<PAGE>
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K/A No. 1
[X] Annual Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the Fiscal Year Ended June 30, 1997
-------------
or
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
Commission File Number: 0-10832
-------
AFP Imaging Corporation
------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-2956272
------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
250 Clearbrook Road, Elmsford, NY 10523
----------------------------------------
(Address of principal executive offices)
Registrant's telephone number: (914)592-6100
Securities registered pursuant Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value .01 per share
-------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
[X]
--- ---
Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( X )
The aggregate market value of the Registrant's Common stock held by
non-affiliates of the Registrant as of August 29, 1997 was approximately
$9,208,065. On such date, the averages of the closing bid and asked prices
of the Common Stock, as quoted by the Nasdaq SmallCap Market, was $2 7/16.
The registrant had 7,471,185 shares of Common Stock outstanding as of
August 29, 1997,
The Company's Proxy Statement for the 1997 Annual Meeting of Shareholders
tentatively scheduled for December 18, 1997 is hereby incorporated by
reference into Part III of this Form 10K.
<PAGE>
Part I
Item 1. Business
a) General Development of Business
AFP Imaging Corporation (the "Company") was organized on September 20, 1978,
under the laws of the State of New York. Since its inception, the Company has
been engaged in the business of designing, developing, manufacturing and
distributing equipment for producing "hard copy" images by chemical processing
photosensitive materials as well as manufacturing other electro/optical imaging
equipment. These products have been adapted to medical, industrial, dental and
graphic arts applications. The Company's products are distributed to worldwide
markets through a network of dealers.
On July 14, 1997, the Company completed the renegotiation of its credit facility
with its senior secured lender. The general terms, conditions and covenants are
substantially the same as prior to such negotiation, except that the Company
renegotiated a lower interest rate and a broader borrowing base.
On April 17, 1997, the Company expanded its dental imaging business by the
acquisition of Regam Medical Systems International AB ("Regam"), a Swedish
company. Regam is a manufacturer of a filmless digital dental radiography
system, with an installed base of over 3,500 units in Europe and Asia. The
purchase price of $2.9 million consisted of cash, notes payable and a contingent
royalty. The Company financed the cash portion of the purchase price from
available cash on hand.
On August 6, 1996, the Company sold its fluoroscopic imaging inventories located
in Richmond, Virginia. The Company realized a loss of approximately $60,000 on
this transaction which loss had been accrued as of June 30, 1996. The assets of
this division were not material to the total assets of the Company.
As discussed in "Competition", the Company's products are subject to competition
from the development of new technologies, products and services by well
established competitors who may have greater financial resources, facilities and
organization than the Company. Accordingly, the Company's product lines are
susceptible to relatively short life cycles.
b) Financial Information about Industry Segments
The Company is engaged in only one industry segment and management believes that
all of its products and services fall within one class of similar or related
products and services.
c) Narrative Description of Business
Principal Products and Services
Medical, Dental and Industrial X-Ray Processors & Accessories
The Company manufactures and distributes a line of free-standing and table top
medical, dental and industrial x-ray film processors. Various models of these
machines are capable of processing or developing up to 400 films per hour. The
exposed film is inserted into equipment and returned to the operator developed,
fixed, washed and dried. The equipment can be located either in a dark room site
or adapted to a daylight, self-loading system. These units are used for
diagnostic x-ray imaging and industrial, non-destructive testing applications.
The Company's products are distributed worldwide through an unaffiliated dealer
network.
Digital Dental Imaging Systems
The Company manufactures and distributes a filmless digital dental radiography
system, based on electronic imaging technology. Such technology creates dental
images on a computer screen that operates in a Windows based software
environment. Currently, these products are being sold in Europe, Latin America
and Asia. The Company will introduce these products into North American markets
in fiscal 1998.
<PAGE>
Diagnostic Imagers and Viewers
The Company manufactures a line of digital and analog multiformat compact
cameras to permanently record and document the images produced during diagnostic
examinations from several different applications. The cameras can produce
anywhere from one to six images on films that can be processed and developed in
Company manufactured film processors. The Company has the distribution rights to
a line of European monitors specifically designed for the high resolution needs
of the medical display market.
X-Ray Systems
The Company has the distribution rights to a European dental x-ray machine for
the North American market. The x-ray film exposed by each of these units is then
developed in the Company's processors. This x-ray product is also compatible
with the Company's digital x-ray unit.
Graphic Arts Processors
The Company manufactures and distributes various sized graphic arts processors
which develop different photosensitive materials such as rapid access film and
papers. These processors are intended for use with phototypesetting, graphics
and other pre-printing press applications. Newspapers, publishers and commercial
printers are primary customers for these products.
Competition
The Company's product lines are subject to both foreign and domestic competition
and is characterized by research and development of new technologies, products
and services. Competitors are well established in the film manufacturing and
distribution businesses and may have greater financial resources, facilities and
organization than the Company. The Company is also an Original Equipment
Manufacturer (OEM) supplier to others. With respect to all of its products, the
Company competes on the basis of price, features, product quality, applications,
engineering, promptness of delivery and customer service. The Company believes
it is one of the largest domestic equipment manufacturers in its class of
products.
Customers
No customer accounted for 10% or more of net sales in fiscal 1997 or 1996.
Management does not believe the loss of any one customer would have a materially
adverse effect on the Company's consolidated business. Foreign markets and sales
are pursued by various international dealers.
Backlog Orders
As of June 30, 1997, the Company's backlog of orders for its products was
approximately $4,174,052 as compared to $3,654,700 as of June 30, 1996. All of
the orders included in the backlog at June 30, 1997 are scheduled for delivery
by June 30, 1998. OEM purchase commitments are typically negotiated for 12 month
periods but are not based on a calendar or fiscal year. Spare part sales are not
part of the Company's backlog calculations. In the opinion of the Company,
fluctuations in the backlog and its size at any given time are not necessarily
indicative of intermediate or long-term trends in the Company's business. Much
of the Company's backlog can be canceled or the delivery dates extended without
penalty. Delivery of capital equipment is frequently subject to changing budget
conditions of consumers.
Government Contracts
The Company has no current contracts with the federal government that are
material to the consolidated business. The Company's policy is to be responsive
to all governmental Request for Quotations (RFQ) which can be fulfilled within
the scope of the Company's product lines.
Patents and Trademarks
The Company presently owns many domestic and foreign utility patents which it
believes are material to the technology used in its products. The Company is not
aware of any patents held by others that conflict with its current domestic
product designs. The Company is evaluating whether its recently acquired foreign
technology infringes on any domestic patents held by others. The principal
technology applied to the
<PAGE>
construction of the Company's other products is state-of-the-art but not
considered proprietary. The Company owns several domestic and foreign trademarks
which it uses in connection with the marketing of its products.
Research and Development
The amount spent during each of the last three fiscal years on primary research
activities relating to the development of new products and the improvement of
existing products, all of which was Company sponsored, is as follows:
1997 1996 1995
---- ---- ----
$776,423 $1,273,032 $750,818
The Company's level of spending is discussed further in "Management's Discussion
and Analysis of Financial Condition and Results of Operation".
Raw Materials
The Company does not utilize any unique raw materials or processes in the design
and manufacture of its products. The Company anticipates that an adequate
commercial supply of all raw materials will be available from multiple sources.
Employees
As of June 30, 1997, the Company employed 190 persons worldwide on a full-time
basis. The Company has no collective bargaining agreements and considers its
relationship with its employees to be satisfactory.
Sales, Marketing and Distribution
All of the Company's products are manufactured and distributed domestically and
internationally in two configurations. Certain products are custom engineered
and brand labeled for other large OEM's. The balance of the Company's products
are brand labeled by the Company with its own trade names and are distributed
through an extensive network of independent medical, dental and graphic arts
dealers who install and service the equipment. The Company maintains a
significant marketing and regional sales management effort to promote and
support all its products.
The Company advertises in trade journals (domestic and international), provides
sales support and literature, prepares technical manuals and conducts customer
education and training programs in order to promote its products. In addition,
the Company participates in domestic and international trade and clinical shows.
The Company utilizes various domestic and international forms of trademarks,
including AFP Imaging, DENT-X, Sens-A-Ray 2000 and LOGE, among others.
Government Regulation
The United States Food and Drug Administration ("FDA"), Bureau of Medical
Devices regulates the distribution of all equipment used as medical devices. The
Company has registered all of its medical apparatus with this agency. The Bureau
of Medical Devices has the right to disapprove the marketing of any medical
device that it believes is unfit for the purposes intended. The Company believes
that its products and procedures satisfy all the criteria necessary to comply
with the regulations of the FDA's Bureau of Medical Devices. The Company's
primary manufacturing facility is ISO 9001 (International Standards
Organization) certified.
Seasonal Nature
The Company's business is not considered seasonal.
Working Capital Practices
The Company engages in no unusual practices regarding inventories, receivables
or other items of working capital. The Company renegotiated its credit facility
with its existing lender in July 1997. See
<PAGE>
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for further discussion.
Environmental Impact
The Company believes it is in compliance with laws and regulations governing the
protection of the environment and that continued compliance will not have a
material effect on its business or require any material capital expenditures.
The Company does not use any controlled or regulated materials or processes in
its operation. Compliance with local codes for the installation and operation of
the Company's products is the responsibility of the end user.
d) Financial Information about Foreign and Domestic Operations and Export Sales
With respect to the Company's last three fiscal years, domestic sales were
$23,527,612 (1997), $26,368,729 (1996), and $20,818,704 (1995) representing 64%,
72%, and 78% respectively of the Company's sales during such periods. Domestic
operating income was $2,283,895, $1,537,291 and $1,524,181 for the years ended
June 30, 1997, 1996, and 1995, respectively. Export and foreign sales during
such periods were $13,520,898 (1997) $10,160,150 (1996) and $5,770,208 (1995) or
36%, 28% and 22% of total Company sales for each period, respectively. The
Company's Swedish subsidiary, Regam, incurred an operating loss of $154,600 from
April 17, 1997 (acquisition date) through June 30, 1997. The Company had no
foreign operating income or losses for the years ended June 1996 and 1995.
Assets used in the manufacture of export sales are integrated with the other
assets of the Company.
Item 2. Properties
The Company's manufacturing facility is well maintained, is in good operating
condition, and has a productive capacity sufficient to meet the Company's
present and anticipated needs. The Company's executive offices and its
manufacturing facility are located in Elmsford, New York. This property is under
a renegotiated lease expiring on December 31, 2000 at a rental of $598,574
through the lease term for the last three years plus increases in real estate
taxes, utility costs and common area charges. The Company leases a sales and
marketing facility in Springfield, Virginia for $140,000 per annum. This lease
expires on March 31, 1998. The Company leases a small facility in Sweden for
approximately $28,000 per annum. The lease expires December 31, 1997.
Item 3. Legal Proceedings
The Company is currently defending a civil complaint instituted by a former
vendor of Visiplex Instruments Ltd., for breach of Bulk Sales Notice, alleging
that no notice of the bulk transfer of assets was given in July 1995. The
Company did not assume such liability. Visiplex Instrument Ltd. provided the
Company with an Indemnification and Hold Harmless Agreement, which has a
$500,000 limit. The complaint does not specify the amount of damages, however,
at this time, the Company does not believe that the outcome of this matter will
have a material adverse effect on the consolidated financial statements. The
Company is not aware of any other litigation which could have a material adverse
effect on its financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the fourth
quarter of the fiscal year ended June 30, 1997.
<PAGE>
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
a) Market Information
The Common Stock of the Company is traded on the Nasdaq SmallCap Market (Symbol
"AFPC"). The following table shows the high and low bid quotations for the
Company's Common Stock for each quarterly period during the Company's last two
fiscal years. These prices do not represent actual transactions and do not
include retail mark-ups, mark-downs or commissions.
