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-----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: [email protected]
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ACCESSION NUMBER: 0001157523-05-008392
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 10
CONFORMED PERIOD OF REPORT: 20050630
FILED AS OF DATE: 20050927
DATE AS OF CHANGE: 20050927
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: AFP IMAGING CORP
CENTRAL INDEX KEY: 0000319126
STANDARD INDUSTRIAL CLASSIFICATION: PHOTOGRAPHIC EQUIPMENT & SUPPLIES [3861]
IRS NUMBER: 132956272
STATE OF INCORPORATION: NY
FISCAL YEAR END: 1210
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-10832
FILM NUMBER: 051105000
BUSINESS ADDRESS:
STREET 1: 250 CLEARBROOK RD
CITY: ELMSFORD
STATE: NY
ZIP: 10523
BUSINESS PHONE: 9145926100
MAIL ADDRESS:
STREET 1: 250 CLEARBROOK RD
CITY: ELMSFORD
STATE: NY
ZIP: 10523
FORMER COMPANY:
FORMER CONFORMED NAME: AUTOMATIC FILM PROCESSOR CORP
DATE OF NAME CHANGE: 19821122
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<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>a4980217.txt
<DESCRIPTION>AFP IMAGING CORPORATION 10-K
<TEXT>
United States
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, 2005
or
( ) Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from ________ to ________
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 (I.R.S. Employer Identification No.)
incorporation or organization)
250 Clearbrook Road, Elmsford, NY 10523
---------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 592-6100
Securities registered pursuant Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value .01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
_X_ ___
Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. YES ( ) NO ( X).
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). YES ( ) NO ( X ).
The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant as of December 31, 2004 was approximately
$7,581,857. On such date, the average of the closing bid and asked prices of the
Registrant's Common Stock, as reported by the OTC Bulletin Board, was $1.28.
The registrant had 9,568,217 shares of Common Stock outstanding as of September
15, 2005.
The information required by Part III of Form 10-K is incorporated by reference
to the registrant's Proxy Statement for the 2005 Annual Meeting of Shareholders
tentatively scheduled for December 12, 2005 to be filed with the Securities and
Exchange Commission on or prior to October 28, 2005.
<PAGE>
Introductory Note - Forward - Looking Statements
This Annual Report on Form 10-K contains certain forward-looking statements,
within the meaning of the Private Securities Reform Act of 1995. Forward-looking
statements involve known and unknown risks, uncertainties and other factors that
could cause actual results of AFP Imaging Corporation (collectively with its
subsidiaries, the "Company") or achievements expressed or implied by such
forward-looking statements to not occur, not be realized or differ materially
from that stated in such forward-looking statements. Forward-looking statements
may be identified by terminology such as "may," "will," project," "expect,"
"believe," "would," "could," "estimate," "anticipate," "intend," "continue,"
"potential," "opportunity" or similar terms, variations of such terms, or the
negative of such terms or variations. Potential risks, uncertainties and factors
include, but are not limited to,
o adverse changes in general economic conditions,
o the Company's ability to repay its debts when due,
o changes in the markets for the Company's products and services,
o the ability of the Company to successfully design, develop, manufacture
and sell new products,
o the Company's ability to successfully market its existing and new
products,
o adverse business conditions,
o changing industry and competitive conditions,
o the effect of technological advancements on the Company's products,
o the Company's ability to protect its intellectual property rights
and/or where its intellectual property rights may infringe on the
intellectual property rights of others,
o maintaining operating efficiencies,
o pricing pressures,
o risk associated with foreign sales,
o risk associated with the loss of services of the key executive
officers,
o the Company's ability to attract, train and retain key personnel,
o difficulties in maintaining adequate long-term financing to meet the
Company's obligations, and fund the Company's operations,
o changes in the nature or enforcement of laws and regulations concerning
the Company's products, services, suppliers, or the Company's
customers,
o determinations in various outstanding legal matters,
o changes in currency exchange rates and regulations, and
o other factors set forth in this Form 10-K and from time to time in the
Company's other filings with the Securities and Exchange Commission.
Readers are urged to carefully review and consider the various disclosures made
by the Company in this Annual Report on Form 10-K for the year ended June 30,
2005, and the Company's other filings with the SEC. These reports attempt to
advise interested parties of the risks and factors that may affect the Company's
business, financial condition and results of operations and prospects. The
forward - looking statements made in this Annual Report on Form 10-K speak only
as of the date hereof and the Company disclaims any obligation to provide
updates, revisions or amendments to any forward-looking statements to reflect
changes in the Company's expectations or future events.
