<PAGE>
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
[X] Annual Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the Fiscal Year Ended June 30, 1998
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or
___ Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
Commission File Number: 0-10832
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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
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Securities registered pursuant Section 12 (b) of the Act: None
----
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value .01 per share
-------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
[X]
--- ---
Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. YES ( ) NO (X)
The aggregate market value of the Registrant's Common stock held by
non-affiliates of the Registrant as of August 28, 1998 was approximately
$6,684,169. On such date, the averages of the closing bid and asked prices of
the Common Stock, as quoted by the Nasdaq SmallCap Market, was $1.188.
The registrant had 9,767,969 shares of Common Stock outstanding as of August
28, 1998,
The Company's Proxy Statement for the 1998 Annual Meeting of Shareholders
tentatively scheduled for December 18, 1998 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 December 24, 1997, the Company expanded its dental imaging business with
the acquisition of ProDen Systems, Inc. ("ProDen"), a U.S. manufacturer of
intraoral dental camera systems utilizing proprietary technology. The purchase
price of $3.5 million consisted of notes payable and cash. The cash portion
was financed with available cash on hand.
On July 14, 1997, the Company completed the re-negotiation of its credit
facility with its senior secured lender. The general terms, conditions and
covenants were 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 acquired Regam Medical Systems International AB
("Regam"), a Swedish 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 with available cash on hand.
As discussed in "Competition", the Company's products are subject to intense
competition through price and services offered and the development of new
technologies and products by well-established competitors who may have greater
financial resources, facilities and organization than the Company.
Accordingly, the Company's product lines may be susceptible to relatively
short life cycles.
b) Financial Information about Industry Segments
The Company is engaged in only one industry segment (imaging equipment) 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 freestanding and table top
medical, dental and industrial x-ray film processors. These machines are
capable of processing or developing up to 400 films, of various sizes, 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, 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 x-rays and electronic imaging technology. Such technology
generates a patient's dental images on a computer screen that operates in a
Windows based software environment.
The Company manufactures and distributes intraoral video dental cameras. This
product allows users to capture up to four intraoral dental images on a
computer screen and have the camera "dock" (plug in) directly into the PC
tower. This system can be networked and is compatible with the Company's
digital dental radiography system. A proprietary Windows based software suite
provides for selection, transmission and manipulation of the desired images by
the dentist.
<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 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 products utilize mechanical as well as analog and digital
electronic technologies. The Company is subject to both foreign and domestic
competition. The competition is characterized by significant investment in
research and development of new technologies, products and services.
Competitors are well established in the film processor manufacturing and
distribution businesses and may have greater financial resources and
facilities than the Company. Other competitors have significant resources and
revenues in electronic digital imaging technologies and expertise in software
development. The Company relies on internal R&D personnel as well as
subcontracted vendors. With respect to all of its products, the Company
competes on the basis of price, features, product quality, applications,
engineering, promptness of delivery and customer service. The Company also
manufacturers and provides to other Original Equipment Manufacturer (OEM)
customers different product versions under each OEM brand label which may
compete with each other as well as the Company's products. The Company
purchases certain products, from others, for resale on a non-exclusive basis
which may be subject to competition from other distributors.
The Company competes in the dental imaging market on the basis of its
proprietary and patented technologies and its participation in a multi-year
European Union (EU) Research and Development contract. The Company will have
the exclusive rights to any dental applications as a result of this project.
See "Research and Development" for further discussion.
Customers
No customer accounted for 10% or more of net sales in fiscal 1998, 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, 1998, the Company's backlog of orders for its products was
approximately $2,302,590 as compared to $4,174,052 as of June 30, 1997. All of
the orders included in the backlog at June 30, 1998 are scheduled for delivery
by June 30, 1999. The backlog as of June 30, 1998 excludes dealer blanket
orders due to a change in the Company's data processing system. It is not
possible to quantify the amount of dealer blanket orders included in the June
30, 1997 backlog. OEM bulk purchase commitments are typically negotiated for
12-month periods but are not based on a calendar or fiscal year. Spare part
sales are not part of the Company's backlog calculations. In the opinion of
the Company, fluctuations in the backlog and its size at any given time are
not necessarily indicative of intermediate or long-term trends in the
Company's business. Much of the Company's backlog can be cancelled or the
delivery dates of orders can be accelerated or extended without penalty.
Delivery of capital equipment is frequently subject to changing budget
conditions of medical institutions or end user clinical practitioners.
<PAGE>
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 product
designs. The Company has agreed to pay a nominal royalty on the domestic sales
of its digital dental systems to an unrelated independent third party for the
use of a format in their software. Such amount is not material to the
operations of the Company. The principal technology applied to the
construction of the Company's other products is state-of-the-art but not
considered proprietary. The Company owns several domestic and foreign
trademarks which it uses in connection with the marketing of its products. The
Company utilizes various domestic and international forms of trademarks,
including AFP Imaging, DENT-X, Sens-A-Ray 2000 and LOGE, among others. The
Company's intellectual property includes many patents acquired as part of
Regam's digital dental technology.
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:
1998 1997 1996
---- ---- ----
$910,861 $776,423 $1,273,032
The Company conducts Research and Development activities internally as well as
contracts certain projects to qualified vendors and expert consultants. The
Company's Research and Development efforts and technologies have been
increased by business acquisitions completed in Fiscal Years 1997 and 1998. In
each transaction, the Company has added new product lines, proprietary
technologies and access to future research and development benefits. The
Company's participation (through its Swedish subsidiary) in a European Union
Contract to develop new x-ray imaging sensors was established in June 1996.
This includes but is not limited to CMOS type sensors. Research and
Development costs for Fiscal 1997 and 1998 does not include the EU grants
towards this project. All dental applications resulting from the developed
technology are assigned exclusively to the Company
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, 1998, the Company employed 174 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 basic configurations. Certain products are custom
engineered and brand labeled for large OEMs. The balance of the Company's
products are brand labeled by the Company with its own trade names and are
distributed through an extensive network of independent medical, dental and
graphic arts dealers who install and service the equipment. The Company
maintains a significant marketing and regional sales management effort to
promote and support all of its products, in its worldwide markets.