Quarter ended High Low
------------- ---- ---
September 30, 1995 2 1/2 5/8
December 31, 1995 2 1/4 1 1/8
March 31, 1996 1 9/16 7/8
June 30, 1996 1 7/16 15/16
September 30, 1996 1 13/16 1
December 31, 1996 1 7/8 1
March 31, 1997 2 5/16 1 11/16
June 30, 1997 2 1/8 1 1/2
b) Holders
The following table sets forth the approximate number of holders of record of
Common Stock of the Company at September 1, 1997.
Title of Class Number of Holders of Record
---------------------------- ---------------------------
Common Stock, $.01 par value 531
c) Dividends
No cash dividends have been declared on the Company's shares to date and the
Company anticipates that for the foreseeable future any earnings will be
retained for use in its business.
Pursuant to the terms of the Company's 12% Convertible Subordinated Debentures,
repaid in full in June 1997, the Company was not permitted to declare or pay any
dividend on any shares of its capital stock, other than cash dividends on its
Preferred Stock, Series A and Series B, until the entire principal amount of the
Debentures was paid in full or converted into Common Stock.
<PAGE>
Item 6. AFP Imaging Corporation and Subsidiaries Selected Financial Data
as of and for The Years Ended June 30, 1997, 1996, 1995, 1994, and 1993
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
NET SALES $37,048,510 $36,528,879 $26,588,912 $30,505,249 $38,257,479
=========== =========== =========== =========== ===========
OPERATING
INCOME (LOSS) $2,129,295 $1,537,291 $1,524,181 $(3,383,100)(c) $(355,372)(d)
========== ========== ========== ============ ==========
NET INCOME (LOSS) $1,548,597 $700,528 $923,999 $(4,184,156)(c) $(1,255,668)(d)
========== ======== ======== ============ ============
NET PRIMARY EARNINGS
(LOSS) PER COMMON
SHARE AND
EQUIVALENTS $.16(a) $.08(a) $.13(a) $(.71) $(.26)
==== ==== ==== ====== ======
NET FULLY DILUTED
EARNINGS (LOSS) PER
COMMON SHARE AND
EQUIVALENTS $.15(a) $.08(a) $.12(a) $(.71) $(.26)
==== ==== ==== ====== ======
TOTAL ASSETS $20,516,028 $20,258,093 $11,789,582 $15,074,720 $22,547,342
=========== =========== =========== ========== ==========
LONG-TERM DEBT $4,412,116(b) $7,278,072(b) $1,935,638(b) $17,235(e) $48,052(e)
========== ========== ========== ====== =======
SHAREHOLDERS'
EQUITY $10,873,384 $9,316,087 $5,538,068 $4,595,319 $7,675,882
=========== ========== ========== ========= =========
SHAREHOLDERS'
EQUITY PER
COMMON SHARE $1.06 $.83 $.66 $.52 $1.20
===== ==== ==== ==== =====
COMMON SHARES
OUTSTANDING,
at end of period 7,432,698 7,077,767 6,449,394 6,423,074 5,332,036
========= ========= ========= ========= =========
CASH DIVIDENDS
PER COMMON SHARE none none none none none
</TABLE>
(a) In 1997, the weighted average number of common shares used in calculating
primary and fully diluted earnings per share reflects the assumed
conversion of the convertible preferred stock and the assumed exercise of
in-the-money stock options and warrants. In 1996 and 1995, primary and
fully diluted earnings per share reflects the assumed conversion of the
convertible preferred stock. For all years, in calculating fully diluted
earnings per share, the weighted average number of common shares includes
the assumed conversion of the convertible subordinated debentures.
(b) In 1997, 1996 and 1995, the Company has classified revolver borrowings as
long-term as the facility was extended for two years on July 14,1995 and
July 14, 1997.
(c) This amount includes provisions of approximately $1.2 million to
write-down the Company's Virginia facility to its estimated fair value,
$1.0 million to write-down the Company's sales office in Frankfurt,
Germany to its estimated fair value, and $1.3 million to discard inventory
from discontinued product lines.
(d) This amount includes a provision of $1.5 million to write-down the
Company's Virginia facility to its estimated fair value, and a write-off
of $426,096 for receivables from a bankrupt customer.
(e) This amount excludes $3,603,583 and $3,331,830 for fiscal years 1994 and
1993, respectively, of debt classified as short-term.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation
Capital Resources and Liquidity
The Company's working capital decreased $4.3 million between fiscal 1997 and
fiscal 1996 due to a $1.5 million decrease in inventories, a $1.3 million
decrease in cash and equivalents, and a $1.7 million increase in accounts
payable and other short term accruals. The Company generated net income of $1.55
million in fiscal 1997. The Company acquired a digital dental imaging company in
April 1997. The cash portion of the purchase price was funded from available
cash.
The Company renegotiated its credit facility of a $9.85 million revolver and
term loan facility with its present lender effective July 14, 1997 for a three
year period. The credit line provides working capital for the Company. The
Company believes that this revised credit facility is sufficient to finance its
ongoing operations. The revolver loan is secured by available and eligible
inventory, accounts receivable, equipment, life insurance policies and proceeds
thereof, trademarks, licenses, patents and general intangibles. The Company
renegotiated a lower interest rate and increased availability based on stated
terms and asset amounts. Other terms, conditions and covenants of the new
facility are similar to those of the previous facility See Notes to Consolidated
Financial Statements for further information regarding this credit facility. As
of June 30, 1997, the Company had $3,506,000 of unused credit available and is
in compliance with all financial ratios and covenants as stated in its loan
documents.
During the 1997 fiscal year, the Company loaned an unaffiliated dental
manufacturing company an aggregate of $300,000. The borrower executed notes
evidencing such obligation with an extended maturity date of October 1, 1997.
The notes are secured by the stock and assets of the borrower. The borrower is
currently negotiating with the Company for an extended repayment of such loan.
In August 1993, the Company was required to begin annual sinking fund payments
on its subordinated debentures. The Company repaid in full the Subordinate
Debentures as of June 30, 1997.
The Company's historical operating cash flows have been positive; however, the
Company is dependent upon its existing credit facilities to finance its ongoing
operations. During fiscal 1997, the Company reduced its borrowings on its credit
facility by approximately $4.6 million with internally generated funds from
operations.
Capital expenditures for fiscal 1997 consisted of individual computer
workstation upgrades, production tooling, molds and other appropriate
replacements in the normal course of operations. The Company has committed
approximately $350,000 to the purchase of a new Business Information System
including the upgrade of existing computer hardware and a new fully integrated
manufacturing software package. The Company has committed to a three year lease
for the hardware and software costs, which is recorded as a capital lease. The
Company expects to continue to finance any future capital requirements
principally from internally generated funds. The Company is presently unaware of
any other demands, commitments or contingencies which are reasonably likely to
result in a material increase or decrease in its liquidity in the foreseeable
future.
Results of Operation - Fiscal 1997 vs. Fiscal 1996
On April 17, 1997 the Company acquired the stock of Regam Medical Systems
International AB ("Regam"), a Swedish digital imaging company. The acquisition
was accounted for under the purchase method of accounting and has been fully
consolidated in the Company's consolidated financial statements. Regam's
operations from the date of acquisition through fiscal year end are not
significant to the Company's consolidated results.
Sales increased $520,000 or 1% between the two fiscal years. The Company
experienced a 20% growth in sales of its dental imaging business offset by a 5%
decline in graphic art sales due to changing customer demands and market
technology. Medical imaging sales stayed constant through the two periods. Gross
profit as a percent of sales decreased .5% due to increased sales of exclusive
distributor goods, which sales generally have lower gross margins.
Selling, general and administrative costs decreased $96,000 or 1%. Fiscal 1996
expenses included a provision of $60,000 for the loss incurred on the sale of
the fluoroscopic imaging assets. The composition of
<PAGE>
these expenses shifted slightly with more costs to promote the dental and
medical products worldwide and less administrative overhead costs, due to
ongoing management expense reduction programs.
Research and development costs decreased $497,000 or 39%. The Company completed
several in-house engineering projects and continues to re-evaluate the market
potential of investment in product engineering versus the distribution of
alternative outsourced products. The Company continues to invest in sustaining
engineering and related costs to maintain their technical advantage.
Interest expense net decreased $325,000 or 42%. The Company reduced its
borrowings with its senior secured lender by $4 million, offset by the lost
interest income resulting from the use of available cash to partially fund the
Regam acquisition.
The income tax provision primarily represents nominal state capital taxes due,
as in the prior fiscal year. The Company realized net operating losses
previously subject to valuation allowances to offset any federal and state
income tax provision.
Results of Operation - Fiscal 1996 vs. Fiscal 1995
On July 14, 1995, the Company acquired most of the assets and selected
liabilities of Visiplex Instruments Ltd., a medical diagnostic imaging equipment
manufacturer and distributor. Visiplex had been a tenant in the Company's New
York facility since November 1994. Management felt that this acquisition
presented the Company with an opportunity to broaden its medical diagnostic
market penetration while potentially achieving efficiencies with the
consolidation of the two operations. Visiplex was fully consolidated into the
Company's operations for substantially all of fiscal 1996.
Sales increased approximately $9.9 million or 37.4%. $9.1 million was due to the
sales generated from the newly acquired Visiplex product line. $2.7 million is
due to increased processor sales, offset by a $1.6 million decrease in graphic
art sales due to changing customer demands and market technology. The Company's
dental business had flat sales growth this year. The fluoroscopic imaging
division experienced a decline in sales which resulted in the sale of this
product line on August 6, 1996.
Gross profit as a percent of sales declined 1.3% from the prior fiscal year.
This was due to the acquisition of the Visiplex product line whose products have
a smaller gross margin and a slight change in the product mix towards more
distributed goods, which also have a lower gross margin.
Selling, general, and administrative costs increased $2.4 million or 35%.
Approximately 85% of the increase can be attributed to the Visiplex acquisition,
including approximately $200,000 of additional amortization expense. Also
included is a $60,000 provision for the estimated loss incurred on the sale of
the fluoroscopic imaging assets on August 6, 1996. The balance of this increase
was due to an increase in marketing expenditures for worldwide promotion of all
Company products.
Research and development costs increased $522,000 or 70%, which was primarily
due to the added Visiplex staff. Visiplex has a highly trained engineering
department whose resources were being utilized to research and develop new
digital imaging products. The Company is currently re-evaluating the market
demand for certain new products versus the distribution of alternative
outsourced products with respect to their anticipated return on investment.
Interest expense, net increased $201,000 or 35%. This represented the increased
debt required to finance the Visiplex acquisition, offset by the interest earned
on the private equity placement, and the convertible subordinated debt converted
to equity earlier in the year.
The income tax provision primarily represents nominal state capital taxes due.
The Company realized net operating losses previously subject to valuation
allowances to offset any federal and state income tax provision.
<PAGE>
AFP IMAGING CORPORATION
AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accountants F-1
Consolidated Balance Sheets -- June 30, 1997 and 1996 F-2 to F-3
Consolidated Statements of Operations for the Years
Ended June 30, 1997, 1996 and 1995 F-4
Consolidated Statements of Shareholders' Equity for
the Years Ended June 30, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows
for the Years Ended June 30, 1997, 1996 and 1995 F-6 to F-7
Notes to Consolidated Financial Statements F-8 to F-15
Schedule II - Valuation and Qualifying Accounts for the
Years Ended June 30, 1997 and 1996 F-16
All other schedules called for under Regulation S-X are not submitted
because they are not applicable or not required or because the required
information is included in the consolidated financial statements and notes
thereto.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
AFP Imaging Corporation:
We have audited the accompanying consolidated balance sheets of AFP Imaging
Corporation (a New York Corporation) and subsidiaries as of June 30, 1997 and
1996, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended June 30,
1997. These consolidated financial statements and the schedule referred to below
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and schedule based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of AFP Imaging
Corporation and subsidiaries as of June 30, 1997 and 1996 and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1997 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. Schedule II, Valuation and
Qualifying Accounts, is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic consolidated financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic consolidated financial statements
taken as a whole.