Part I
- ------
Item 1. Business
- -----------------
a) General Development of Business
AFP Imaging Corporation was organized on September 20, 1978, under the laws of
the State of New York. Since such date, the Company has been engaged in the
business of designing, developing, manufacturing and distributing equipment for
generating, capturing and/or producing medical and dental diagnostic images
through electronic technologies, as well as the chemical processing of
photosensitive materials. Medical, dental, veterinary and industrial
professionals use these products. The Company's products are distributed to
worldwide markets, under various brand names, through a network of independent
and unaffiliated dealers. The Company has been ISO 9001 certified since 1996.
The Company's objective is to be a leading provider of cost effective,
diagnostic radiographic products utilized in the medical, dental, veterinarian
and industrial imaging fields. The Company is concentrating on
2
<PAGE>
o continually broadening is product offerings,
o enhancing both its domestic and international distribution channels and
o expanding its market presence in the diagnostic veterinary and dental
imaging fields.
In February 2005, the Company settled an outstanding environmental litigation
claim, which had been filed in 2001 as a civil complaint by the current owners
of property, which the Company had owned between August 1984 and June 1985. The
Company paid $325,000, which represented their entire liability under the
settlement offer. See Item 3, Legal proceedings for a further discussion of this
matter.
In September 2003, the Company completely dissolved two of its wholly-owned
subsidiaries: LogEtronics Corporation and Regam Medical Systems AB. The Company
sold selected assets of its graphic arts business in July 2001, which had been
distributed through LogEtronics Corporation. Upon completion of the transfer of
the manufacturing operations to the United States, the Company, in accordance
with Swedish Law, dissolved Regam Medical Systems AB.
b) Financial Information about Industry Segments
The Company is engaged in one industry segment, the manufacture and distribution
of medical/dental x-ray equipment and accessories. Prior to July 2001, when the
Company sold the assets related to its graphic arts subsidiary, the Company had
been engaged in two industry segments, the manufacture and distribution of
medical/dental x-ray equipment and accessories, and graphic arts processing
equipment. The Company has agreed not to compete in this same business line of
graphic arts film and plate processing equipment for ten years, to expire in
July 2011. The Company's business segments until July 2001 were based on
significant differences in the nature of the Company's operations, including
distribution channels and customers. The composition of the current industry
segment is consistent with that used by the Company's management in making
strategic decisions. See Note 10 to the Consolidated Financial Statements for
further discussion of the Company's industry segments.
c) Narrative Description of Business
All of the Company's products are distributed worldwide through an unaffiliated
dealer network to doctors, dentists, veterinarians, hospitals, medical clinics,
the U.S. military and others.
Principal Products and Services
Digital Dental and Large Body DR and CR Imaging Systems
The Company manufactures, distributes and services a filmless, digital dental
radiography system, utilizing x-rays and electronic imaging technology. Such
equipment generates and captures a patient's dental images with an intraoral
sensor and then displays the image on a computer screen that operates in a
Windows-based, software environment. These filmless, digital dental radiographic
systems, referred to as DR Systems, have practical applications in both human
and companion animal dentistry. The Company has developed proprietary
application software for use with the sensor. The Company also distributes a
computed radiology system, referred to as CR Systems, that utilizes a reusable
phosphorus plate and laser scanner in place of x-ray film. The plate can be
erased and then re-exposed to capture another image. The CR System is applicable
to larger body x-ray examinations.
Medical, Dental and Industrial X-Ray Processors & Accessories
The Company manufactures and distributes a line of freestanding and table top
medical, dental and industrial x-ray film processors, commonly referred to as
analog systems. These machines are capable of processing or developing films of
various sizes. The exposed film is inserted into the Company's equipment and
returned to the operator developed, fixed, washed and dried. The equipment can
be located either in a dark room site or adapted to a daylight loading system.
These units are used for diagnostic x-ray imaging and industrial,
non-destructive testing applications.
X-Ray Systems
The Company has the exclusive distribution rights in the North American and
Mexican markets for a well established, European-designed intraoral dental x-ray
machine and a panoramic/cephalometric dental x-ray machine. The Company also has
the North American distribution rights to a Japanese-developed panoramic/
cephalometric dental x-ray machine. The x-ray film exposed by all of these units
can be developed in the Company's film processors. Alternatively, these x-ray
products can be sourced and distributed with a digital, filmless sensor that is
compatible with the Company's other digital x-ray products and software.