<PAGE>
The Company advertises in trade journals (domestic and international),
provides sales support and literature, prepares technical manuals and conducts
customer education and training programs in order to promote its products. In
addition, the Company participates in domestic and international trade and
clinical shows.
Government Regulation
The United States Food and Drug Administration ("FDA"), Bureau of Medical
Devices regulates the distribution of all equipment used as medical devices.
The Company has registered all of its medical products with this agency. The
Bureau of Medical Devices has the right to disapprove the marketing of any
medical device that it believes is unfit for the purposes intended. The
Company believes that its products and procedures satisfy all the criteria
necessary to comply with the regulations of the FDA's Bureau of Medical
Devices. The Company's primary manufacturing facility is ISO (International
Standards Organization) 9001 certified.
Seasonal Nature
The Company's business is not considered seasonal.
Working Capital Practices
The Company engages in no unusual practices regarding inventories, receivables
or other items of working capital. The Company renegotiated its credit
facility with its existing lender in July 1997. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" for further
discussion.
Environmental Impact
The Company believes it is in compliance with the laws and regulations
governing the protection of the environment and that continued compliance will
not have a material effect on its business or require any material capital
expenditures. The Company does not use any controlled or regulated materials
or processes in its operation. Compliance with local codes for the
installation and operation of the Company's products is the responsibility of
the end user.
d) Financial Information about Foreign and Domestic Operations and Export
Sales
With respect to the Company's last three fiscal years, domestic sales were
$22,106,153 (1998), $23,527,612 (1997) and $26,368,729 (1996) representing
65%, 64% and 72%, respectively, of the Company's sales during such periods.
Domestic operating income (loss) was ($2,481,513), $2,283,895 and $1,537,291
for the years ended June 30, 1998, 1997 and 1996, respectively. Export and
foreign sales during such periods were $11,666,554 (1998), $13,520,898 (1997)
and $10,160,150 (1996) or 35%, 36% and 28% of total Company sales for each
period, respectively. The Company's Swedish subsidiary, Regam, incurred
operating losses of $108,900 for fiscal 1998 and $154,600 for the period April
17, 1997 (acquisition date) through June 30, 1997. The Company had no foreign
operating income or losses for fiscal 1996.
Assets used in the manufacture of export sales are integrated with the other
assets of the Company.
Item 2. Properties
The Company's manufacturing facility is well maintained, is in good operating
condition, and has a productive capacity sufficient to meet the Company's
present and anticipated needs. The Company's executive offices and principal
manufacturing facility are located in Elmsford, New York. This property is
under a renegotiated lease expiring on December 31, 2000 at a rental of
$598,574 per year through the lease term, plus increases in real estate taxes,
utility costs and common area charges. The Company rents a sales and marketing
facility in Springfield, Virginia, a small facility in Vancouver, Washington
and a small office at a University in Sweden. Their aggregate monthly rental
is approximately $16,000.
Item 3. Legal Proceedings
The Company is currently defending a civil complaint filed on December 19,
1995, in Worcester, Massachusetts, in the Superior Court of the Commonwealth
of Massachusetts. Such complaint was instituted by 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 had acquired
selected assets and liabilities of Visiplex Instruments Ltd. in July 1995. In
addition, the plaintiff alleges a claim concerning certain inventories and
disputed invoices.
<PAGE>
The Company maintains it did not assume such liabilities. Visiplex Instruments
Ltd. provided the Company with an Indemnification and Hold Harmless Agreement,
which has a $500,000 limit. The amended complaint seeks damages in the sum of
$443,500 for unpaid material invoices and $19.9 million in consequential
damages, treble damages, interest and attorney fees. The Company's motion to
summary dismiss the amended claim was denied in May 1998. The Company and its
attorneys are preparing for the discovery process and vigorously deny there
are any merits to the amended claim. The Company will be cross-claiming
against Visiplex Instruments Ltd. and its general partner. At this time, the
Company does not believe that the final outcome of this matter will have a
material adverse effect on the consolidated financial statements. The Company
is 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, 1998.
<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 closing sale prices for the
Company's Common Stock for each quarterly period during the Company's last two
fiscal years. These prices reflect inter-dealer prices and do not include
retail mark-ups, markdowns or commissions.
Quarter ended High Low
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September 30, 1996 1.81 1.00
December 31, 1996 1.88 1.00
March 31, 1997 2.31 1.69
June 30, 1997 2.13 1.50
September 30, 1997 2.88 1.81
December 31, 1997 2.69 1.81
March 31, 1998 2.75 1.88
June 30, 1998 2.63 .72
b) Holders
The following table sets forth the approximate number of holders of record of
Common Stock of the Company at September 1, 1998.
Title of Class Number of Holders of Record
---------------------------- ---------------------------
Common Stock, $.01 par value 524
c) Dividends
No cash dividends have been declared on the Company's common stock to date and
the Company anticipates that for the foreseeable future any earnings will be
retained for use in its business.
<PAGE>
Item 6. AFP Imaging Corporation and Subsidiaries Selected Financial Data
as of and for The Years Ended June 30, 1998, 1997, 1996, 1995, and 1994
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
NET SALES $33,772,707 $37,048,510 $36,528,879 $26,588,912 $30,505,249
=========== =========== =========== =========== ===========
OPERATING
INCOME (LOSS) $(2,799,245)(a) $2,129,295 $1,537,291 $1,524,181 $(3,383,100)(d)
=========== ========== ========== ========== ===========
NET INCOME (LOSS) $(3,327,565)(a) $1,548,597 $700,528 $923,999 $(4,184,156)(d)
=========== ========== ======== ======== ===========
NET EARNINGS (LOSS)
PER SHARE (b)
BASIC $(.34) $.21 $.10 $.14 $(.71)
DILUTED $(.34) $.16 $.08 $.12 $(.71)
TOTAL ASSETS $18,660,909 $20,516,028 $20,258,093 $11,789,582 $15,074,720
=========== =========== =========== =========== ==========
LONG-TERM DEBT $6,968,609 $4,412,116 $7,278,072 $1,935,638 $17,235(c)
========== ========== ========== ========== ======
SHAREHOLDERS'
EQUITY $7,793,985 $10,873,384 $9,316,087 $5,538,068 $4,595,319
========== =========== ========== ========== =========
SHAREHOLDERS'
EQUITY PER
COMMON SHARE $.80 $1.06 $.83 $.66 $.52
==== ===== ==== ==== ====
COMMON SHARES
OUTSTANDING,
at end of period 9,767,949 7,432,714 7,077,767 6,449,394 6,423,074
========= ========= ========= ========= =========
CASH DIVIDENDS
PER COMMON SHARE none none none none none
</TABLE>
(a) This amount includes provisions of approximately $1.3 million to reduce
the original goodwill associated with the acquisition of Regam Medical
Systems AB for a recognized impairment in the carrying value of this
asset, $1.7 million for the portion of the purchase price of ProDen
Systems, Inc. related to in-process research and development
expenditures, and approximately $329,000 of non-recurring costs to close
down the Swedish plant and transfer all the manufacturing activities to
the US.