Arthur Andersen LLP
New York, New York
August 13, 1997
<PAGE>
AFP IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
------ ------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,858,287 $ 3,133,198
Accounts receivable, less allowance for doubtful accounts and sales returns
of $277,926 and $238,000, respectively 5,816,106 6,020,129
Inventories (Note 1) 6,016,528 7,530,128
Prepaid expenses and other 650,095 163,374
------------ ------------
Total current assets 14,341,016 16,846,829
PROPERTY, PLANT AND EQUIPMENT, at cost:
Leasehold improvements 287,474 263,378
Machinery and equipment 7,224,278 6,840,122
------------ ------------
7,511,752 7,103,500
Less - Accumulated depreciation (6,113,123) (5,833,067)
------------ ------------
1,398,629 1,270,433
INTANGIBLE ASSETS, net of accumulated amortization of $681,363 and $666,968
respectively (Note 1) 4,441,453 1,907,112
OTHER ASSETS 334,930 233,719
------------ ------------
$ 20,516,028 $ 20,258,093
============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
F-2
<PAGE>
AFP IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
------------------------------------ ------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt (Note 2) $ 639,314 $ 214,620
Accounts payable 1,801,973 1,364,937
Accrued expenses 2,220,096 1,140,198
Accrued payroll expenses 569,145 544,179
Convertible subordinated debenture - 200,000
------------ ------------
Total current liabilities 5,230,528 3,463,934
LONG-TERM DEBT (Note 2) 4,412,116 7,278,072
CONVERTIBLE SUBORDINATED DEBENTURE - 200,000
COMMITMENTS AND CONTINGENCIES (Note 7) - -
SHAREHOLDERS' EQUITY (Notes 3 and 4):
Convertible Preferred Stock, Series A, 1,750,000 authorized, 1,396,814 and
1,724,984 shares issued and outstanding at June 30, 1997 and
1996, respectively 2,171,071 2,564,876
Convertible Preferred Stock, Series B, 824,844 authorized, 711,872 shares
issued and outstanding at June 30, 1997 and 1996 854,247 854,247
Common Stock warrants 25,314 25,314
Common Stock, $.01 par value, 30,000,000 shares authorized, 7,432,698 and
7,077,751 shares issued and outstanding at June 30, 1997 and
1996, respectively 74,327 70,778
Paid-in capital in excess of par 8,578,549 8,175,793
Accumulated deficit (826,324) (2,374,921)
Cumulative translation adjustment (3,800) -
------------ ------------
Total shareholders' equity 10,873,384 9,316,087
------------ ------------
$ 20,516,028 $ 20,258,093
============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
F-3
<PAGE>
AFP IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES $37,048,510 $36,528,879 $26,588,912
COST OF SALES 24,950,627 24,430,698 17,427,070
----------- ----------- -----------
Gross profit 12,097,883 12,098,181 9,161,842
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 9,192,165 9,287,858 6,886,843
RESEARCH AND DEVELOPMENT EXPENSES (Note 1) 776,423 1,273,032 750,818
----------- ----------- -----------
Operating income 2,129,295 1,537,291 1,524,181
INTEREST EXPENSE, net 451,466 776,763 575,182
----------- ----------- -----------
Income before provision for income taxes 1,677,829 760,528 948,999
PROVISION FOR INCOME TAXES (Note 5) 129,232 60,000 25,000
----------- ----------- -----------
NET INCOME $ 1,548,597 $ 700,528 $ 923,999
=========== =========== ===========
NET EARNINGS PER COMMON SHARE (Note 1)
Primary $.16 $.08 $.13
Fully diluted $.15 $.08 $.12
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
F-4
<PAGE>
AFP IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Convertible Convertible
Preferred Preferred Common
Stock, Stock, Stock Common
Series A Series B Warrants Stock
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance June 30, 1994 $ 1,281,626 $ - $ 25,314 $ 64,230
Conversion of 1,320 shares of
preferred stock to common stock (3,432) - - 13
Issuance of 25,000 shares of
"restricted" common stock - - - 250
Net Income - - - -
------------ ------------ ------------ ------------
Balance June 30, 1995 1,278,194 - 25,314 64,493
Issuance of 2,083,333 shares of
preferred stock 1,645,753 854,247 - -
Conversion of subordinated
debentures into common stock - - - 4,309
Conversion of 138,088 shares of
preferred stock, Series A, to
common stock (359,071) - - 1,381
Issuance of 59,880 shares of
common stock in connection
with the exercise of stock
options - - - 599
Retirement of 444 shares of
common stock - - - (4)
Net Income - - - -
------------ ------------ ------------ ------------
Balance June 30, 1996 2,564,876 854,247 25,314 70,778
Issuance of 15,000 shares of
common stock in connection
with the exercise of stock
options - - - 150
Conversion of 328,170 shares of
preferred stock, Series A, to
339,947 shares of common stock (393,805) - - 3,399
Foreign currency translation
adjustment - - - -
Net Income - - - -
------------ ------------ ------------ ------------
Balance June 30, 1997 $ 2,171,071 $ 854,247 $ 25,314 $ 74,327
============ ============ ============ ============
<CAPTION>
Paid-in Foreign
Capital Currency
In Excess of Accumulated Translation
Par Deficit Adjustment Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance June 30, 1994 $ 7,223,597 $ (3,999,448) $ - $ 4,595,319
Conversion of 1,320 shares of
preferred stock to common stock 3,419 - - -
Issuance of 25,000 shares of
"restricted" common stock 18,500 - - 18,750
Net Income - 923,999 - 923,999
------------ ------------ ------------ ------------
Balance June 30, 1995 7,245,516 (3,075,449) - 5,538,068
Issuance of 2,083,333 shares of
preferred stock - - - 2,500,000
Conversion of subordinated
debentures into common stock 512,691 - - 517,000
Conversion of 138,088 shares of
preferred stock, Series A, to
common stock 357,690 - - -
Issuance of 59,880 shares of
common stock in connection
with the exercise of stock
options 60,531 - - 61,130
Retirement of 444 shares of
common stock (635) - - (639)
Net Income - 700,528 - 700,528
------------ ------------ ------------ ------------
Balance June 30, 1996 8,175,793 (2,374,921) - 9,316,087
Issuance of 15,000 shares of
common stock in connection
with the exercise of stock
options 12,350 - - 12,500
Conversion of 328,170 shares of
preferred stock, Series A, to
339,947 shares of common stock 390,406 - - -
Foreign currency translation
adjustment - - (3,800) (3,800)
Net Income - 1,548,597 - 1,548,597
------------ ------------ ------------ ------------
Balance June 30, 1997 $ 8,578,549 $ (826,324) $ (3,800) $ 10,873,384
============ ============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
F-5
<PAGE>
AFP IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1997 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,548,597 $ 700,528 $ 923,999
Adjustments to reconcile net income to net cash provided
by (used in) operating activities-
(Gain) loss on sale of equipment 3,396 - (31,719)
Depreciation and amortization 891,370 969,439 761,475
Provision for losses on accounts receivable 93,463 131,280 65,650
Change in assets and liabilities:
(Increase) decrease in accounts receivable 567,560 (842,774) (539,008)
(Increase) decrease in inventories 1,859,800 (26,956) 1,680,364
(Increase) decrease in prepaid expenses and other (167,221) 124,917 (12,723)
Increase (decrease) in other assets (2,636) (223,877) (65,334)
Increase (decrease) in accounts payable (302,565) (1,564,700) 97,127
Increase (decrease) in accrued expenses 955,898 (578,856) (64,860)
Increase (decrease) in accrued payroll expenses 24,966 107,153 97,578
----------- ----------- -----------
Total adjustments 3,924,031 (1,904,374) 1,988,550
----------- ----------- -----------
Net cash provided by (used in) operating
activities 5,472,628 (1,203,846) 2,912,549
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Regam Medical Systems
International AB (1,561,293) - -
Investment in Visiplex Instruments, Ltd. - (3,554,367) -
Issuance of notes receivable (310,000) - -
Acquisition of licensing agreement - (25,000) -
Capital expenditures (217,525) (197,824) (131,221)
Proceeds from sales of land, building and equipment - - 1,712,124
----------- ----------- -----------
Net cash provided by (used in) investing
activities (2,088,818) (3,777,191) 1,580,903
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
F-6
<PAGE>
AFP IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1997 1996 AND 1995
(Continued)
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing of debt - 5,582,432 250,000
Repayments of debt (4,667,421) (552,278) (4,588,982)
Exercise of common stock options 12,500 60,491 -
Issuance of convertible preferred stock - 2,500,000 -
----------- ----------- -----------
Net cash provided by (used in) financing
activities (4,654,921) 7,590,645 (4,338,982)
EXCHANGE RATE EFFECTS ON CASH AND CASH EQUIVALENTS (3,800) - -
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents (1,274,911) 2,609,608 154,470
CASH AND CASH EQUIVALENTS, at beginning of year 3,133,198 523,590 369,120
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, at end of year $ 1,858,287 $ 3,133,198 $ 523,590
=========== =========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid during the year for-
Interest $ 450,683 $ 848,521 $ 598,028
Income taxes 80,373 47,648 11,929
</TABLE>
SUPPLEMENTAL NON-CASH INVESTING AND FINANCIAL ACTIVITIES DISCLOSURES:
In fiscal 1997, common stock was issued upon the conversion of $393,805 of
Series A convertible preferred stock. In fiscal 1996, common stock was issued
upon the conversion of $517,000 of convertible subordinated debentures and
$359,071 of Series A convertible preferred stock. In fiscal 1995, common stock
was issued upon the conversion of $3,432 of Series A convertible preferred
stock.
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
F-7
<PAGE>
AFP IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(1) Accounting Policies:
The Company
AFP Imaging Corporation (together with its subsidiaries, the
"Company") was organized on September 20, 1978, under the laws of the
State of New York. Since its inception, the Company has been engaged
in the business of designing, developing, manufacturing and
distributing equipment for producing "hard copy" images by chemical
processing photosensitive materials. During fiscal 1996, the Company
acquired most of the assets and selected liabilities of Visiplex
Instruments Ltd. which manufactures electronic diagnostic imaging
equipment. On April 17, 1997, the Company acquired all of the
outstanding shares of Regam Medical Systems International AB, a
Swedish manufacturer of advanced dental imaging devices. The Company's
products are distributed to worldwide markets through a network of
dealers and original equipment manufacturers.
Principles of consolidation
The consolidated financial statements include AFP Imaging Corporation
and its wholly owned subsidiaries. All significant intercompany
transactions have been eliminated in consolidation.
Revenue recognition
Revenue is recognized by the Company when products are shipped and
title passes to the customer.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
Cash and cash equivalents
Cash and cash equivalents include deposits with original maturities of
three months or less.
Inventories
Inventories, which include material, labor and manufacturing overhead,
are stated at the lower of cost (first-in, first-out) or market (net
realizable value). Inventories used in the determination of cost of
sales were as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Raw materials and sub-component parts $4,565,064 $5,576,116
Work-in-process and finished goods 1,451,464 1,954,012
---------- ----------
$6,016,528 $7,530,128
========== ==========
</TABLE>
F-8
<PAGE>
Depreciation
Machinery and equipment is depreciated using straight-line and
accelerated methods over estimated useful lives ranging from three to
ten years. Leasehold improvements are depreciated on a straight-line
basis over the shorter of 40 years or their estimated useful lives.
Research and development costs
Research and development costs are charged to expense as incurred.
These costs have been incurred in connection with the design and
development of the Company's products.