3
<PAGE>
Veterinary Imaging and Radiographic Systems
The Company manufactures and distributes a line of x-ray and related
equipment specifically designed for the veterinary marketplace. These include
intraoral x-ray systems, a filmless digital dental radiography system, film
processors, dental veterinary film, and a large body CR filmless scanner used in
conjunction with general radiographic equipment. In July 2005, the Company was
appointed the exclusive worldwide distributor of general-purpose x-ray systems
and components specifically designed for all veterinary applications, known in
the market under trade names "Universal" and "VetTek." These systems are
designed to be either digital or film based and allows the veterinarian to
perform either dental or general radiography on companion animals.
Patents and Trademarks
The Company presently holds or has licensed a number of domestic and foreign
utility patents, which, the Company believes, are material to the technology
used in its products. The Company's intellectual property includes several
patents obtained in connection with acquisitions completed in 1997. The Company
is not aware of any patents or other intellectual property held by others that
conflict with the Company's current product designs. However, there can be no
assurance that infringement claims will not be asserted against the Company in
the future. Patent applications have been filed where appropriate. The Company
owns several domestic and foreign trademarks, which it uses in connection with
the marketing of its products, including AFP Imaging, DENT-X, EVA and DIGIVET,
among others. The Company believes that these utility patents and trademarks are
important to its operations and the loss or infringement by others of or to its
rights to such patents and trademarks could have a material adverse effect on
the Company. Even with the patent rights in the Company's products, the
Company's technology may not preclude or inhibit competitors from producing
products that have identical performance as the Company's products.
The Company has agreed to pay a nominal royalty on the domestic sales of its
digital dental systems to a third party under a license for the use of the third
party's software format for the computer display of such images. The Company
also has agreed to pay a royalty to a third party on the worldwide sales of its
digital dental sensors, under a license to use certain technology developed and
owned by the third party and utilized in the sensor's operations. The Company is
dependant to some degree on these third-party licenses, and the loss or
inability to replace these licenses could result in increased costs as well as
initial delays or reductions in product shipments. The principal technology
applied to the construction of the Company's other products may be considered
proprietary.
Research and Development
The amounts spent by the Company during each of the Company's last three fiscal
years on primary research activities relating to the development of new products
and the improvement of existing products, all of which was Company sponsored,
are as follows:
Year Ended June 30,
-------------------
2005 2004 2003
---- ---- ----
$435,812 $397,444 $553,991
The Company conducts research and development activities internally, at its
Elmsford, New York facility, as well as contracts out certain projects to
qualified vendors and external consultants. The Company's research and
development efforts and technologies have been enhanced by business acquisitions
completed prior to 2001.
The Company's level of research and development spending is discussed further in
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
Raw Materials
The Company manufactures, assembles, and services its products at its ISO
9001/2000 (International Standards Organization) certified facility in Elmsford,
New York. The Company's products are manufactured from parts, components and
subassemblies obtained from several unaffiliated suppliers and/or fabricated
internally at its manufacturing facility. In most cases, the Company does not
utilize any unique procedures, nor does it traditionally have difficulties in
obtaining raw materials or processes, in the design and manufacture of its
products. The Company does own proprietary designs and tooling to produce the
digital x-ray sensors, which are in the physical possession of a Company vendor.
Although the Company anticipates that an adequate commercial supply of most raw
material parts and components will remain available from multiple sources, the
loss of the Company's relationship with a particular supplier could result in
some productions delays; however, such a loss is not expected to materially
adversely affect the Company's business, as the proprietary design is readily
reproducible.
4
<PAGE>
Warranties
The Company generally warrants each of its products against defects in materials
and workmanship for a period of one to two years from the date of shipment plus
any extended warranty period purchased by the customer, and three years for the
digital sensors. The need to fulfill warranty claims by the Company's dealers
could have an adverse effect on the Company, by requiring additional
expenditures for material and/or labor.
Sales, Marketing and Distribution
The Company's manufactured products are produced domestically and distributed
both domestically and internationally to independent dealers and distributors.
The Company's products are marketed under the Company's own trade names and are
distributed through an extensive network of independent medical, dental, and
veterinary dealers. These dealers install and service such products. Other
products are imported from foreign suppliers and sold in North America.
The Company conducts worldwide marketing and regional sales management efforts
to promote all of its products and brand names. The Company advertises in
domestic and international trade journals, provides sales support and
literature, prepares technical manuals and conducts customer education and
training programs in order to promote its products. In addition, the Company
participates in domestic and international trade and clinical shows. The Company
also maintains two separate web sites, which provide an easy-to-navigate,
on-line information environment, including Company information, product
description and extensive technical specifications and information.