(b) These amounts reflect the adoption of Statement of Financial Accounting
Standards 128 "Earnings Per Share". As such, all prior fiscal years have
been restated to ensure consistency with currently reported amounts. In
1998 and 1994, the diluted weighted average number of shares excludes
all potential common stock equivalents, as their inclusion would be
anti-dilutive. In 1997, 1996 and 1995, the diluted weighted average
number of shares includes the assumed conversion of the convertible
preferred stock, convertible subordinate debentures, and the exercise of
the in-the-money stock options and warrants.
(c) This amount excludes $3,603,583 of debt classified as short-term.
(d) 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.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation
The following should be read in conjunction with the Consolidated Financial
Statements included elsewhere herein.
Capital Resources and Liquidity
The Company's working capital decreased $883,300 between fiscal 1998 and
fiscal 1997. The Company acquired ProDen Systems, Inc. ("ProDen"), an
intraoral video imaging company on December 24, 1997, for approximately $3.5
million in cash and notes payable. The cash portion of the purchase price was
funded from available cash. The Company also utilized working capital funds to
invest in inventory for the newly acquired digital dental product line.
The Company has a senior credit facility consisting of a $9.85 million
revolver and term loan facility which expires on July 14, 2000. The credit
line provides working capital for the Company. The Company believes that this
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 in
July 1997. Other terms, conditions and covenants of this 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, 1998, the Company had $2,019,154 of unused credit available for short-term
financing needs plus cash and cash equivalents of approximately $595,000. The
Company is in compliance with all financial ratios and covenants as stated in
its loan documents. 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.
Capital expenditures for fiscal 1998 consisted of individual computer
workstation upgrades, production tooling, molds and other appropriate
replacements in the normal course of operations. The Company acquired a new
Business Information System including the upgrade and replacement of existing
computer hardware and a new fully integrated manufacturing software package.
The Company committed to a three year lease for the hardware and software
costs, which has been recorded as a capital lease. All implementation costs
have been capitalized and are being amortized over three years in accordance
with generally accepted accounting principles. This system was fully
implemented during the third quarter of this fiscal year and fully satisfies
all Year 2000 compliance issues. 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.
Year 2000 Compliance
The Company has developed and substantially implemented a plan to ensure its
systems are compliant with the requirements to process transactions in the
year 2000. As described above, all of the Company's internal information
systems have been replaced with fully compliant new systems. The total cost of
the software, implementation and hardware were capitalized as incurred. The
Company upgraded its internal information systems during the past two years as
part of an overall operational plan to upgrade and replace older systems with
more efficient current technology. All information systems selected and
implemented are Year 2000 compliant. The Company believes that all significant
costs related to the Year 2000 compliance issue have been incurred.
The Company is also working with its processing banks and payroll service
provider to ensure that their services are Year 2000 compliant. The Company
has been assured that all of these information systems are Year 2000
compliant.
Results of Operation - Fiscal 1998 vs. Fiscal 1997
On April 17, 1997 the Company acquired all of the outstanding shares of Regam
Medical Systems International AB ("Regam"), a Swedish manufacturer of
electronic dental imaging equipment for cash and notes payables. The
acquisition was accounted for under the purchase method of accounting and was
fully consolidated in fiscal 1997. The goodwill associated with this
acquisition was written-down to its net realizable value in the second quarter
fiscal 1998, based on the recognized impairment in the value of the
operations, resulting in a charge of $1.3 million. Such amount is included in
Special Charges. The remaining goodwill is being amortized over fourteen years
on a straight-line basis. Also included are $329,000 of non-recurring costs to
shutdown and relocate the manufacturing
<PAGE>
operations, marketing, technical service and customer support operations from
Sweden to the US. These costs also include severance and required social tax
payments to former employees.
In connection with the Company's acquisition of selected assets and
liabilities of ProDen, the Company determined, based upon an independent
appraisal, that a portion of the purchase price related to in-process research
and development, resulting in a charge of $1.7 million. Such amount is also
included in Special Charges. The remaining goodwill of $1.5 million is being
amortized over fifteen years on a straight-line basis.
Sales decreased $3.27 million between the two fiscal years or 8.8%. There was
a decrease in medical sales due to adjustments in OEM contracts and a decrease
in the sale of graphic arts products due to changing customer demands and
printing technology. The Company is repositioning its products in the graphic
arts market. The decrease in sales was offset by a 21% increase in the
Company's expanding dental product line, mainly from the two recent dental
acquisitions. Gross margin as a percent of sales decreased 1.4 percentage
points due to a 15% increase in the sales of distributor goods, which have
lower gross margins, and higher initial material costs on the newly acquired
dental lines. As production and sales increase for these products, the Company
expects to achieve improved unit production costs.
Selling, general and administrative costs remained consistent between the two
fiscal years, decreasing $84,000 or 1%. Management continued its programs to
reduce administrative overhead costs and restructure staffing with their
related benefit costs. However, these costs were offset by additional costs to
promote and service the dental and medical products worldwide. Included in
these expenses in fiscal 1998 are the amortization costs of the two
acquisitions exclusive of the specific adjustments mentioned above and
included in Special Charges.