Intangible assets
Intangible assets are valued at their estimated fair value when
acquired. These assets, which are amortized on a straight-line basis,
consist of the following:
<TABLE>
<CAPTION>
Amortization
1997 1996 Period
---------- ---------- ------------
<S> <C> <C> <C>
Goodwill $5,097,816 $2,549,080 15-40 years
Licensing Fees 25,000 25,000 2 years
---------- ----------
5,122,816 2,574,080
Less - Accumulated amortization (681,363) (666,968)
---------- ----------
Intangible assets, net $4,441,453 $1,907,112
========== ==========
</TABLE>
The Company periodically reviews the carrying value of the goodwill
and other long lived assets to determine whether an impairment may
exist. The Company considers relevant cash flow, estimated future
operating results, trends and other available information in assessing
whether the carrying value of the asset can be recovered. The Company
believes no such impairments exist as of June 30, 1997.
Net earnings per common share
The computation of net earnings per common share is based upon the
weighted average number of common shares outstanding during the period
plus (in periods in which they have a dilutive effect) the effect of
common shares contingently issuable. Primary and fully diluted
earnings per common share for the fiscal years ended 1997, 1996, and
1995 are presented below:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net Earnings Available for Common
Shareholders $1,548,597 $700,528 $923,999
Total Common Stock and Equivalents 9,981,525 9,112,677 6,922,512
---------- ---------- ----------
Primary Earnings Per Share $.16 $.08 $.13
========== ========== ==========
Net Earnings Available for Common
Shareholders $1,560,541 $737,141 $1,009,785
Total Common Stock and Equivalents 10,245,336 9,628,992 8,297,512
---------- ---------- ----------
Fully Diluted Earnings Per Share $.15 $.08 $.12
========== ========== ==========
</TABLE>
F-9
<PAGE>
The primary earnings per share computation reflects the effects of
common shares contingently issuable upon the exercise of warrants,
options and convertible preferred stock (see Notes 3 and 4), in
periods in which such exercise would cause dilution. The fully diluted
earnings per share computation reflects the effect of the conversion
of convertible subordinated debentures in periods in which such
conversion would cause dilution. In fiscal 1997 and 1996, the
conversion of certain warrants would be antidilutive while in fiscal
1995, the exercise of certain warrants and options would be
antidilutive.
In all years, net earnings available for common shareholders differs
between primary and fully diluted earnings per share due to interest
expense, net of taxes, associated with the convertible subordinated
debentures, which would not have been incurred assuming conversion at
the beginning of the period.
(2) Debt:
As of June 30, 1996, the Company had a $9.85 million revolver and term
loan with its senior lender at an interest rate of 2% above prime. This
facility expired on July 14, 1997 and was replaced by an $8.4 million
revolver loan and a $1.45 million term loan at an interest rate of 3/4%
above prime (the "Credit Facility"). The Credit Facility is
collateralized by accounts receivable, eligible inventory, equipment,
life insurance policies and proceeds thereof, trademarks, licenses,
patents, and general intangibles. The arrangement provides for
restrictions on borrowings, requires certain financial ratios related to
total debt, unsubordinated debt to tangible net worth and current assets
to current liabilities be maintained and requires minimum levels of
working capital, net worth and cash flow. The Company has unused lines of
credit available, subject to formula, of $3.50 million as of June 30,
1997 for short-term financing needs.
As the Company extended its credit facility to mature on July 14, 2000,
the balance of the original revolver has been classified as long-term as
of June 30, 1997.
As of June 30, 1997 and 1996, debt consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Revolver $2,956,399 $6,948,072
Term Loan (a) 330,000 440,000
Notes Payable (b) 1,200,000 -
Capital leases and other 565,031 104,620
---------- ----------
5,051,430 7,492,696
Less - Current Portion 639,314 214,620
---------- ----------
$4,412,116 $7,278,072
========== ==========
</TABLE>
(a) The term loan bears interest at prime plus 2% (10.25% at June
30,1997). Effective July 14, 1997, the term loan will bear
interest at Citibank base rate for borrowing plus 3/4%.
(b) The $1.2 million notes payable to ACG Nystromgruppen AB, the
former parent of Regam Medical Systems International AB,
consists of a $1 million promissory note and a $200,000 note
payable backed by a letter of credit. The promissory note
bears interest at LIBOR plus 2% (8.375% at June 30, 1997).
This note is payable in full on April 17, 2000. The $200,000
note payable is due on March 31, 1998.
The Company's weighted average borrowing rate was approximately 10.25%
and 10.7% as of June 30, 1997 and 1996, respectively. The fair market
value of all of the Company's debt approximates its carrying value.
F-10
<PAGE>
Maturities of debt by fiscal year ended June 30 are as follows:
1998 $ 639,314
1999 223,585
2000 1,175,301
2001 2,988,741
2002 24,489
At June 30, 1997 the Company had guarantees of $389,461 with foreign
vendors.
(3) Convertible Preferred Stock, Series A and B:
The Company has two series of convertible preferred stock of which
1,396,814 Series A shares and 711,872 Series B shares are currently
outstanding. Each Series A share is convertible into 1.03 shares of
common stock while all Series B shares are convertible into one share of
common stock.
(4) Stock Purchase Plans and Common Stock Warrants:
In November 1991, the Company reinstated its restricted stock purchase
plan which had expired (the "Restricted Plan") under which 400,000 shares
of Common Stock were reserved for issuance. 25,000 shares were issued
during fiscal 1995.
The Company has two employee incentive stock option plans, under which
approximately 1,000,000 shares of Common Stock were authorized and
available for issuance. Under the terms of the plans, options to purchase
common stock of the Company may be granted at not less than 100% of the
fair market value of the stock on the date of grant, or 110% of the fair
market value if granted to persons owning more than 10% of the
outstanding stock of the Company. Transactions for 1997, 1996 and 1995
are as follows:
<TABLE>
<CAPTION>
Weighted Weighted Weighted
Average Average Average
1997 Price 1996 Price 1995 Price
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding July 1, 794,120 $0.79 238,000 $0.74 146,880 $1.33
Granted 63,500 1.23 626,000 0.83 127,120 0.51
Exercised (15,000) 0.83 (59,880) 1.02 - N/A
Cancelled (20,000) 0.64 (10,000) 0.75 (36,000) 2.27
-------- -------- -------- -------- -------- --------
Options outstanding June 30, 822,620 $0.82 794,120 $0.79 238,000 $0.74
======== ======== ======== ======== ======== ========
Options exercisable at June 30, 822,620 794,120 238,000
======== ======== ========
Weighted average fair value of
options granted during years
ended June 30, $0.52 $0.35 $0.24
======== ======== ========
</TABLE>
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model and the following
assumptions for grants in fiscal 1997, 1996, and 1995: dividend yield of
0%; expected volatility of 54%; expected life of four years and risk-free
interest rate ranging from 5.86% to 7.35%.
F-11
<PAGE>
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:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Income As reported $1,548,597 $700,528 $923,999
Pro forma 1,515,477 483,642 893,160
Primary earning per share As reported .16 .08 .13
Pro forma .15 .05 .13
Fully diluted earnings per share As Reported .15 .08 .12
Pro Forma .15 .05 .11
</TABLE>
As of June 30, 1997, there remained outstanding warrants to purchase
253,138 shares of common stock at prices ranging from $1.50 to $2.60
share.
5) Income Taxes:
The income (loss) before provision for income taxes is comprised of the
following:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
United States $1,832,429 $ 760,528 $948,999
Foreign (154,600) - -
---------- ---------- ----------
Total $1,677,829 $760,528 $948,999
---------- ---------- ----------
</TABLE>
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Current:
State $129,232 $60,000 $15,000
Foreign - - 10,000
---------- ---------- ----------
$129,232 $60,000 $25,000
========== ========== ==========
</TABLE>
The difference between the provision for income taxes at the effective
federal statutory rates and the amounts provided in the financial
statements is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Tax Provision at Federal statutory rates $ 570,462 $ 258,580 $ 322,660
Increase (decrease) in tax provision
resulting from:
State income tax provision, net of 85,293 60,000 15,000
federal benefit
Foreign loss not benefited 52,564 - -
Amortization in excess of tax basis 103,467 69,548 123,819
Realization of deferred tax assets (699,672) (343,095) (437,897)
Other 17,118 14,967 1,418
---------- ---------- ----------
Provision for income taxes $ 129,232 $ 60,000 $ 25,000
========== ========== ==========
</TABLE>
F-12
<PAGE>
The items which comprise the deferred tax balance are as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Depreciation $ 26,507 $ 8,086
Accrued liabilities and reserves not currently deductible 428,477 617,828
Inventory 174,986 173,386
Net operating loss carryforwards 653,808 1,334,825
----------- -----------
1,283,778 2,134,125
Deferred tax asset valuation reserve (1,283,778) (2,134,125)
----------- -----------
Tax asset recognized on balance sheets $ - $ -
=========== ===========
</TABLE>
Net operating loss carryforwards will expire beginning in 2009.
(6) Profit Sharing Plan:
The Company maintains a profit sharing plan and trust pursuant to which
participants receive certain benefits upon retirement, death, disability
and, to a limited extent, upon termination of employment for other
reasons. Allocation among participants' interests, including officers and
directors who are employees, is in accordance with current Internal
Revenue Service regulations.
The aggregate amount contributed to the plan by the Company each fiscal
year is determined by the Board of Directors following a review of the
profits of such fiscal year. The plan requires no minimum contribution by
the Company. Profit sharing expense of $50,000, $40,000 and $50,000 was
recorded for the years ended June 30, 1997, 1996 and 1995, respectively.
(7) Commitments and Contingencies:
The Company and its subsidiaries are defendants (together with other
third parties) in a legal claim alleging that the Company violated
bulksales laws upon the acquisition of Visiplex Instruments Ltd.
("Visiplex") in July 1995. The Company believes that this claim is
without merit and intends to vigorously defend the litigation. While no
monetary damages have been specified in the lawsuit, the Company believes
that any potential loss resulting from this claim would not have any
material effect on the company's financial position or results of
operations. Furthermore, the Company has filed a cross claim against the
former owners of Visiplex under an indemnification clause contained in
the asset purchase agreement between the two parties.
The Company has leases for office and manufacturing facilities for
periods expiring through fiscal year 2001. Approximate minimum annual
rental payments under these leases as of the fiscal year ended June 30
are as follows:
1998 $598,574
1999 598,574
2000 598,574
2001 299,287
Rent expense was approximately $719,000, $748,000 and $606,000 for the
years ended June 30, 1997, 1996 and 1995, respectively.
F-13
<PAGE>
(8) Segment Information:
The Company operates in one business segment which designs, develops,
manufactures and markets medical, dental and graphic arts image systems
and all related accessories. There were no sales to any one customer in
excess of 10% of net sales in fiscal 1997, 1996, and 1995.
Segment financial information:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Sales
United States $23,527,612 $26,368,729 $20,818,704
Europe 529,100 - -
Domestic export sales 12,991,798 10,160,150 5,770,208
----------- ----------- -----------
Total $37,048,510 $36,528,879 $26,588,912
=========== =========== ===========
Net Income (loss)
United States $ 1,702,497 $ 700,528 $ 923,999
Europe (153,900) - -
----------- ----------- -----------
Total $ 1,548,597 $ 700,528 $ 923,999
=========== =========== ===========
Identifiable assets
United States $19,630,528 $20,258,093 $11,789,582
Europe 885,500 - -
----------- ----------- -----------
Total $20,516,028 $20,258,093 $11,789,582
=========== =========== ===========
</TABLE>
The net loss in Europe for the fiscal year ended June 30, 1997 was
related to the acquisition of Regam Medical Systems International AB (See
Note 9).
(9) Acquisition of Regam Medical Systems International
On April 17, 1997 the Company acquired all of the outstanding shares of
Regam Medical Systems International AB ("Regam"), a Swedish manufacturer
of electronic dental imaging equipment for $2.9 million in cash and notes
payable. The notes payable, totaling $1.2 million, were issued to the
former owner of Regam (See Note 2). The results of Regam's operations
have been combined with those of the Company since the date of
acquisition.