Government Regulation
The Company's medical and dental products are subject to government regulation
in the United States and certain other countries. The United States Food and
Drug Administration ("FDA") regulates the distribution of all equipment used as
medical devices. The Company must comply with the procedures and standards
established by the FDA and comparable foreign regulatory agencies. The Company
believes it has registered all of its applicable medical and dental products
with the FDA, and that all of its products and procedures satisfy all the
criteria necessary to comply with FDA regulations. The FDA has the right to
disapprove the marketing of any medical device that fails to comply with FDA
regulations. The Company's manufacturing facility is ISO 9001/2000 certified.
Where applicable, the Company's products are Conformite' Europeenne ("CE")
certified for sales within the European Union. Any future changes in existing
regulations, or adoption of additional regulations, domestically or
internationally, which govern devices such as the Company's medical and dental
products have the potential to have a material adverse effect on the Company's
ability to market its existing products or to market new products.
The Company is also subject to other federal, state, and local laws, regulations
and recommendations relating to safe working conditions and manufacturing
processes.
International sales of our products are subject to the regulatory agency product
registration requirements of each country in which the Company's products are
sold. The regulatory review process varies from country to country. The Company
typically relies on its distributors in foreign countries to obtain the required
regulatory approvals.
Product Liability Exposure
The Company's business involves the inherent risk of product liability claims.
The Company currently maintains general product liability insurance as well as
an umbrella liability policy, which the Company believes are sufficient to
protect the Company from any potential risks to which it may be subject.
However, there can be no assurances that product liability insurance coverage
will continue to be available or, if available, that it can be obtained in
sufficient amounts or at a reasonable cost. See Item 3. Legal Proceedings, for
further discussion of any outstanding product liability claims.
Seasonal Nature
Historically, the Company's fourth quarter revenues of any fiscal year have been
higher than the subsequent first quarter's revenues. This is due to aggressive
fourth quarter marketing, followed by lower customer demand in the first fiscal
quarter attributed to summer holidays and traditional foreign business closings
during July and August. The Company expects net sales and operating results to
continue to reflect this seasonality.
5
<PAGE>
Working Capital Practices
The Company believes its practices regarding inventories, receivables or other
items of working capital to be typical for the industry involved. On September
21, 2004, the Company renewed its senior secured credit facility (the "Renewed
Revolving Credit Loan"), with its existing senior secured lender, for an
additional three-year period. The maximum borrowing permitted under the Renewed
Revolving Credit Loan is lower than that under the prior credit facility, based
on the Company's current requirements. However, the Renewed Revolving Credit
Loan has more favorable terms, including a lower interest rate and less
stringent reporting requirements, than that under the prior credit facility and
gives the Company the ability to borrow on a specific amount of foreign accounts
receivable. The Renewed Revolving Credit Loan replaced the existing senior
credit facility (the "Original Revolving Credit Loan"). The Renewed Revolving
Credit Loan consists of a $2.5 million revolving line of credit, which is
secured by all of the Company's inventory, accounts receivable, equipment,
officer life insurance policies and proceeds thereof, trademarks, licenses,
patents and general intangibles. It is believed that the Renewed Revolving
Credit Loan is sufficient to finance the Company's ongoing working capital
requirements for the foreseeable future. The Renewed Revolving Credit Loan has
an interest rate of 1.375% over the prime rate, currently at 6-3/4 %, has a
specific formula to calculate available funds based on eligible accounts
receivable and inventory, and has certain reporting requirements to the senior
secured lender. The Renewed Revolving Credit Loan requires that certain
financial ratios and net worth amounts be maintained. The Renewed Revolving
Credit Loan provides for increases in the interest rate charged on monies
outstanding under specific circumstances.
As of June 30, 2005, the Company was in compliance with all the terms and
conditions of its Renewed Revolving Credit Loan, as amended. In connection with
the initial closing of the Original Revolving Credit Loan, the Company issued a
5-year warrant to the lender for the purchase of 100,000 shares of the Company's
common stock at $.32 per share, subject to adjustment for all subsequent
issuances of stock. This warrant expires on September 21, 2006. The
Black-Scholes Method was used to value the warrant, and the stock price was
based on the stock price the day prior to closing, plus 10%, as stipulated in
the Loan and Security Agreement for the Original Revolving Credit Loan.
See Note 4 to the Consolidated Financial Statements and Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operation for
further discussion of the revised terms and conditions.