Research and development costs increased $134,000 or 17% between the two
fiscal years. The Company continues to invest in sustaining engineering and
related costs. The Company has also increased its efforts to expand and
develop its emerging digital dental products to increase market share.
Interest expense, net increased $13,000 or 3% due to interest charges
associated with the two notes related to the recent acquisitions, offset by a
slightly lower average borrowing base during the year.
The income tax provision primarily represents nominal state and foreign
capital taxes due. The Company did not recognize a tax benefit for the net
loss in fiscal 1998, as the Company does not meet the criteria described in
Statement of Financial Accounting Standard No. 109, "Accounting for Income
Taxes" for recording such benefit.
Results of Operation - Fiscal 1997 vs. Fiscal 1996
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 1997
expenses included a provision of $60,000 for the loss incurred on the sale of
the fluoroscopic imaging assets. The composition of these expenses shifted
slightly with more costs to promote the dental and medical products worldwide
and less administrative overhead costs, due to ongoing management expense
reduction programs.
Research and development costs decreased $497,000 or 39%. The Company
completed several in-house engineering projects and continues to re-evaluate
the market potential of investment in product engineering versus the
distribution of alternative outsourced products. The Company continues to
invest in sustaining engineering and related costs to maintain their technical
advantage.
Interest expense net, decreased $325,000 or 42%. The Company reduced its
borrowings with its senior secured lender by $4 million, offset by the lost
interest income resulting from the use of available cash to partially fund the
Regam acquisition.
The income tax provision primarily represents nominal state capital taxes due,
as in the prior fiscal year. The Company realized net operating losses
previously subject to valuation allowances to offset any federal and state
income tax provision.
<PAGE>
AFP IMAGING CORPORATION
AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants F-1
Consolidated Balance Sheets -- June 30, 1998 and 1997 F-2 to F-3
Consolidated Statements of Operations for the Years Ended June 30, 1998, 1997 F-4
and 1996
Consolidated Statements of Shareholders' Equity for the Years Ended June 30, F-5 to F-6
1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended June 30, 1998, F-7 to F-8
1997 and 1996
Notes to Consolidated Financial Statements F-9 to F-16
Schedule II - Valuation and Qualifying Accounts for the Years Ended June 30, F-17
1998, 1997 and 1996
</TABLE>
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, 1998 and
1997, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended June 30,
1998. 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 financial statements referred to above present fairly, in
all material respects, the financial position of AFP Imaging Corporation and
subsidiaries as of June 30, 1998 and 1997 and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1998 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II, Valuation and Qualifying
Accounts, is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the
audits of the basic financial statements and, in our opinion, fairly states in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
New York, New York
August 11, 1998
F-1
<PAGE>
AFP IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
------ ----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 594,992 $ 1,858,287
Accounts receivable, less allowance for doubtful accounts and sales returns
of $422,203 and $277,926, respectively 4,755,093 5,816,106
Inventories 6,607,441 6,016,528
Prepaid expenses and other 293,989 650,095
----------- -----------
Total current assets 12,251,515 14,341,016
PROPERTY, PLANT AND EQUIPMENT, at cost:
Leasehold improvements 287,474 287,474
Machinery and equipment 7,825,247 7,224,278
----------- -----------
8,112,721 7,511,752
Less - Accumulated depreciation (6,474,878) (6,113,123)
----------- -----------
1,637,843 1,398,629
INTANGIBLE ASSETS, net of accumulated amortization of $698,642 and $681,363,
respectively 4,390,461 4,441,453
OTHER ASSETS 381,090 334,930
----------- -----------
$18,660,909 $20,516,028
=========== ===========
</TABLE>
F-2
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
<PAGE>
AFP IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
------------------------------------ ----------- -----------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 770,834 $ 639,314
Accounts payable 1,266,127 1,801,973
Accrued expenses 1,345,015 2,220,096
Accrued payroll expenses 516,339 569,145
----------- -----------
Total current liabilities 3,898,315 5,230,528
LONG-TERM DEBT 6,968,609 4,412,116
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY:
Convertible Preferred Stock, Series A, 1,750,000 authorized, 0 and
1,396,814 shares issued and outstanding at June 30, 1998 and 1997,
respectively - 2,171,071
Convertible Preferred Stock, Series B, 824,844 authorized, 0 and 711,872
shares issued and outstanding at June 30, 1998 and 1997, respectively - 854,247
Common Stock warrants - 25,314
Common Stock, $.01 par value, 30,000,000 shares authorized, 9,767,949 and
7,432,714 shares issued and outstanding at June 30, 1998 and
1997, respectively 97,679 74,327
Paid-in capital in excess of par 11,858,704 8,578,549
Accumulated deficit (4,153,889) (826,324)
Cumulative translation adjustment (8,509) (3,800)
----------- -----------
Total shareholders' equity 7,793,985 10,873,384
----------- -----------
$18,660,909 $20,516,028
=========== ===========
</TABLE>
F-3
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
<PAGE>
AFP IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES $33,772,707 $37,048,510 $36,528,879
COST OF SALES 23,231,693 24,950,627 24,430,698
----------- ----------- -----------
Gross profit 10,541,014 12,097,883 12,098,181
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 9,108,415 9,192,165 9,287,858
RESEARCH AND DEVELOPMENT EXPENSES 910,861 776,423 1,273,032
SPECIAL CHARGES 3,320,983 - -
----------- ----------- -----------
Operating (loss) income (2,799,245) 2,129,295 1,537,291
INTEREST EXPENSE, net 464,336 451,466 776,763
----------- ----------- -----------
(Loss) income before provision for income taxes (3,263,581) 1,677,829 760,528
PROVISION FOR INCOME TAXES 63,984 129,232 60,000
----------- ----------- -----------
NET (LOSS) INCOME $(3,327,565) $ 1,548,597 $ 700,528
=========== =========== ===========
NET (LOSS) EARNINGS PER COMMON SHARE
Basic $(.34) $.21 $.10
Diluted $(.34) $.16 $.08
</TABLE>
F-4
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
<PAGE>
AFP IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<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, 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, 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>