The acquisition was accounted for using the purchase method of
accounting. Accordingly, a portion of the purchase price was allocated to
the net assets acquired based on their estimated fair values. The balance
of the purchase price, $2.8 million, was recorded as the excess of cost
over net assets acquired (goodwill) and is being amortized over fifteen
years on a straight-line basis. The allocation of the purchase price will
be finalized during fiscal 1998 upon completion of restructuring
decisions and asset valuations.
The following table reflects unaudited pro forma combined results of
operations of the Company and Regam on the basis that the acquisition had
taken place at the beginning of the latest fiscal year presented:
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
1997 1996
----------- -----------
<S> <C> <C>
Revenues $38,544,797 $38,006,591
Net income 770,183 191,668
Income per common share $.08 $.02
Shares used in computation 9,981,525 9,112,677
</TABLE>
F-14
<PAGE>
In management's opinion, the unaudited pro forma combined results of
operations are not indicative of the actual results that would have
occurred had the acquisition been consummated at the beginning of fiscal
1997 or 1996, or of future operations of the combined companies under the
ownership and management of the Company.
(10) Adoption of New Financial Standard
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128, "Earnings Per Share"
(SFAS 128). SFAS requires the replacement of primary and fully-diluted
earnings per share with basic and diluted earnings per share,
respectively. The statement also requires restatement of previously
reported earnings per share information to ensure consistency with future
reported amounts. The Company does not believe that the adoption of this
standard will result in any significant differences from previously
reported earnings per share.
F-15
<PAGE>
AFP IMAGING CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
Balance at Charged to Charged to
Beginning Costs and Other Balance at End
Description of Period Expenses Accounts(1) Deductions of Period
- -------------------------------- ----------- ----------- ----------- ---------- --------------
<S> <C> <C> <C> <C> <C>
June 30, 1997
- -------------
Allowance for doubtful accounts
and sales returns $ 238,000 $ 93,463 $ 67,926 $ (121,463) $ 277,926
Accumulated depreciation 5,833,067 363,195 - (83,139) 6,113,123
Accumulated amortization 666,968 398,150 - (383,755) 681,363
Deferred tax asset valuation
reserve 2,134,125 - (850,347) - 1,283,778
June 30, 1996
- -------------
Allowance for doubtful accounts
and sales returns $ 179,998 $ 131,280 $ 88,728 $ (162,006) $ 238,000
Accumulated depreciation 5,450,566 382,501 - - 5,833,067
Accumulated amortization 1,272,973 586,938 - (1,192,943) 666,968
Deferred tax asset valuation
reserve 1,974,402 - 159,723 - 2,134,125
</TABLE>
(1) Represents amounts acquired from Visiplex Instruments Ltd. or Regam
Medical Systems International AB, or corresponding increase (decrease)
in the related deferred tax asset.
F-16
<PAGE>
Item 9. Disagreements on Accounting and Financial Disclosure
During the three years ended June 30, 1997, there were no disagreements with the
Company's independent accountants on any matters or accounting principles or
practices or financial statement disclosure.
Part III
Items 10, 11, 12, and 13 are hereby incorporated by reference from the Company's
Proxy Statement for the Annual Meeting of Shareholders, tentatively scheduled
for December 18, 1997.
<PAGE>
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
a) 1. The financial statements and schedules listed in the accompanying
index to financial statements are filed as a part of this annual
report.
2. See a)1. Above.
3. The following exhibits are filed pursuant to Item 601 of
Regulation S-K. The numbers set forth below opposite the description
of each Exhibit correspond to the Exhibit Table of Item 601 of
Regulation S-K.
2. (a) -- Asset Purchase Agreement between Xenon Industries
Inc., and Visiplex Instruments, Ltd., dated June 30,
1995. (6)
(b) -- Stock Purchase Agreement between ACG Nystromgruppen
AB and AFP Imaging Corporation, dated April 17, 1997.
(12)
(c) -- Promissory Note between ACG Nystromgruppen AB and AFP
Imaging Corporation, dated April 17, 1997. (12)
3. (a) -- Certificate of Incorporation of Registrant as
amended. (2)
(b) -- Restated Certificate of Incorporation of Registrant.
(4)
(c) -- Certificate of Amendment to Certificate of
Incorporation of Registrant. (8)
(d) -- Certificate of Amendment of the Certificate of
Incorporation of the Company filed with the Secretary
of the State of New York on October 12, 1995. (10)
(e) -- By-Laws of Registrant. (2)
(f) -- Excerpt from minutes of Board of Directors meeting of
August 12, 1982, amending the By-Laws of Registrant.
(5)
4. (a) -- Specimen of Common Stock Certificates. (2)
(b) -- Form of Common Stock Purchase Warrant. (2)
(c) -- 1980 Restricted Stock Purchase Plan of the
Registrant. (2)
(d) -- Form of Restricted Stock Purchase Agreement. (2)
(e) -- Profit Sharing Plan of the Registrant, as
supplemented. (2)
(f) -- Specimen of Preferred Stock, Series A. Certificate.
(5)
(g) -- Form of Preferred Stock and Debenture Purchase
Agreement, dated as of August 12, 1982, between
Registrant and each of the persons listed on the
schedule of purchasers annexed thereto. (4)
(h) -- Form of Registrant's 12% Convertible Subordinated
Debenture due 1997. (4)
(i) -- Restated Certificate of Incorporation. (4)
(j) -- Registration Right Agreement, dated August 12, 1982
between Registrant and Pako Corporation. (4)
(k) -- Warrant Certificate, dated August 12, 1982, issued to
Frederick R. Adler. (4)
(l) -- Warrant Certificate, dated October 22, 1982 issued to
61 Broadway Associates Partnership. (1)
(m) -- Registrant's 1992 Stock Option Plan. (9)
(n) -- Subscription Agreement, dated October 11, 1995 of New
Ballantrae Partners, L.P. (10)
(o) -- Registration Rights Agreement, dated as of October
12, 1995 by and between AFP Imaging Corporation and
New Ballantrae Partners, L.P. (10)
(p) -- Shareholders Agreement, dated as of October 12, 1995
by and among New Ballantrae Partners, L.P., Donald
Rabinovitch and David Vozick. (10)
(q) -- Registrant's 1995 Stock Option Plan. (11)
10.(a) -- Health and Medical Reimbursement Plan. (2)
(b) -- Lease Agreement dated September 1, 1985, for premises
at 250 Clearbrook Road, Elmsford, NY. (7)
(c) -- Letter Amendment dated May 1992, to Registrant's 12%
Convertible Subordinated Debenture due 1997. (9)
<PAGE>
(d) -- Greyhound Financial Capital Corporation Loan and
Security Agreement (8)
(e) -- Finova Capital Corporation (formerly Greyhound
Financial Capital Corporation) Amendment No. 3 to
Loan and Security Agreement and Replacement Secured
Promissory Note.
11. -- Statement re computation per share earnings. (3)
21. -- Subsidiaries of the Registrant.
27. -- Financial Data Schedule
b) Reports on Form 8-K:
A current Report on Form 8K/A was filed on June 30, 1997, to present the
Financial Statements of Regam Medical Systems International AB for the year
ended August 31, 1996, and the required pro-forma financial information
(1) Incorporated by reference from the Exhibits filed with Registrant's
Report on Form 10-K, dated June 30, 1984, filed with the Securities and
Exchange Commission.
(2) Incorporated by reference from the exhibits filed with Registration
Statement #2-G8980 of the Company, as amended, on file with the Securities
and Exchange Commission.
(3) See Note 1 to "Notes to Financial Statements".
(4) Incorporated by reference from the Exhibits filed with Registrant's
Report on Form 8-K, dated August 12, 1982.
(5) Incorporated herein by reference from the Exhibits filed with the
Registrant's Annual Report on Form 10-K for the fiscal year ended June 30,
1982.
(6) Incorporated by reference from the Exhibits filed with Registrant's
Report on Form 8-K, dated July 31, 1995.
(7) Incorporated by reference from the Exhibits filed with Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30, 1986.
(8) Incorporated by reference from the Exhibits filed with Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30, 1994.
(9) Incorporated by reference from the Exhibits filed with Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30, 1993.
(10) Incorporated by reference from the Exhibits filed with Registrant's
current report on Form 8-K, dated October 12, 1995.
(11) Incorporated by reference from the Exhibits filed with Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30, 1996.
(12) Incorporated by reference from the Exhibits filed with the
Registrant's Report on form 8-K, dated May 1, 1997.
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
By: /s/ Donald Rabinovitch
------------------------------
Donald Rabinovitch, President
Date: September 24, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Donald Rabinovitch
------------------------------
Donald Rabinovitch, President
& Director
(Principal Executive Officer)
Date: September 24, 1997
By: /s/ David Vozick
------------------------------
David Vozick, Chairman of the Board
Secretary and Treasurer
(Principal Financial and Accounting Officer)
Date: September 24, 1997
By: /s/ Robert Rosen
------------------------------
Robert Rosen, Director
Date: September 24, 1997
By: /s/ Robert Blatt
------------------------------
Robert Blatt, Director
Date: September 24, 1997
By: /s/ Frank O'Bryan
------------------------------
Frank O'Bryan, Director
Date: September 24, 1997
<PAGE>
THIRD AMENDMENT TO
LOAN AND SECURITY AGREEMENT
This Third Amendment to Loan and Security Agreement (this "Amendment"),
dated as of July 14, 1997, is entered into by and among AFP IMAGING CORPORATION,
a New York corporation, successor by merger to AFP Technologies Corporation,
formerly known as Kenro Corporation, a New Jersey corporation ("AFP"),
LOGETRONICS CORPORATION, a New York corporation ("LogE"), VISIPLEX INSTRUMENTS
CORPORATION, a New York corporation formerly known as Xenon Industries, Inc.
("Visiplex") and REGAM MEDICAL SYSTEMS INTERNATIONAL AB, a Swedish corporation
("Regam") (AFP, LogE, Visiplex and Regam are hereinafter jointly and severally,
referred to as "Borrower"), and FINOVA CAPITAL CORPORATION, a Delaware
corporation ("Lender") formerly known as Greyhound Financial Corporation,
successor-by-merger to Greyhound Financial Capital Corporation, an Oregon
corporation ("Original Lender").
W I T N E S S E T H:
WHEREAS, Borrower, AFP Technologies Corporation, formerly known as Kenro
Corporation, a New Jersey corporation and Original Lender are parties to that
certain Loan and Security Agreement dated as of November 22, 1993, as the same
was amended by (i) that certain First Amendment to Loan and Security Agreement
dated as of December 7, 1993 and (ii) that certain Second Amendment to Loan and
Security Agreement dated as of July 14, 1995 (as so amended, the "Loan
Agreement") setting forth the terms and conditions under which Original Lender
would make loans and other advances to Borrower; and
WHEREAS, effective as of December 31, 1994, Original Lender was merged with
and into Lender (then known as Greyhound Financial Corporation), with Lender
being the surviving corporation of such merger, and Lender succeeded to all the
rights and obligations of Original Lender under the Loan Agreement and the Loan
Documents; and
WHEREAS, effective on April 17, 1997 AFP acquired all of the issued and
outstanding stock of Regam; and
WHEREAS, Borrower has requested that Lender make certain amendments to the
Loan Agreement, which Lender is willing to do but only upon the terms and
subject to the conditions herein set forth;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
<PAGE>
1. Definitions. Unless otherwise defined in this Amendment, all capitalized
terms used herein shall have the same meaning as set forth in the Loan
Agreement.