Customers
In the Company's fiscal year ended June 30th 2005 ("Fiscal Year 2005") there
were no sales to any one customer, which accounted for 10% or more of the
Company's total consolidated sales. In the Company's fiscal year ended June 30th
2004 ("Fiscal Year 2004"), sales of dental imaging equipment to Henry Schein
Inc., accounted for approximately 11% of the Company's total consolidated sales.
In the Company's fiscal year ended June 30th 2003 ("Fiscal Year 2003"), sales of
dental imaging equipment to Henry Schein Inc., and Patterson Dental Supply, each
accounted for approximately 11% of the Company's total consolidated sales.
Management believes that the loss of any one customer would have an adverse
effect on the Company's consolidated business for a short period of time, as the
Company seeks new customers.
Backlog Orders
As of June 30, 2005, the Company's backlog of orders for its products was
approximately $1,089,500 as compared to $1,192,100 as of June 30, 2004. All of
the orders included in the backlog at June 30, 2005 are scheduled for delivery
on or before June 30, 2006. Spare part sales are not included in the Company's
backlog calculations. In the opinion of the Company, fluctuations in the backlog
and its size at any given time are not necessarily indicative of intermediate or
long-term trends in the Company's business. Much of the Company's backlog can be
canceled or the delivery dates of orders can be accelerated or extended without
penalty. Delivery of capital equipment is frequently subject to changing budget
conditions of medical institutions and end user clinical practitioners, which
can vary significantly between fiscal periods.
Government Contracts
The Company did not fulfill any significant contracts in Fiscal Years 2005, 2004
and 2003 with the United States Government that were material to the Company's
consolidated business. The Company's policy is to be responsive to all
governmental Requests for Quotations (RFQ), which can be fulfilled by items
within the scope of the Company's product lines.
6
<PAGE>
Competition
The Company's products utilize mechanical, as well as analog and digital
electronic, technologies. The Company is subject to both foreign and domestic
competition. The competition is characterized by significant investment in
research and development of new technologies, products and services. Some
competitors are well established in the film processor manufacturing and
distribution businesses and may have greater financial, distribution resources
and facilities than the Company. With respect to all of its products, the
Company competes on the basis of price, features, product quality, applications,
engineering, promptness of delivery and customer service. The Company purchases
certain products from others for resale on an exclusive or non-exclusive basis,
which may be subject to competition from other independent distributors.
The Company also competes in the dental imaging market on the basis of its
proprietary and patented technologies. Certain competitors have significant or
greater resources and revenues in electronic digital imaging technologies and
expertise in software development utilized in dental imaging products.
The market for technology professional services is intensely competitive,
rapidly evolving and subject to rapid technological change. The Company expects
competition not only to persist, but also to increase. Competition may result in
price reductions, reduced margins and loss of market share. The market for the
Company's goods and services is rapidly evolving and is subject to continuous
technological change. As a result, the Company's competitors may be better
positioned to address these developments or may react more favorably to these
changes.
While the Company believes its products are competitive in terms of
capabilities, quality and price, increased competition in the marketplace could
have an adverse effect on the Company's business and, recent business mergers
and acquisitions may have potentially adversely affect the Company's business.
Many of the Company's competitors are much larger with significantly greater
financial, sales, marketing and other resources than those of the Company. There
can be no assurance that these competitors are not currently developing or will
attempt to develop new products that are more effective than those of the
Company or that might render the Company's products noncompetitive or obsolete.
No assurances can be given that the Company will be able to compete successfully
with such competitors in the future.
Environmental
The Company believes it is in compliance with the current laws and regulations
governing the protection of the environment and that continued compliance would
not have a material adverse effect on the Company or require any material
capital expenditures. Compliance with local codes for the installation and
operation of the Company's products is the responsibility of the end user, or
the dealer who independently provides installation services. See Item 3. Legal
Proceedings, for further discussion of an environmental claim in which the
Company is involved.
Employees
As of June 30, 2005, the Company employed 84 people on a full-time basis. The
Company has no collective bargaining agreements and considers its relationship
with its employees to be satisfactory.
d) Financial Information about Foreign and Domestic Operations and Export Sales
Financial information related to foreign and domestic operations and
export sales for the last three fiscal years is as follows:
<TABLE>
<CAPTION>
FY 2005 FY 2004 FY 2003
<S> <C> <C> <C> <C> <C> <C>
Domestic sales $18,858,056 82% $16,733,360 84% $15,111,108 84%
Export and foreign sales $4,277,007 18% $3,099,550 16% $2,932,560 16%
Domestic operating income $1,354,617 $1,466,228 $1,395
Foreign operating loss - ($12,600) ($1,940)
</TABLE>
Assets used in the manufacture of export sales are integrated with the other
assets of the Company. The Company liquidated its foreign subsidiary in
September 2003.