F-5
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
<PAGE>
AFP IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(Continued)
<TABLE>
<CAPTION>
Convertible Convertible
Preferred Preferred Common
Stock, Stock, Stock Common
Series A Series B Warrants Stock
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Conversion of 1,396,814 shares of
preferred stock, Series A, to
1,430,036 shares of common
stock (2,171,071) - - 14,300
Conversion of 711,872 shares of
preferred stock, Series B, to
728,672 shares of common stock - (854,247) - 7,287
Issuance of 24,500 shares of
common stock in connection
with the conversion of stock
options - - - 245
Issuance of 152,027 shares of
common stock in connection with
the conversion of 150,000
common stock warrants - - (15,000) 1,520
Expiration of 103,138 warrants - - (10,314) -
Foreign Currency Translation
Adjustment - - - -
Net Loss - - - -
----------- ----------- ----------- -----------
Balance June 30, 1998 $ - $ - $ - $ 97,679
=========== =========== =========== ===========
<CAPTION>
Paid-in Foreign
Capital Currency
In Excess of Accumulated Translation
Par Deficit Adjustment Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Conversion of 1,396,814 shares of
preferred stock, Series A, to
1,430,036 shares of common
stock 2,156,771 - - -
Conversion of 711,872 shares of
preferred stock, Series B, to
728,672 shares of common stock 846,960 - - -
Issuance of 24,500 shares of
common stock in connection
with the conversion of stock
options 27,630 - - 27,875
Issuance of 152,027 shares of
common stock in connection with
the conversion of 150,000
common stock warrants 238,480 - - 225,000
Expiration of 103,138 warrants 10,314 - - -
Foreign Currency Translation
Adjustment - - (4,709) (4,709)
Net Loss - (3,327,565) - (3,327,565)
----------- ----------- ----------- -----------
Balance June 30, 1998 $11,858,704 $(4,153,889) $ (8,509) $ 7,793,985
=========== =========== =========== ===========
</TABLE>
F-6
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
<PAGE>
AFP IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(3,327,565) $ 1,548,597 $ 700,528
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities-
Non-cash effect of special charges 2,991,983 - -
Accretion of imputed interest on note payable 82,451 - -
(Gain) loss on sale of equipment - 3,396 -
Depreciation and amortization 869,304 891,370 969,439
Provision for losses on accounts receivable 215,797 93,463 131,280
Change in assets and liabilities:
(Increase) decrease in accounts receivable 911,241 567,560 (842,774)
(Increase) decrease in inventories (330,018) 1,859,800 (26,956)
(Increase) decrease in prepaid expenses and other 52,543 (167,221) 124,917
(Increase) decrease in other assets (357,637) (2,636) (223,877)
Increase (decrease) in accounts payable (807,001) (302,565) (1,564,700)
Increase (decrease) in accrued expenses (906,152) 955,898 (578,856)
Increase (decrease) in accrued payroll expenses (52,806) 24,966 107,153
----------- ----------- -----------
Total adjustments 2,669,705 3,924,031 (1,904,374)
----------- ----------- -----------
Net cash provided by (used in) operating
activities (657,860) 5,472,628 (1,203,846)
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Regam Medical Systems
International AB - (1,561,293) -
Investment in Visiplex Instruments, Ltd. - - (3,554,367)
Investment in ProDen Systems, Inc. (1,030,100) - -
Issuance of notes receivable - (310,000) -
Proceeds from collection of notes receivable 310,000 - -
Acquisition of licensing agreement - - (25,000)
Capital expenditures (479,971) (217,525) (197,824)
----------- ----------- -----------
Net cash provided by (used in) investing
activities (1,200,071) (2,088,818) (3,777,191)
</TABLE>
F-7
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
<PAGE>
AFP IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(Continued)
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing of debt 1,240,911 - 5,582,432
Repayments of debt (894,441) (4,667,421) (552,278)
Exercise of common stock options 27,875 12,500 60,491
Exercise of common stock warrants 225,000 - -
Issuance of convertible preferred stock - - 2,500,000
----------- ----------- -----------
Net cash provided by (used in) financing
activities 599,345 (4,654,921) 7,590,645
EXCHANGE RATE EFFECTS ON CASH AND CASH EQUIVALENTS (4,709) (3,800) -
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents (1,263,295) (1,274,911) 2,609,608
CASH AND CASH EQUIVALENTS, at beginning of year 1,858,287 3,133,198 523,590
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, at end of year $ 594,992 $ 1,858,287 $ 3,133,198
=========== =========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid during the year for-
Interest $ 465,466 $ 450,683 $ 848,521
Income taxes $ 161,585 80,373 47,648
</TABLE>
SUPPLEMENTAL NON-CASH INVESTING AND FINANCIAL ACTIVITIES DISCLOSURES:
In fiscal 1998, common stock was issued upon the conversion of $2,171,071 of
Series A convertible preferred stock and $854,247 of Series B preferred stock.
In fiscal 1997, common stock was issued upon the conversion of $393,805 of
Series A convertible preferred stock. In fiscal 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 1998, notes payable of $2.5 million were issued in lieu of cash
payments made for the acquisition of ProDen. In fiscal 1997, notes payable of
$1.2 million were issued in lieu of cash payments made for the acquisition of
Regam.
F-8
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
<PAGE>
AFP IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(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 specified 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. On December
24, 1997, the Company acquired, through its wholly owned subsidiary,
Dent-X International Inc., selected assets and liabilities of ProDen
Systems, Inc., a manufacturer of intraoral dental camera systems.
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:
F-9
<PAGE>
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Raw materials and sub-component parts $4,958,225 $4,565,064
Work-in-process and finished goods 1,649,216 1,451,464
----------- -----------
$6,607,441 $6,016,528
=========== ===========
</TABLE>
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
1998 1997 Period
----------- ----------- -----------
<S> <C> <C> <C>
Goodwill $ 5,089,103 $ 5,097,816 15-40 years
Licensing Fees - 25,000 2 years
----------- -----------
5,089,103 5,122,816
Less - Accumulated Amortization (698,642) (681,363)
----------- -----------
Intangible Assets, Net $ 4,390,461 $ 4,441,453
=========== ===========
</TABLE>
The Company periodically reviews the carrying value of its goodwill
and other long-lived assets to determine whether an impairment may
exist. The Company considers relevant cash flow, estimated future
operating results, trends and other available information in
assessing whether the carrying value of the asset can be recovered.