2. Amendments. The Loan Agreement is hereby amended as follows:
(a) Paragraph 1(A) is hereby amended by adding or substituting, as the case
may be, the following definitions:
"this Agreement' shall mean this Loan and Security Agreement dated as
of November 22, 1993, as amended by the First Amendment, the Second
Amendment and the Third Amendment, and as the same may hereafter be
amended, restated, renewed, extended or modified from time to time."
"'Borrower' means, individually and collectively, jointly and
severally, each of AFP, LogE, Visiplex and Regam."
"'Collateral' shall have the meaning given to it in Section 3 of the
Third Amendment."
"'Eligible Backed Foreign Receivable' shall mean an otherwise Eligible
Receivable of an account debtor not located in the United States, where
such Receivable is fully supported by a letter of credit or other form of
guaranty or security, in each case in form and substance satisfactory to
Lender."
"'Eligible Named Foreign Receivable' shall mean an otherwise Eligible
Receivable of any of Siemens AG, Phillips Medical Systems, GE Belgium or
AGFA Gaevert."
"'Eligible Foreign Receivable' shall mean an Eligible Receivable of an
account debtor not located in the United States, but excluding (A) Eligible
Backed Foreign Receivables and (B) Eligible Named Foreign Receivables."
"'Loan Documents' means, collectively, this Agreement, the
Intellectual Property Security Agreement, the Subordination Agreement, the
Environmental Certificate, the Assignment of Contract, Term Note C, any
other note or notes executed by Borrower and payable to Lender, and any
other agreements entered into in connection with this Agreement, together
with all alterations, amendments, changes, extensions, modifications,
refinancings, refundings, renewals,
-2-
<PAGE>
replacements, restatements, or supplements, of or to any of the foregoing."
"'Regam' means Regam Medical Systems International AB, a Swedish
corporation."
"'Subordinating Creditor' means ACG Nystromgruppen AB, a Swedish
corporation."
"'Subsidiary' means any of LogE, Visiplex or Regam."
"'Term Note C' shall mean that certain promissory note of Borrower,
payable to Lender's order, dated as of the Third Amendment Effective Date,
in the original principal amount of $1,450,000, and attached as Exhibit A
to the Third Amendment, as the same may hereafter be amended, restated,
renewed, extended or modified, or any new note issued in substitution
therefor, from time to time."
"'Third Amendment' shall mean that certain Third Amendment to Loan and
Security Agreement dated as of July 14, 1997, between Lender and Borrower."
"'Third Amendment Effective Date' shall mean July 14, 1997, the date
upon which the Third Amendment became effective."
(b) Clause (v) of the definition of "Eligible Receivables" is hereby
amended in its entirety to read as follows:
"(v) [Reserved];"
(c) Paragraph 2(B)(i)(b) is hereby amended in its entirety to read as
follows:
"(b) an amount equal to (1) eighty percent (80%) of the net amount of
Eligible Receivables other than Eligible Named Foreign Receivables or
Eligible Foreign Receivables, plus (2) the lesser of (A) eighty percent
(80%) of the net amount of Eligible Named Foreign Receivables or (B)
$500,000, plus (3) the lesser of (A) fifty percent (50%) of the net amount
of Eligible Foreign Receivables or (B) $500,000;"
-3-
<PAGE>
(d) Paragraph 2(B)(iii) is hereby amended in its entirety to read as
follows:
"(iii) Fixed Asset Loan: a term loan in the outstanding principal
amount of One Million Four Hundred and Fifty Thousand Dollars and No/100
($1,450,000.00) (the "Fixed Asset Loan"); provided, that the Fixed Asset
Loan shall be subject to such terms and conditions as are set forth on Term
Note C.
Lender shall disburse the Fixed Asset Loan in a single advance in
accordance with the terms and subject to the conditions set forth in the
Loan Agreement."
(e) The first sentence of Paragraph 3(A) is hereby amended in its entirety
to read as follows:
"Borrower shall pay Lender interest on the daily outstanding balance of
Borrower's loan account at a per annum rate of three-quarters of one
percent (0.750%) in excess of the rate of interest announced publicly by
Citibank, N.A., from time to time as its 'base rate' (or any successor
thereto), which may not be such institution's lowest rate (the 'Base
Rate')."
(f) The final sentence of Paragraph 3(A) is hereby amended in its entirety
to read as follows:
"The foregoing notwithstanding, the principal balance of the Fixed Asset
Loan shall bear interest at a per annum rate as set forth in Term Note C."
(g) Paragraph 3(B), providing for a Minimum Interest Charge, is hereby
deleted in its entirety.
(h) Paragraph 3(G) is hereby amended in its entirety to read as follows:
"(G) Examination Fees. Borrower agrees to pay to Lender an examination
fee in the amount of Five Hundred and No/100 Dollars ($500.00) per day per
auditor in connection with each audit or examination of Borrower performed
by Lender prior to or after the date hereof, plus all costs and expenses
incurred in connection therewith (the "Examination Fee"). Notwithstanding
the foregoing, so long as there exists no Event of Default or any act or
event which with notice, passage of time, or both would constitute an Event
of Default, Borrower shall pay only Lender's actual fees and expenses
incurred during Lender's field examinations and audits, based upon a cycle
of
-4-
<PAGE>
one hundred and eighty (180) days between such field examinations/audits
and a limit of five (5) business days per such field examination/audit;
provided, however, that nothing herein shall be deemed to limit the
frequency or the duration of Lender's field examinations/audits."
(i) Paragraph 17(A) is hereby amended and restated in its entirety to read
as follows:
"Term. The initial term of this Agreement shall be for three (3) years
from the Third Amendment Effective Date (the 'Initial Term') and shall be
automatically renewed for successive periods of one (1) year (each, a
'Renewal Term'), at the discretion of Lender, unless earlier terminated as
provided herein. All loans and all credit facilities shall be coterminous."
(j) Paragraph 17(D) is hereby amended in its entirety to read as follows:
"(D) Early Termination; Termination Fee. In addition to the procedure
set forth in Paragraph 17(B), Borrower may terminate this Agreement at any
time upon sixty (60) days' prior written notice and prepay the Obligations.
Upon any such early termination by Borrower or any termination of this
Agreement by Lender upon the occurrence of an Event of Default under
Paragraph 18(A) hereof, then, and in any such event, Borrower shall pay to
Lender upon the effective date of such termination a fee (the 'Termination
Fee') in an amount equal to: (i) three percent (3%) of the average daily
outstanding balance of the Obligations for the 180 day period (or lesser
period if applicable) preceding the date of termination, if such early
termination occurs on or prior to the first anniversary of the Third
Amendment Effective Date; (i) two percent (2%) of the average daily
outstanding balance of the Obligations for the 180 day period (or lesser
period if applicable) preceding the date of termination, if such early
termination occurs after the first anniversary of the Third Amendment
Effective Date but on or prior to the second anniversary of the Third
Amendment Effective Date; or (ii) one percent (1%) of the average daily
outstanding balance of the Obligations for the 180-day period preceding the
date of termination, if such early termination occurs after the second
anniversary of the Third Amendment Effective Date. The Termination Fee
shall be presumed to be the amount of damages sustained by Lender as a
result of the early termination, and Borrower agrees that because it is
difficult to calculate such damages, the Termination Fee provided for
herein is reasonable under the circumstances."
-5-
<PAGE>
(k) Notwithstanding anything to the contrary contained in the Loan
Agreement, as long as (i) Borrower shall maintain excess borrowing availability
of at least Five Hundred Thousand Dollars ($500,000), after giving effect to any
requested but unfunded advance and payment in full of Borrower's suppliers to
within sixty (60) days of such suppliers' respective written or agreed-upon
terms, and (ii) there shall not then exist an Event of Default or any act or
event which with notice, passage of time, or both would constitute an Event of
Default, (1) Borrower shall report to Lender Collateral information on a monthly
basis (in the form of a Borrowing Base Certificate to be prescribed by Lender),
and (2) Borrower shall maintain dominion over its cash.
(l) Lender's address for notice purposes in Exhibit B to the Loan Agreement
is hereby amended in its entirety to read as follows:
Lender's address for notices: FINOVA Capital Corporation
311 South Wacker Drive
Suite 4400
Chicago, Illinois 60606
Att'n: Brian G. Rujawitz
Fax: (312) 322-7250
with a copy to: FINOVA Capital Corporation
1850 North Central Avenue
Phoenix, Arizona 85002
Attention: Joseph R. D'Amore, Esq.
Fax: (602) 207-5036
with a copy to: Gammage & Burnham
Two North Central Avenue
Eighteenth Floor
Phoenix, Arizona 85004
Att'n: Randall S. Dalton, Esq.
Fax: (602) 256-4475
(m) The Validity and Support Agreement is hereby terminated and deemed to
be of no further force or effect.
(n) Within sixty (60) days after the Third Amendment Effective Date,
Borrower shall cause to be delivered to Lender a Subordination Agreement from
ACG Nystromgruppen AB (the Subordinating Creditor) with respect to that certain
US$1,000,000 promissory note of AFP dated April 17, 1997.
(o) Notwithstanding anything to the contrary contained in the Loan
Agreement, "Eligible Receivables" shall exclude Receivables of Regam unless and
-6-
<PAGE>
until Lender shall have satisfied itself in its sole determination that Lender
has a first priority perfected security interest in such Receivables of Regam.
(p) Notwithstanding anything to the contrary contained in the Loan
Agreement, "Eligible Inventory" shall exclude Inventory of Regam unless and
until Lender shall have satisfied itself in its sole determination that Lender
has a first priority perfected security interest in such Inventory.
(q) The following new Section 13(A)(v) is hereby added to read as follows:
"(v) Regam is a corporation duly organized, validly existing and in
good standing under the laws of the Country of Sweden, is qualified and
authorized to do business and is in good standing in all jurisdictions in
which such qualification and good standing are necessary in order for it to
conduct its business and own its property (other than to the extent that
such failure to qualify would not have a material adverse effect on the
business or financial condition of Regam), and has all requisite power and
authority to conduct its business as presently conducted, to own its
property and to execute and deliver each of the Loan Documents to which it
is a party and perform all of its Obligations thereunder;"
(r) Section 15(L), which presently reads as follows:
"(L) Affiliate Transactions. Except as set forth below, sell,
transfer, distribute or pay any money or property to any Affiliate, or
invest in (by capital contribution or otherwise) or purchase or repurchase
any stock or Indebtedness, or any property, of any Affiliate, or become
liable on any guaranty of the indebtedness, dividends or other obligations
of any Affiliate. Notwithstanding the foregoing, Borrower may pay
compensation permitted by Paragraph 15(J) to employees who are Affiliates,
make loans or other advances permitted by Paragraph 15(B) to executives who
are Affiliates and make payments to E-Ticket to the extent permitted under
the Subordination Agreement between Lender and E-Ticket and, if no Event of
Default has occurred, Borrower may engage in transactions with Affiliates
in the normal course of business, in amounts and upon terms which are fully
disclosed to Lender and which are no less favorable to Borrower than would
be obtainable in a comparable arm's length transaction with a Person who is
not an Affiliate;"
is hereby amended in its entirety to read as follows:
-7-
<PAGE>
"(L) Affiliate Transactions.