7
<PAGE>
Item 2. Properties
- -------------------
The Company's sole executive offices and manufacturing facility are located in
Elmsford, New York. This facility, which comprises approximately 47,735 square
feet, is subject to a lease expiring on December 31, 2009 with a current rental
of $525,085 per year, through the lease term, plus increases for real estate
taxes, utility costs and common area charges. The Company believes its facility
is well maintained, in good operating condition and sufficient to meet the
Company's present and anticipated needs.
Item 3. Legal Proceedings
- --------------------------
The Company is a defendant in an environmental claim relating to property in New
Jersey owned by the Company between August 1984 and June 1985. This claim
relates to the offsite commercial disposition of trash and waste in a landfill
in New Jersey. The Company maintains that its waste materials are of a general
commercial nature. This claim was originally filed in 1998 by the federal
government in United States District Court and the State of New Jersey, citing
several hundred other third-party defendants. The Company (through its former
subsidiary, Kenro Corporation) was added, along with many other defendants, to
the suit. The Company's claimed liability was potentially assessed by the
plaintiff at $150,000. The Company has joined, along with other involved
companies, in an alternative dispute resolution (ADR) process for smaller
claims. No potential cost to the Company has been assessed on this claim;
however, the Company has accrued $75,000 which represents the Company's
potential liability, net of the Company's insurance carrier's agreed upon
contribution towards a potential settlement. The Company does not expect to
receive any further information until a status conference is held in mid-October
2005. The Company cannot, at this time, assess the amount of liability above its
accrued amount, if any, that could result from any adverse final outcome of this
environmental complaint.
On December 6, 2004, the Company reached an agreement as to the parameters of a
settlement, which was finalized on February 8, 2005 and paid on February 18,
2005 relating to a separate environmental claim filed in 2001 as a civil
complaint by the current owners of the same property owned by the Company
between August 1984 and June 1985. This claim was filed in the Superior Court of
New Jersey, Morris County, and alleged that the Company's discontinued graphic
art camera subsidiary had contaminated a portion of the site during its
manufacturing process prior to 1985. The Settlement included a Release and
Indemnification as well as a Stipulation of Dismissal with Prejudice. The
Company paid $325,000, which represented the Company's entire liability under
this settlement offer, net of the Company's insurance carrier's agreed upon
contribution towards the total and final settlement,
The Company's insurance carrier has agreed to equally share with the Company the
defense costs incurred for both of the environmental claims since September
2001.
The Company is a defendant (with several other parties) in a product liability
insurance action, which was filed in May 2005 in the Superior Court in Hartford,
Connecticut. The plaintiff, through their insurance company, claims that the
Company's equipment caused a fire on the plaintiff's premises in May 2003. The
complaint seeks unspecified compensatory damages. The Company maintains that
their equipment was not the cause of the fire or the resultant damage. The
Company's insurance carriers, and their attorneys, are assisting in the
Company's defense in this matter. The Company does not believe that the final
outcome of this matter will have a material adverse effect on the Company.
From time to time, the Company is party to other claims and litigation arising
in the ordinary course of business. The Company does not believe that any
adverse final outcome of any of these matters, whether covered by insurance or
otherwise, would have a material adverse effect on the Company.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
There were no matters submitted to a vote of security holders during the fourth
quarter of Fiscal Year 2005.
8
<PAGE>
Part II
- -------
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
- --------------------------------------------------------------------------
a) Market Information
The Company's Common Stock, par value $.01 per share, is the only class of the
Company's common equity securities outstanding and is traded on the OTC Bulletin
Board (Symbol "AFPC"), maintained by the NASD Inc. The following table, based on
information supplied by Commodity Systems Inc., shows the range of the closing
high and low bid information for the Company's Common Stock for each quarterly
period during the Company's last two fiscal years. These prices reflect
inter-dealer prices and do not include retail mark-ups, markdowns or
commissions, and may not represent actual transactions.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Quarter ended High Bid Low Bid
------------- -------- -------
September 30, 2003 .32 .14
December 31, 2003 .74 .25
March 31, 2004 1.19 .64
June 30, 2004 1.64 1.02
September 30, 2004 1.85 1.21
December 31, 2004 1.51 1.11
March 31, 2005 1.70 1.12
June 30, 2005 2.25 1.40
</TABLE>
The market for the Company's Common Stock is highly volatile and the trading
price of the Common Stock could widely fluctuate in response to numerous
factors. In addition, the stock market has from time to time experienced extreme
price and volume fluctuations, which have particularly affected the market price
for the securities of many companies, which often have been unrelated to the
operating performance of these companies. These broad market fluctuations may
adversely affect the market price of the Company's Common Stock.