During fiscal 1998, the Company determined that the value of
goodwill associated with its Regam operations was impaired (See Note
9). Accordingly, the Company wrote-down the carrying value by
approximately $1.3 million based upon management's best estimate of
the fair value of this goodwill and estimates of future cash flows
associated with the Regam product line, discounted for the
time-value of money. This write-down has been included in "Special
Charges" in the accompanying financial statements. As of June 30,
1998, the Company believes that no impairment of any other
long-lived assets exist.
Preferred stock
The Company's Preferred Stock, Series A and Series B were fully
converted to common stock as of June 30, 1998.
Net earnings per common share
Effective December 31, 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" (SFAS 128) which requires the replacement of primary and
fully diluted earnings per share with basic and diluted earnings per
share, respectively.
F-10
<PAGE>
SFAS 128 also requires restatement of previously reported earnings
per share information for all periods presented in the accompanying
Consolidated Statements of Operations to ensure consistency with
currently reported amounts. Accordingly, the Company has restated
previously reported earnings per share amounts.
The computation of net earnings per common share is based upon the
weighted average number of common shares outstanding during the
period plus (in periods in which they have a dilutive effect) the
effect of common shares contingently issuable. Basic and diluted
earnings per common share for the fiscal years ended 1998, 1997 and
1996 are presented below:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net (Loss) Earnings Available for
Common Shareholders $(3,327,565) $ 1,548,597 $ 700,528
Total Common Stock and Equivalents
9,767,949 7,432,714 7,077,755
----------- ----------- -----------
Basic Earnings Per Share $ (.34) $ .21 $ .10
=========== =========== ===========
Net (Loss) Earnings Available for
Common Shareholders $(3,327,565) $ 1,560,541 $ 737,141
Total Common Stock and Equivalents
9,767,949 10,064,457 9,737,829
----------- ----------- -----------
Diluted Earnings Per Share $ (.34) $ .16 $ .08
=========== =========== ===========
</TABLE>
The diluted earnings per share computation reflects the effect of
common shares contingently issuable upon the exercise of warrants,
options and the conversion of convertible subordinated debentures
and convertible preferred stock in periods in which such conversion
would cause dilution. The diluted weighted average number of shares
outstanding does not include the conversion of 974,120 stock options
in fiscal 1998, as such amounts are antidilutive when there is a
loss. In fiscal 1997 and 1996, the conversion of 103,138 and 253,138
warrants, respectively, would be antidilutive.
In 1997 and 1996, net earnings available for common shareholders
differs between basic and diluted earnings per share due to interest
expense, net of taxes, associated with the convertible subordinated
debentures, which would not have been incurred assuming conversion
at the beginning of the period.
(2) Debt:
As of June 30, 1998, the Company has 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 $2.0 million as of June 30, 1998 for short-term
financing needs.
The Credit Facility matures on July 14, 2000, therefore the revolver
has been classified as long-term as of June 30, 1998.
F-11
<PAGE>
As of June 30, 1998 and 1997, debt consisted of the following:
1998 1997
---------- ----------
Revolver $3,077,310 $2,956,399
Term Loan (a) 1,305,000 330,000
Subordinated Notes Payable (b) 3,143,719 1,200,000
Capital Leases and Other 213,414 565,031
---------- ----------
7,739,443 5,051,430
Less - Current Portion 770,834 639,314
---------- ----------
$6,968,609 $4,412,116
========== ==========
(a) The term loan balance increased during fiscal 1998 as part
of the renegotiated Credit Facility. The loan will be paid
in monthly payments of $12,083 for the period from August
1997 through and including July 2000, with the balance of
$1,015,000 due on July 14, 2000.
(b) The notes payable consist of a $1.0 million promissory note
to ACG Nystromgruppen AB ("Nystrom"), the former parent of
Regam Medical Systems International AB, and a $2.4 million
promissory note to the former owner of ProDen Systems, Inc.
("ProDen"), reflected net of imputed interest of
approximately $256,000. The Nystrom promissory note bears
interest at a rate of 7.844% which represents LIBOR plus 2%
at June 30, 1998 and is payable in full on April 17, 2000.
The ProDen promissory note is a non-interest bearing note
for which an 8% imputed interest rate has been applied. This
note will be paid in semi-annual payments of $500,000
commencing on January 1, 1999, with the balance of $400,000
due on January 1, 2001.
The Company's weighted average borrowing rate was approximately 9.29%
and 10.25% as of June 30, 1998 and 1997, respectively. The fair market
value of all of the Company's debt approximates its carrying value.
Maturities of debt by fiscal year ended June 30 are as follows:
1999 $ 770,834
2000 2,232,580
2001 4,992,310
At June 30, 1998, the Company had guarantees of $250,253 with foreign
vendors.
(3) 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 1,500,000 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 1998,
1997 and 1996 are as follows:
F-12
<PAGE>
<TABLE>
<CAPTION>
Weighted Weighted Weighted
Average Average Average
1998 Price 1997 Price 1996 Price
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding July 1, 822,620 $0.82 794,120 $0.79 238,000 $0.74
Granted 187,000 2.29 63,500 1.23 626,000 0.83
Exercised (24,500) 1.14 (15,000) 0.83 (59,880) 1.02
Cancelled (11,000) 0.64 (20,000) 0.64 (10,000) 0.75
---------- ---------- ---------- ---------- ---------- ----------
Options outstanding June 30, 974,120 $1.10 822,620 $0.82 794,120 $0.79
========== ========== ========== ========== ========== ==========
Options exercisable at June 30, 974,120 822,620 794,120
========== ========== ==========
Weighted average fair value of
options granted during years
ended June 30, $1.02 $0.52 $0.35
========== ========== ==========
</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 1998, 1997 and 1996: dividend yield of
0%; expected volatility ranging from 54% to 84%; expected life of five
years and risk-free interest rate ranging from 5.52% to 7.35%.