(i) sell, transfer, distribute or pay any money or property to
any Affiliate other than Regam, or invest in (by capital contribution
or otherwise) or purchase or repurchase any stock or Indebtedness, or
any property, of any Affiliate other than Regam, or become liable on
any guaranty of the indebtedness, dividends or other obligations of
any Affiliate other than Regam; provided, however, that if (A) no
Event of Default exists and (B) no act or event has occurred which,
with the passing of time or the giving of notice, or both, would
constitute an Event of Default, then Borrower may engage in
transactions with any Affiliate other than Regam in the normal course
of business, in amounts and upon terms which are fully disclosed to
Lender and which are no less favorable to Borrower than would be
obtainable in a comparable arm's length transaction with a Person who
is not an Affiliate;
(ii) sell, transfer, distribute or pay any money or property to
Regam, except on the following terms and subject to the following
conditions: (A) both before and after having given effect to such
sale, transfer, distribution or payment , no Event of Default exists
and no act or event has occurred which, with the passing of time or
the giving of notice, or both, would constitute an Event of Default
and (B) either (1) Lender shall continue to have a first priority
perfected security interest in such money or property, or (2) both
before and after having given effect to such sale, transfer,
distribution or payment, Borrower shall have excess borrowing
availability of at least One Million Five Hundred Thousand Dollars
($1,500,000) after giving effect to any requested but unfunded advance
and payment in full of Borrower's suppliers to within sixty (60) days
of such suppliers' respective written or agreed-upon terms, or (3)
FINOVA shall have given its prior written approval for such sale,
transfer, distribution or payment;
(iii) notwithstanding the provisions of Section 15(L)(i) or
Section 15(L)(ii), Borrower may pay compensation permitted by
Paragraph 15(J) to employees who are Affiliates, make loans or other
advances permitted by Paragraph 15(B) to executives who are Affiliates
and make payments to Subordinated Creditor to the extent permitted
under the Subordination Agreement between Lender and Subordinated
Creditor;".
-8-
<PAGE>
3. Reaffirmation and Grant of Security Interest. Without in any way
limiting the provisions of Section 4(A) of the Loan Agreement, and to secure the
prompt payment and performance of the Obligations (other than those Obligations
arising out of the Environmental Certificate), and notwithstanding which entity
constituting Borrower receives a particular advance of the Total Facility, each
entity constituting Borrower hereby reaffirms the grant to Lender of or grants
to Lender, as the case may be, a security interest in all of such Borrower's now
owned or hereafter acquired or arising Inventory, Equipment, Receivables, the
Life Insurance Policies and the proceeds thereof, Trademarks, Licenses and
Patents, and General Intangibles, including, without limitation, all of such
Borrower's Deposit Accounts, money, any and all property now or at any time
hereafter in Lender's possession (including claims and credit balances), and all
proceeds (including proceeds of any insurance policies, proceeds of proceeds and
claims against third parties), all products and all books and records related to
any of the foregoing (all of the foregoing, together with all other property in
which Lender may be granted a lien or security interest, is referred to herein,
collectively, as the "Collateral"; provided, however, that, with respect solely
to Collateral of Regam, such Collateral of Regam shall in all events include
only property of Regam located in the United States of America as of the Third
Amendment Effective Date together with such Collateral of Regam as thereafter
may be located therein from time to time.
4. Conditions Precedent. The amendments described in this Amendment and the
obligations of Lender set forth in this Amendment will not be effective unless
and until each of the following conditions precedent have been satisfied, in
form, manner and substance satisfactory to Lender:
(a) Borrower shall have delivered or caused to be delivered to Lender the
following documents, all of which shall be properly completed, executed and
otherwise satisfactory to Lender:
(i) this Third Amendment;
(ii) Term Note C (as described in Section 2(a) hereof), in form and
substance set forth in Exhibit A attached hereto and incorporated herein by
this reference, which Term Note C shall be issued in substitution for, but
not in payment of or satisfaction of, (A) that certain First Amended
Secured Promissory Note (Term Note A) in the original principal amount of
$550,000 and (B) that certain Secured Promissory Note (Term Note B);
(iii) Any other consents deemed necessary by Lender;
(iv) A corporate resolution from the Board of Directors of each entity
constituting Borrower (and from the Shareholders, if
-9-
<PAGE>
necessary) approving the transactions contemplated hereby and the execution
and delivery of this Amendment and Term Note C;
(v) A certificate of Borrower's president and corporate assistant
secretary attesting to the facts that (A) the corporate resolutions set
forth in Section 3(a)(vi) above have not been modified or revoked and
remain in full force and effect; and (B) the by-laws of such Borrower have
not changed from the date of the last such certification, or attaching any
amendments thereto.
(vi) Such amendments to Lender's existing financing statements and
such new financing statements in Lender's favor as Lender deems necessary;
and
(vii) Such other items as Lender may require;
(b) Lender shall have received a certificate of corporate status with
respect to each Borrower, dated within ten (10) days of the date hereof, from
the Secretary of State or other appropriate governmental authority of the state
or country of incorporation of each Borrower, which certificate shall indicate
that each Borrower is in good standing in such jurisdiction, together in each
case with a certified copy of the articles of incorporation of each Borrower
from such governmental authority;
(c) There shall not then exist an Event of Default or any act or event
which with notice, passage of time, or both would constitute an Event of
Default;
(d) All the representations and warranties of the Loan Parties in the Loan
Documents (as defined in Section 2(a) hereof) as amended hereby shall be true
and correct, in all material respects, before and after giving effect to the
making of this Amendment;
(e) Lender shall have reviewed and approved a current UCC search on
Borrower; and
(f) Borrower shall have paid all closing costs, recording fees and taxes,
appraisal fees and expenses, travel expenses, fees and expenses of Lender's
counsel, and all other costs and expenses incurred by Lender in connection with
the preparation of, closing of and disbursement of the advances pursuant to this
Amendment, which costs, fees and expenses may be payable from the first advance
made pursuant to this Amendment.
5. Indebtedness Acknowledged. Borrower acknowledges that the indebtedness
evidenced by the Loan Documents is just and owing and agrees to pay the
indebtedness in accordance with the terms of the Loan Documents. Borrower
-10-
<PAGE>
further acknowledges and represents that no event has occurred and no condition
presently exists that would constitute a default or event of default by Lender
under the Loan Agreement as amended hereby or any of the other Loan Documents,
with or without notice or lapse of time.
6. Validity of Documents. Borrower hereby ratifies, reaffirms, acknowledges
and agrees that the Loan Agreement as amended hereby and the other Loan
Documents represent valid, enforceable and collectable obligations of Borrower,
and that Borrower presently has no existing claims, defenses (personal or
otherwise) or rights of setoff whatsoever with respect to the Obligations of
Borrower under the Loan Agreement as amended hereby or any of the other Loan
Documents. Borrower furthermore agrees that it has no defense, counterclaim,
offset, cross-complaint, claim or demand of any nature whatsoever which can be
asserted as a basis to seek affirmative relief or damages from Lender.
7. Reaffirmation of Warranties. Borrower hereby reaffirms to Lender each of
the representations, warranties, covenants and agreements of Borrower as set
forth in each of the Loan Documents as amended hereby with the same force and
effect as if each were separately stated herein and made as of the date hereof.
Borrower represents and warrants to Lender that with respect to the financing
transaction herein contemplated, no Person is entitled to any brokerage fee or
other commission and Borrower agrees to indemnify and hold Lender harmless
against any and all such claims.
8. Ratification of Terms and Conditions. All terms, conditions and
provisions of the Loan Agreement as amended hereby, and of each of the other
Loan Documents shall continue in full force and effect and shall remain
unaffected and unchanged except as specifically amended hereby. In the event of
any conflict between the terms and conditions of this Amendment and any of the
other Loan Documents, the provisions of this Amendment shall control.
9. Other Writings. Lender and Borrower will execute such other writings as
may be necessary to confirm or carry out the intentions of Lender and Borrower
evidenced by this Amendment.
10. Benefit of this Amendment. The terms and provisions of this Amendment
and the other Loan Documents shall be binding upon and inure to the benefit of
Lender and Borrower and their respective successors and assigns, except that
Borrower shall not have any right to assign its rights under this Amendment or
any of the Loan Documents or any interest therein without the prior written
consent of Lender.
11. Choice of Law. The Loan Documents and this Amendment shall be performed
and construed in accordance with the laws of the State of Arizona.
-11-
<PAGE>
12. Entire Agreement. Except as modified by this Amendment, the Loan
Documents remain in full force and effect. The Loan Documents as modified by
this Amendment embody the entire agreement and understanding between Borrower
and Lender, and supersede all prior agreements and understandings between said
parties relating to the subject matter thereof.
13. Counterparts; Telecopy Execution. This Amendment may be executed in any
number of separate counterparts, all of which when taken together shall
constitute one and the same instrument, admissible into evidence,
notwithstanding the fact that all parties have not signed the same counterpart.
Delivery of an executed counterpart of this Amendment by telefacsimile shall be
equally as effective as delivery of a manually executed counterpart of this
Amendment. Any party delivering an executed counterpart of this Amendment by
telefacsimile shall also deliver a manually executed counterpart of this
Amendment, but the failure to deliver a manually executed counterpart shall not
affect the validity, enforceability, and binding affect of this Amendment.
14. Effectiveness of Amendment. This Amendment shall not be effective until
the same is executed and delivered by the parties hereto and all conditions set
forth in Section 4 hereof have been satisfied.
15. Reaffirmation. All of the terms and provisions of the Loan Agreement
are hereby confirmed and ratified. However, in the event of a conflict between
the Loan Agreement and this Amendment, the provisions of this Amendment shall
prevail.
[SIGNATURE PAGE FOLLOWS]
-12-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment on the date
and year first written above.
AFP IMAGING CORPORATION, a New York LOGETRONICS CORPORATION, a New
corporation, successor by merger to York corporation
AFP Technologies Corporation,
formerly known as Kenro
Corporation, a New Jersey
corporation
By: _______________________________ By: _______________________________
Name: Name:
Title: Title:
VISIPLEX INSTRUMENTS CORPORATION, a REGAM MEDICAL SYSTEMS INTERNATIONAL
New York Corporation formerly known AB, a Swedish corporation
as Xenon Industries, Inc.
By: _______________________________ By: _______________________________
Name: Name:
Title: Title:
FINOVA CAPITAL CORPORATION, a Delaware
corporation formerly known as
Greyhound Financial Corporation,
successor-by-merger to Greyhound
Financial Capital Corporation, an
Oregon corporation
By: __________________________________
Name:
Title:
-13-
<PAGE>
EXHIBIT A TO FIRST AMENDMENT
Form of Term Note C
(to be attached)
<PAGE>
REPLACEMENT SECURED PROMISSORY NOTE
(TERM NOTE C)
$1,450,000 Phoenix, Arizona
July 14, 1997
FOR VALUE RECEIVED, AFP IMAGING CORPORATION, a New York corporation,
successor by merger to AFP Technologies Corporation, formerly known as Kenro
Corporation, a New Jersey corporation, LOGETRONICS CORPORATION, a New York
corporation, VISIPLEX INSTRUMENTS CORPORATION, a New York corporation formerly
known as Xenon Industries, Inc. and REGAM MEDICAL SYSTEMS INTERNATIONAL AB, a
Swedish corporation ("Regam") (all of the foregoing, individually and
collectively "Debtor"), jointly and severally promise to pay to the order of
FINOVA CAPITAL CORPORATION ("Secured Party"), formerly known as Greyhound
Financial Corporation and successor-by-merger to Greyhound Financial Capital
Corporation, an Oregon corporation, at its offices at 355 South Grand Avenue,
Suite 2400, Los Angeles, California 90071, or at such other place or places as
Secured Party may from time to time designate in writing, the principal sum of
One Million Four Hundred Fifty Thousand Dollars ($1,450,000), payable as
follows:
a. Thirty-Six (36) equal successive monthly installments of principal
of Twelve Thousand Eighty-Three and 33/100 Dollars ($12,083.33) each on the
first day of each month, beginning August 1, 1997, and continuing through
and including July 1, 2000; and
b. A final installment of One Million Fifteen Thousand and 12/100
Dollars ($1,015,000.12) on the 14th day of July, 2000,
together with accrued interest on the principal balance from time to time
remaining unpaid, payable monthly on the first day of each and every month,
beginning August 1, 1997. Notwithstanding anything herein to the contrary, in
the event that certain Loan and Security Agreement, dated as of November 22,
1993 by and among Debtor (other than Regam), AFP Technologies Corporation,
formerly known as Kenro Corporation, a New Jersey corporation and Secured Party
(the "Original Agreement"), as amended by that certain First Amendment to Loan
and Security Agreement dated as of December 7, 1993 (the "First Amendment") that
certain Second Amendment to Loan and Security Agreement dated as of July 14,
1995 (the "Second Amendment") and that certain Third Amendment to Loan and
Security Agreement of even date herewith (the "Third Amendment"; and
collectively with the Second Amendment, the First Amendment and the Original
Agreement, and as the same may hereafter be amended, restated, renewed, extended
or modified from time to time, the "Loan Agreement") is terminated by Debtor, by
Secured Party or by any other person at any time, then the entire unpaid
principal balance of this Note,
<PAGE>
together with all accrued and unpaid interest hereon, shall become immediately
due and payable in full on the effective date of such termination, without
presentment, notice or demand of any kind.