b) Holders
As of September 15, 2005, the closing bid price for the Company's Common Stock,
as reported on the OTC Bulletin Board, was $2.10, and there were 319
shareholders of record of the Common Stock. The Company estimates, based on
surveys conducted by its transfer agent in connection with the Company's 2004
Annual Meeting of Shareholders, that there are approximately 1,400 beneficial
holders of the Common Stock.
c) Dividends
No cash dividends have been declared on the Company's Common Stock to date and
the Company anticipates that any earnings will be retained for use in the
Company's business for the foreseeable future. The Company currently is
prohibited from paying cash dividends on its Common Stock under the terms and
conditions of its Renewed Revolving Credit Loan. The Company currently does not
have a set policy with respect to payment of dividends. Any future determination
to pay cash dividends will be at the discretion of the Company's Board of
Directors and will be dependent upon the Company's financial condition, results
of operations, capital requirements and other relevant factors.
d) Securities authorized for issuance under equity compensation plans
The following table sets forth as of June 30, 2005:
o the number of shares of the Company's Common Stock issuable upon
exercise of outstanding options, warrants and rights, separately
identified by those granted under equity incentive plans approved by
the Company's shareholders and those granted under plans, including
individual compensation contracts, not approved by the Company's
shareholders (column A),
o the weighted average exercise price of such options, warrants and
rights, also as separately identified (column B), and
o the number of shares remaining available for future issuance under such
plans, other than those shares issuable upon exercise of outstanding
options, warrants and rights (column C).
9
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(a) (b) (c)
Plan Category Number of securities Weighted average Number of securities
to be issued upon exercise price of remaining available
exercise of outstanding options, for future issuance
outstanding options, warrants and rights under equity
warrants and rights compensation plans
(excluding securities
reflected in column
(a))
Equity compensation
plans approved by
security holders (1) 948,400 $.76 1,114,500
Equity compensation
plan not approved by
security holders 0 0 0
Total 948,400 $.76 1,114,500
</TABLE>
(1) The equity compensation plans approved by the security holders are the
Company's 2004 Equity Incentive Plan, 1999 Stock Option Plan and the
1995 Stock Option Plan, as amended, which expires this year.
10
<PAGE>
<TABLE>
<CAPTION>
Item 6. Selected Financial Data
- --------------------------------
As of and for the Years Ended June 30,
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
NET SALES 23,135,063 $19,832,910 $18,043,668 $20,086,888 $24,051,300
========== =========== =========== =========== ===========
OPERATING INCOME (LOSS) 1,354,617 $1,453,628 $(545) $391,408 $(1,285,785)(b)
========= ========== ====== ======== ===============
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF 1,899,930 $1,345,467 $(218,338) $84,002 $(1,738,346)(b)
========= ========== ========== ======= ===============
CHANGE IN ACCOUNTING PRINCIPLE
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING $-- $-- $(1,297,069) $-- $--
=== === ============ === ===
PRINCIPLE (a)
NET INCOME (LOSS) 1,899,930 $1,345,467 $(1,515,407) $84,002 $(1,738,346)(b)
========= ========== ============ ======= ===============
EARNINGS (LOSS) PER SHARE BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
BASIC $.20 $.15 $(.02) $.01 $(.19)
==== ==== ====== ==== ======
DILUTED $.19 $.14 $(.02) $.01 $(.19)
==== ==== ====== ==== ======
NET EARNINGS (LOSS) PER SHARE
BASIC $.20 $.15 $(.16) $.01 $(.19)
==== ==== ====== ==== ======
DILUTED $.19 $.14 $(.16) $.01 $(.19)
==== ==== ====== ==== ======
TOTAL ASSETS $8,153,396 $6,244,895 $6,043,855 $7,849,510 $8,635,214
========== ========== ========== ========== ==========
LONG-TERM DEBT $-- $222,223 $630,556 $1,180,556 $2,359,033
=== ======== ======== ========== ==========
SHAREHOLDERS' EQUITY $4,662,631 $2,665,396 $1,319,929 $2,822,717 $2,717,233
========== ========== ========== ========== ==========
SHAREHOLDERS' EQUITY PER COMMON SHARE $.50 $.29 $.14 $.30 $.29
==== ==== ==== ==== ====
COMMON SHARES OUTSTANDING, at end
of period 9,407,717 9,270,617 9,270,617 9,270,617 9,270,617
========= ========= ========= ========= =========
CASH DIVIDENDS PER COMMON SHARE none none none none none
</TABLE>
(a) Upon adoption of SFAS 142 in the first quarter of Fiscal Year 2003, the
Company recorded a one-time, non-cash charge of approximately
$1,297,069, to reduce the carrying value of its goodwill. Such charge
is non-operational in nature and is reflected as a cumulative effect of
an accounting change. See Note 1 to the Consolidated Financial
Statements for further discussion and required disclosures.
