,710 5,115,589 13,986,084 29,370,338 29,370,338 20,462,789 10,589,437 0 0 658,421 (2,340,309) (133,367) (2,206,942) 0 0 0 (2,206,942) (.24) (.24)
-----END PRIVACY-ENHANCED MESSAGE-----