Interest shall be computed on the basis of a 360-day year for the actual
number of days elapsed, and shall be at the rate of three-quarters of one
percent (0.750%) in excess of the Base Rate (as hereinafter defined), computed
on the basis of a 360-day year; provided, however, upon the occurrence and
during the continuance of an event of default (as hereinafter defined), interest
shall accrue on the outstanding principal balance of this Note at a default rate
(the "Default Rate") of two and three-quarters percent (2.750%) in excess of the
Base Rate, and shall be payable on demand. "Base Rate" means, for any day, the
rate of interest per annum (over a year of 360 days) announced by Citibank, N.A.
(the "Bank"), from time to time, as its "base rate" (or any successor thereto)
in effect on such day. The Base Rate is not necessarily the lowest rate charged
by the Bank. The applicable rate of interest assessed hereunder will be
increased or decreased from time to time hereafter in an amount equal to any
increase or decrease hereafter made by the Bank in the Base Rate. A change in
the Base Rate shall be effective on the first day following such change,
provided that a cumulative change of less than one fourth of one percent (0.25%)
shall not be considered.
Debtor warrants and represents to Secured Party that Debtor has used and
will continue to use the loans and advances represented by this Note solely for
proper business purposes, and consistent with all applicable laws and statutes.
Debtor further warrants and represents to Secured Party and covenants with
Secured Party that Debtor is not in the business of extending credit for the
purpose of purchasing or carrying margin stock (within the meaning of Regulation
G issued by the Board of Governors of the Federal Reserve System), and no part
of the loan represented by this Note has been or will be used to purchase or
carry any margin stock or to extend credit to others for the purpose of
purchasing or carrying any margin stock.
This Note is secured by the Collateral described in the Loan Agreement.
The occurrence of any one of the following events shall constitute a
default by Debtor under this Note (hereinafter an "Event of Default"): (a) if
Debtor fails to pay to Secured Party an installment of principal or interest
hereunder when due; (b) if Debtor fails to pay any of its Obligations (as
defined in the Loan Agreement) to Secured Party when due and payable or declared
due and payable; (c) if Debtor fails or neglects to perform, keep or observe any
term, provision, covenant, warranty or representation contained in this Note or
the Loan Agreement (other than as referred to in (a) or (b) of this paragraph),
which is required to be performed, kept or observed by Debtor or if a default
occurs under the Loan Agreement; (d) an Event of Default under and as defined in
the Loan Agreement shall exist; or (e) the
-2-
<PAGE>
occurrence of a default or an event of default under any agreement, instrument
or document heretofore, now or at any time or times hereafter delivered to
Secured Party by Debtor or by any guarantor of part or all of Debtor's
obligations to Secured Party.
Upon the occurrence of any Event of Default hereunder, in addition to
Secured Party's right to charge interest on the Obligations at the Default Rate:
(a) at the option of Secured Party, the entire unpaid amount of all of the
Obligations shall become immediately due and payable without demand, notice or
legal process of any kind; (b) Secured Party may, at its option, without demand,
notice or legal process of any kind, exercise any and all rights and remedies
granted to it by the Loan Agreement or by any other agreement now or hereafter
existing between Secured Party and Debtor or between Secured Party and any
guarantor of part or all of Debtor's liabilities to Secured Party; and (c)
Secured Party may at its option exercise from time to time any other rights and
remedies available to it under the Uniform Commercial Code or other law of the
State of Arizona.
The remedies of Secured Party as provided herein and in the Loan Agreement
shall be cumulative and concurrent, and may be pursued singularly, successively,
or together, at the sole discretion of Secured Party. No act of omission or
commission of Secured Party, including specifically any failure to exercise any
right, remedy or recourse, shall be deemed to be a waiver or release of the
same, such waiver or release to be effected only through a written document
executed by Secured Party and then only to the extent specifically recited
therein. A waiver or release with reference to any one event shall not be
construed as continuing, as a bar to, or as a waiver or release of, any
subsequent right, remedy or recourse as to a subsequent event.
Debtor waives presentment, demand and protest, notice of protest, notice of
presentment and all other notices and demands in connection with the enforcement
of Secured Party's rights hereunder, except as specifically provided and called
for by this Note, and hereby consents to, and waives notice of, the release,
addition, or substitution, with or without consideration, of any collateral or
of any person liable for payment of this Note. Any failure of Secured Party to
exercise any right available hereunder or otherwise shall not be construed as a
waiver of the right to exercise the same or as a waiver of any other right at
any other time.
If legal action is necessary to enforce any provision of this Note, the
prevailing party to such action shall be entitled to recover payment of its
costs and attorneys' fees, paralegals' fees and expert witnesses' fees from the
losing party.
Secured Party may at any time transfer this Note and Secured Party's rights
in any or all collateral securing this Note, and Secured Party thereafter shall
be relieved from all liability with respect to such collateral arising after the
date of such transfer.
-3-
<PAGE>
This Note shall be binding upon Debtor and its legal representatives,
successors and assigns. Wherever possible, each provision of this Note shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of the Note shall be prohibited by or invalid under such
law, such provision shall be severable, and be ineffective to the extent of such
prohibition or invalidity, without invalidating the remaining provision of this
Note. The representations, warranties, covenants, liabilities and obligations of
Debtor contained herein constitute the joint and several representations,
warranties, covenants, liabilities and obligations of each of the parties
constituting Debtor.
This Note is issued in substitution for, but not in payment for or
satisfaction of (i) that certain First Amended Secured Promissory Note (Term
Loan A) dated July 14, 1995 in the original principal amount of $550,000, which
itself was issued in amendment and restatement of, but not in payment for or
satisfaction of, that certain Secured Promissory Note dated as of November 22,
1993 in the original principal amount of $250,000.00 and (ii) that certain
Secured Promissory Note (Term Loan B) dated as of July 14, 1995 in the original
principal amount of $900,000.00 (collectively, the "Original Note"). Upon
execution and delivery hereof and satisfaction of the conditions precedent set
forth in the Third Amendment, the terms and provisions of this Note shall govern
and control all matters formerly governed by the Original Note. This Note is
Term Note C as defined in the Loan Agreement.
THIS NOTE HAS BEEN DELIVERED FOR ACCEPTANCE BY SECURED PARTY IN PHOENIX,
ARIZONA AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL
LAWS (AS OPPOSED TO THE CONFLICTS OF LAW PROVISIONS) OF THE STATE OF ARIZONA, AS
THE SAME MAY FROM TIME TO TIME BE IN EFFECT, INCLUDING, WITHOUT LIMITATION, THE
UNIFORM COMMERCIAL CODE AS ADOPTED IN ARIZONA. DEBTOR HEREBY (i) IRREVOCABLY
SUBMITS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED IN MARICOPA
COUNTY, ARIZONA OVER ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY MATTER
ARISING FROM OR RELATED TO THIS NOTE; (ii) WAIVES PERSONAL SERVICE OF ANY AND
ALL PROCESS UPON DEBTOR, AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS BE MADE
BY MESSENGER, CERTIFIED MAIL OR REGISTERED MAIL DIRECTED TO DEBTOR AT THE
ADDRESS SET FORTH BELOW AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED UPON
THE EARLIER OF ACTUAL RECEIPT OR THREE (3) DAYS AFTER THE SAME SHALL HAVE BEEN
POSTED TO DEBTOR'S ADDRESS; (iii) IRREVOCABLY WAIVES, TO THE FULLEST EXTENT
DEBTOR MAY EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT FORUM TO THE
MAINTENANCE OF ANY SUCH ACTION OR PROCEEDING; (iv) AGREES THAT A FINAL JUDGMENT
IN ANY SUCH ACTION OR PROCEEDING SHALL BE
-4-
<PAGE>
CONCLUSIVE AND MAY BE ENFORCED IN ANY OTHER JURISDICTION BY SUIT ON THE JUDGMENT
OR IN ANY OTHER MANNER PROVIDED BY LAW; (v) AGREES NOT TO INSTITUTE ANY LEGAL
ACTION OR PROCEEDING AGAINST SECURED PARTY OR ANY OF SECURED PARTY'S DIRECTORS,
OFFICERS, EMPLOYEES, AGENTS OR PROPERTY, CONCERNING ANY MATTER ARISING OUT OF OR
RELATING TO THIS NOTE IN ANY COURT OTHER THAN ONE LOCATED IN MARICOPA COUNTY,
ARIZONA; AND (vi) IRREVOCABLY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION
ARISING UNDER OR IN CONNECTION WITH THIS NOTE. NOTHING IN THIS PARAGRAPH SHALL
AFFECT OR IMPAIR SECURED PARTY'S RIGHT TO SERVE LEGAL PROCESS IN ANY MANNER
PERMITTED BY LAW OR SECURED PARTY'S RIGHT TO BRING ANY ACTION OR PROCEEDING
AGAINST DEBTOR OR DEBTOR'S PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION.
AFP IMAGING CORPORATION, a New York LOGETRONICS CORPORATION, a New
corporation, successor by merger to York corporation
AFP Technologies Corporation,
formerly known as Kenro
Corporation, a New Jersey
corporation
By: _______________________________ By: _______________________________
Name: Name:
Title: Title:
Employer ID No.: 13-2956272 Employer ID No.: 22-2825090
VISIPLEX INSTRUMENTS CORPORATION, a REGAM MEDICAL SYSTEMS INTERNATIONAL
New York corporation formerly known AB, a Swedish corporation
as Xenon Industries, Inc.
By: _______________________________ By: _______________________________
Name: Name:
Title: Title:
Employer ID No.: 11-2557539 Employer ID No.: ___________
Debtor's address: 250 Clearbrook Road
Elmsford, New York 10523
Att'n: David Vozick
-5-
<PAGE>
Exhibit 21
Subsidiaries of Registrant
Country/State of % of Voting
Name Incorporation Securities Owned
- ---- ------------- ----------------
LogEtronics Corporation New York 100%
Visiplex Instruments Corporation New York 100%
AFP/LOGE International New York 100%
Regam Medical Systems
International AB Sweden 100%
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,858,287
<SECURITIES> 0
<RECEIVABLES> 6,094,032
<ALLOWANCES> 277,926
<INVENTORY> 6,016,528
<CURRENT-ASSETS> 14,341,016
<PP&E> 7,511,752
<DEPRECIATION> 6,113,123
<TOTAL-ASSETS> 20,516,028
<CURRENT-LIABILITIES> 5,230,527
<BONDS> 0
0
3,025,318
<COMMON> 74,327
<OTHER-SE> 7,773,739
<TOTAL-LIABILITY-AND-EQUITY> 20,516,028
<SALES> 37,048,510
<TOTAL-REVENUES> 37,048,510
<CGS> 24,950,627
<TOTAL-COSTS> 9,968,588
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 451,466
<INCOME-PRETAX> 1,677,829
<INCOME-TAX> 129,232
<INCOME-CONTINUING> 1,548,597
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,548,597
<EPS-PRIMARY> .16
<EPS-DILUTED> .15
</TABLE>