(b) The amounts for Fiscal Year 2001 include charges and provisions of
$846,000, to reduce the goodwill associated with the medical diagnostic
imager product line to $0, and $110,000, to reflect the sale of the
graphic arts business, including $50,000 to reduce the graphic arts
inventory to the fair market value and $60,000, for severance and other
closing costs.
11
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation
- --------------------------------------------------------------------------------
The following should be read in conjunction with the Company's Consolidated
Financial Statements and notes thereto included elsewhere in this Annual Report
on Form 10-K.
Capital Resources and Liquidity
- -------------------------------
The Company's working capital increased by approximately $1,764,600 between
Fiscal Year 2005 and Fiscal Year 2004. This increase is principally due to
internally generated funds with corresponding reductions in the revolver debt,
an increase in the current deferred tax asset and increases in accounts payable,
offset by scheduled payments on the subordinated debt and increases in inventory
and accounts receivable. The Company used the current availability from the
revolving line of credit to make the required principal payments on the two
subordinated notes and income from operations to reduce the principal amount of
the revolver debt. The Company is current on all of its principal payments.
The Company's higher sales in Fiscal Year 2005 have increased cash collections
and profits. This cash has been used to reduce debt whenever possible. A small
percentage increase in customers using national credit cards has expedited the
collection process. The Company is continuing to increase its finished goods
inventory levels, so as to better satisfy worldwide customer demand. The Company
has not changed its payment policies available to its significant vendors.
On September 21, 2004, the Company renewed its senior secured credit facility
(the "Renewed Revolving Credit Loan") with its existing senior secured lender
for an additional three-year period. The Renewed Revolving Credit Loan replaced
the existing senior credit facility (the "Original Revolving Credit Loan").The
maximum borrowing permitted under the Renewed Revolving Credit Loan is lower
than that under the prior credit facility, based on the Company's current
requirements. However, the Renewed Revolving Credit Loan has more favorable
terms, including a lower interest rate and less stringent reporting
requirements, than that under the Original Revolving Credit Loan and gives the
Company the ability to borrow on a specific amount of foreign accounts
receivable The Renewed Revolving Credit Loan consists of a $2.5 million
revolving line of credit, which is secured by all of the Company's inventory,
accounts receivable, equipment, officer life insurance policies and proceeds
thereof, trademarks, licenses, patents and general intangibles. It is believed
that the Renewed Revolving Credit Loan is sufficient to finance the Company's
ongoing working capital requirements for the foreseeable future. The Renewed
Revolving Credit Loan has an interest rate of 1.375% over the prime rate,
currently at 6-3/4 % (6 1/4 % as of June 30, 2005), has a specific formula to
calculate available funds based on eligible accounts receivable and inventory,
and has certain reporting requirements to the senior secured lender. The Renewed
Revolving Credit Loan also requires that certain financial ratios and net worth
amounts be maintained by the Company. The Renewed Revolving Credit Loan provides
for increases in the interest rate charged on monies outstanding under specific
circumstances. As of June 30, 2005, the principal amount outstanding under the
Renewed Revolving Credit Loan was $452,363.
As of June 30, 2005, the Company was in compliance with all the terms and
conditions of the Renewed Revolving Credit Loan, as amended.
In connection with the Original Revolving Credit Loan, the Company issued a
5-year warrant to the lender for the purchase of 100,000 shares of the Company's
common stock at $.32 per share, subject to adjustment for all subsequent
issuances of stock. This warrant expires on September 21, 2006. The
Black-Scholes option pricing method was used to value the warrant, and the stock
price was based on the stock price the day prior to closing, plus 10%, as
stipulated in the Loan and Security Agreement for the Original Revolving Credit
Loan.
Included in debt is a subordinated promissory note related to a prior dental
company acquisition. As of June 30, 2005, the outstanding principal amount of
this note totals $222,222, and the entire amount has been classified as a
current liability as it is scheduled to be repaid in full within Fiscal Year