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>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Income As reported $(3,327,565) $1,548,597 $700,528
Pro forma (3,518,588) 1,515,477 483,642
Basic earning per share As reported (.34) .21 .10
Pro forma (.36) .20 .07
Diluted earnings per share As Reported (.34) .16 .08
Pro Forma (.36) .15 .05
</TABLE>
(4) Income Taxes:
The (loss) income before provision for income taxes is comprised of the
following:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
United States $(3,075,481) $1,832,429 $760,528
Foreign (188,100) (154,600) -
----------- ----------- -----------
Total $(3,263,581) $1,677,829 $760,528
=========== =========== ===========
</TABLE>
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Current:
State $53,984 $129,232 $60,000
Foreign 10,000 - -
----------- ----------- -----------
$63,984 $129,232 $60,000
=========== =========== ===========
</TABLE>
F-13
<PAGE>
The difference between the (benefit) provision for income taxes at the
effective federal statutory rates and the amounts provided in the
financial statements is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Tax benefit provision at Federal statutory
rates $(1,109,618) $ 570,462 $ 258,580
Increase (decrease) in tax provision
resulting from:
State income tax provision, net of federal
benefit 53,984 85,293 60,000
Foreign tax provision 10,000 - -
Foreign losses not benefited 75,240 52,564 -
Amortization in excess of tax basis 96,000 103,467 69,548
Realization of deferred tax assets - (699,672) (343,095)
Domestic losses not benefited 921,113 - -
Other 17,265 17,118 14,967
----------- ----------- -----------
Provision for income taxes $ 63,984 $ 129,232 $ 60,000
=========== =========== ===========
</TABLE>
The items which comprise the deferred tax balance are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Depreciation and amortization $ 1,097,803 $ 26,507
Accrued liabilities and reserves not currently deductible 469,783 428,477
Inventory 159,223 174,986
Net operating loss carryforwards 635,169 653,808
----------- -----------
2,361,978 1,283,778
Deferred tax asset valuation reserve (2,361,978) (1,283,778)
----------- -----------
Tax asset recognized on balance sheets $ - $ -
=========== ===========
</TABLE>
Net operating loss carryforwards will expire beginning in 2009.
(5) Profit Sharing Plan:
The Company maintains a profit sharing plan and trust pursuant to which
participants receive certain benefits upon retirement, death,
disability and, to a limited extent, upon termination of employment for
other reasons. Allocation among participants' interests, including
officers and directors who are employees, is in accordance with 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 $0, $50,000 and $40,000 was
recorded for the years ended June 30, 1998, 1997 and 1996,
respectively.
(6) Commitments and Contingencies:
The Company and its subsidiaries are defendants (together with other
third parties) in a legal claim alleging that the Company violated bulk
sales laws upon the acquisition of Visiplex Instruments Ltd.
("Visiplex") in July 1995. The Company believes that this claim is
without merit and intends to vigorously defend the litigation. While
substantial monetary damages have been alleged in the lawsuit, the
Company believes the actual outcome of this matter would not have a
material adverse effect on the Company's financial position or results
of operations. Furthermore, the Company has filed a cross claim against
the former owners of Visiplex under an indemnification clause contained
in the asset purchase agreement between the two parties.
F-14
<PAGE>
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:
1999 $599,000
2000 599,000
2001 299,000
Rent expense was approximately $733,000, $719,000 and $748,000 for the
years ended June 30, 1998, 1997 and 1996, respectively.
(7) 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 1998, 1997 and 1996.
Segment financial information:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Sales
United States $ 22,106,153 $ 23,527,612 $ 26,368,729
Europe 1,167,200 529,100 -
Domestic export sales 10,499,354 12,991,798 10,160,150
------------ ------------ ------------
Total $ 33,772,707 $ 37,048,510 $ 36,528,879
============ ============ ============
Net (Loss) Income
United States $ (3,139,565) $ 1,702,497 $ 700,528
Europe (188,000) (153,900) -
------------ ------------ ------------
Total $ (3,327,565) $ 1,548,597 $ 700,528
============ ============ ============
Identifiable Assets
United States $ 18,521,609 $ 19,630,528 $ 20,258,093
Europe 139,300 885,500 -
------------ ------------ ------------
Total $ 18,660,909 $ 20,516,028 $ 20,258,093
============ ============ ============
</TABLE>
(8) Acquisitions:
On December 24, 1997, the Company acquired, through its wholly owned
subsidiary, Dent-X International, Inc., ProDen Systems, Inc.,
("ProDen") of Vancouver, Washington for approximately $3.5 million in
cash and notes. ProDen is a manufacturer of intraoral dental camera
systems, utilizing proprietary technology. Existing capital funds were
used to acquire ProDen. The results of ProDen's operations have been
combined with those of the Company since the date of acquisition.
The acquisition was accounted for under the purchase method.
Accordingly, a portion of the purchase price was allocated to the net
assets acquired based on their estimated fair values. The balance of
the purchase price was recorded as the excess of cost over net assets
acquired ("goodwill") and is being amortized over fifteen years on a
straight-line basis. During the quarter ended March 31, 1998, the
Company re-allocated a portion of the purchase price to in-process
research and development expenditures, which reduced operating income
by $1.7 million. Such re-allocation was recorded based on a third party
appraisal of the value of the in-process research and development
projects acquired as of the acquisition date. The remaining goodwill is
being amortized over a 15-year period.
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).
F-15
<PAGE>
The acquisition was accounted for using the purchase method of
accounting. Goodwill of approximately $2.8 million was originally
recorded associated with this acquisition. A portion of this goodwill
was deemed to be impaired during 1998 and, accordingly, was written-off
in accordance with the provisions of Statement of Financial Accounting
Standards No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" (See Notes 1 and 9).
The following table reflects unaudited pro forma combined results of
operations of the Company, ProDen and Regam on the basis that the
acquisitions had taken place at the beginning of fiscal 1996:
<TABLE>
<CAPTION>
(Unaudited) (Unaudited) (Unaudited)
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenues $34,674,883 $40,399,691 $38,006,591
Net (loss) income (3,240,136) 793,581 191,668
(Loss) income per common share:
Basic $(.33) $ 11 $.03
Diluted $(.33) $.08 $.02
Shares used in computation:
Basic 9,767,949 7,432,714 7,077,755
Diluted 9,767,949 10,064,457 9,737,829
</TABLE>
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 1996, or of future operations of the combined companies under
the ownership and management of the Company.
(9) Special Charges
During fiscal 1998, the Company implemented a restructuring and
integration program associated with the relocation of the Regam
operations which reduced operating income by approximately $1.6
million. These charges included $329,000 of non-recurring costs to
close down the Swedish plant and transfer all the manufacturing
activities to the U.S., such as severance and related social costs,
production line set-up and training costs in the U.S., and costs to
terminate various contracts in Sweden. This charge also includes an
amount of $1.3 million to reduce the goodwill associated with the
Company's acquisition of Regam, due to the recognized impairment in the
value of the Swedish operations (See Note 1).
In addition, in connection with the acquisition of ProDen, the Company
allocated approximately $1.7 million of the purchase price to
in-process research and development (See Note 8).
(10) Adoption of New Financial Standards
The Company does not believe any recently issued accounting standards
will have a material impact on its financial condition or results of
operations.
F-16
<PAGE>
AFP IMAGING CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Balance at Charged to Charged to
Beginning Costs and Other Balance at
Description of Period Expenses Accounts(1) Deductions End of Period
- --------------------------------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
June 30, 1998
- -------------
Allowance for doubtful accounts
and sales returns $ 277,926 $ 234,571 $ - $ (90,294) $ 422,203
Accumulated depreciation 6,113,123 361,755 - - 6,474,878
Accumulated amortization 681,363 475,546 - (458,267) 698,642
Deferred tax asset valuation
reserve 1,283,778 - 1,078,200 - 2,361,978
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-17
<PAGE>
Item 9. Disagreements on Accounting and Financial Disclosure
During the three years ended June 30, 1998, 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, 1998.
<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,
1998. (12)
(c) -- Promissory Note between ACG Nystromgruppen
AB and AFP Imaging Corporation, dated April
17, 1998. (12)
(d) -- Asset Purchase Agreement between AFP Imaging and
ProDen Systems, Inc., dated December 24, 1997. (13)
(e) -- Two Promissory Notes between ProDen Systems, Inc.
and AFP Imaging Corporation, dated December 24,
1997. (13)
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 1998. (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)
(r) -- Registration Statement dated December 31, 1997 to
register the Common Stock issuable upon exercise of
options granted under the Employee Stock Option
Plans. (15)
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 1998. (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. (14)
11. -- Statement re computation per share earnings. (3)
21. -- Subsidiaries of the Registrant.
27. -- Financial Data Schedule
b) Reports on Form 8-K:
No reports on Form 8K were filed by the Company during the three
months ended June 30, 1998.
(1) Incorporated by reference from the Exhibits filed with Registrant's
Report on Form 10-K, dated June 30, 1984, filed with the Securities and
Exchange Commission.
(2) Incorporated by reference from the exhibits filed with Registration
Statement file #2-G8980 of the Company, as amended, on file with the
Securities and Exchange Commission.
(3) See Note 1 to "Notes to Financial Statements".
(4) Incorporated by reference from the Exhibits filed with Registrant's
Report on Form 8-K, dated August 12, 1982.
(5) Incorporated herein by reference from the Exhibits filed with the
Registrant's Annual Report on Form 10-K for the fiscal year ended June
30, 1982.
(6) Incorporated by reference from the Exhibits filed with Registrant's
Report on Form 8-K, dated July 31, 1995.
(7) Incorporated by reference from the Exhibits filed with Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30, 1986.
(8) Incorporated by reference from the Exhibits filed with Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30, 1994.
(9) Incorporated by reference from the Exhibits filed with Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30, 1993.
(10) Incorporated by reference from the Exhibits filed with Registrant's
current report on Form 8-K, dated October 12, 1995.
(11) Incorporated by reference from the Exhibits filed with Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30, 1996.
(12) Incorporated by reference from the Exhibits filed with the
Registrant's Report on Form 8-K, dated May 1, 1997.
(13) Incorporated by reference from the Exhibits filed with Registrant's
Report on Form 8-K, dated January 8, 1998.
(14) Incorporated by reference from the Exhibits filed with Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30, 1997.
(15) Incorporated by reference from the Exhibits filed with the
Registrant's Registration Statement on Form S-8, dated December 31, 1997.
<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/ Elise Nissen
----------------------------------------
Elise Nissen, Chief Financial Officer
Date: September 28, 1998
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 28, 1998
By: /s/ David Vozick
----------------------------------------
David Vozick, Chairman of the Board
Secretary and Treasurer
Date: September 28, 1998
By: /s/ Robert Blatt
----------------------------------------
Robert Blatt, Director
Date: September 28, 1998
By: /s/ Jack Becker
----------------------------------------
Jack Becker, Director
Date: September 28, 1998
By: /s/ Robert Rosen
----------------------------------------
Robert Rosen, Director
Date: September 28, 1998
<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%
Dent-X International Inc. New York 100%
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 594,992
<SECURITIES> 0
<RECEIVABLES> 5,177,296
<ALLOWANCES> 422,203
<INVENTORY> 6,607,441
<CURRENT-ASSETS> 12,251,515
<PP&E> 8,112,721
<DEPRECIATION> 6,474,878
<TOTAL-ASSETS> 18,660,909
<CURRENT-LIABILITIES> 3,898,315
<BONDS> 0
0
0
<COMMON> 97,679
<OTHER-SE> 7,696,306
<TOTAL-LIABILITY-AND-EQUITY> 18,660,909
<SALES> 33,772,707
<TOTAL-REVENUES> 33,772,707
<CGS> 23,231,693
<TOTAL-COSTS> 13,340,259
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 464,336
<INCOME-PRETAX> (3,263,581)
<INCOME-TAX> 63,984
<INCOME-CONTINUING> (3,327,565)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,327,565)
<EPS-PRIMARY> (.34)
<EPS-DILUTED> (.34)
</TABLE>
