<PAGE>
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended March 31, 1998
--------------
Commission File Number 0-10832
-------
AFP Imaging Corporation
------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-2956272
- ------------------------------- ---------------------
(State or other jurisdiction of (IRS Employer ID No.)
incorporation or organization)
250 Clearbrook Road, Elmsford, New York 10523
- --------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 592-6100
--------------
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 for 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. Yes X No
----- -----
The registrant had 9,767,949 shares of Common Stock outstanding as of May
1, 1998.
1
<PAGE>
PART I. Financial Information
The consolidated financial statements included herein have been prepared by
AFP Imaging Corporation (the "Company"), without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. While certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, the Company
believes that the disclosures made herein are adequate to make the information
presented not misleading. It is recommended that these consolidated financial
statements be read in conjunction with the consolidated financial statements
and notes thereto included in the Company's Annual Report on Form 10-K/A No. 1
for the year ended June 30, 1997.
In the opinion of the Company, all adjustments necessary to present fairly the
financial position of AFP Imaging Corporation as of March 31, 1998 and June
30, 1997, and the results of its operations for the three and nine month
periods ended March 31, 1998 and 1997, and its cash flows for the nine month
periods then ended, have been included. In addition to the adjustments for
normal recurring accruals, the Company recorded charges in the second quarter
of approximately $1.6 million associated with the restructuring of its Swedish
operations, and charges in the third quarter of approximately $1.7 million
associated with the re-allocation of the purchase price to acquired in-process
research and development related to the December 1997 acquisition of ProDen
(see Note 7 to financial statement).
2
<PAGE>
Item 1: FINANCIAL STATEMENTS
AFP Imaging Corporation and Subsidiaries
Consolidated Balance Sheets - March 31, 1998 and June 30, 1997
<TABLE>
<CAPTION>
March 31, June 30,
Assets 1998 1997
- ------ ------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 566,036 $ 1,858,287
Accounts receivable, less allowance
for doubtful accounts of $252,000
and $277,900 respectively 5,562,944 5,816,106
Inventories 6,794,931 6,016,528
Prepaid expenses and other 215,487 650,095
------------ ------------
Total current assets 13,139,398 14,341,016
------------ ------------
Property and Equipment, (at cost) 7,902,190 7,511,752
Less accumulated depreciation (6,404,054) (6,113,123)
------------ ------------
1,498,136 1,398,629
------------ ------------
Intangible Assets,
net of accumulated amortization 4,759,303 4,441,453
------------ ------------
Other Assets 562,443 334,930
------------ ------------
$ 19,959,280 $ 20,516,028
============ ============
<CAPTION>
March 31, June 30,
Liabilities and Stockholders' Equity 1998 1997
- ------------------------------------ ------------ ------------
<S> <C> <C>
Current Liabilities:
Current portion of long-term debt $ 1,029,642 $ 639,314
Accounts payable 1,678,315 1,801,973
Accrued expenses 1,424,891 2,789,241
------------ ------------
Total current liabilities 4,132,848 5,230,528
------------ ------------
Long Term Debt 7,404,272 4,412,116
------------ ------------
Shareholders' Equity
Convertible Preferred Stock, Series A,
1,750,000 authorized, -0- and
1,396,814 shares issued and outstanding
at March 31, 1998 and
June 30, 1997, respectively -0- 2,171,071
Convertible Preferred Stock, Series B,
824,844 authorized, -0- and 711,872
shares issued and outstanding
at March 31, 1998
and June 30, 1997 respectively -0- 854,247
Common Stock Warrants -0- 25,314
Common Stock, $.01 par value,
30,000,000 shares authorized, 9,767,949
and 7,432,698 shares issued and
outstanding at March 31, 1998
and June 30, 1997, respectively 97,679 74,327
Paid-in capital in excess of par 11,858,704 8,578,549
Accumulated deficit (3,529,119) (826,324)
Cumulative translation adjustment (5,104) (3,800)
------------ ------------
Total shareholders' equity 8,422,160 10,873,384
------------ ------------
$ 19,959,280 $ 20,516,028
============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
consolidated balance sheets.
3
<PAGE>
AFP Imaging Corporation and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended Nine months Ended
March 31, March 31,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $ 8,548,583 $ 9,217,711 $ 26,313,956 $ 26,469,996
Cost of Sales 6,006,719 6,157,415 17,792,499 17,917,367
------------ ------------ ------------ ------------
Gross Profit 2,541,864 3,060,296 8,521,457 8,552,629
------------ ------------ ------------ ------------
Selling, General and
Administrative Expenses 2,244,093 2,174,388 6,945,638 6,505,394
Research and Development 256,146 222,109 648,865 591,083
Special charges (Notes 6 & 7) 1,700,000 -- 3,320,983 --
------------ ------------ ------------ ------------
4,200,239 2,396,497 10,915,486 7,096,477
------------ ------------ ------------ ------------
Operating income (loss) (1,658,375) 663,799 (2,394,029) 1,456,152
------------ ------------ ------------ ------------
Interest, net 99,738 78,687 258,286 335,536
------------ ------------ ------------ ------------
Income (loss) before provision for taxes (1,758,113) 585,112 (2,652,315) 1,120,616
Provision for Income Taxes -- 65,000 50,480 120,000
------------ ------------ ------------ ------------
Net Income (loss) ($ 1,758,113) $ 520,117 ($ 2,702,795) $ 1,000,616
============ ============ ============ ============
NET EARNINGS (LOSS) PER
SHARE (Note 2)
Basic ($ .18) $ .07 ($ .31) $ .14
============ ============ ============ ============
Diluted ($ .18) $ .05 ($ .31) $ .10
============ ============ ============ ============
Weighted average outstanding
Common stock 9,767,949 7,170,518 8,594,533 7,163,851
Preferred stock -- 2,361,780 -- 2,361,780
Employee stock options -- 516,072 -- 404,517
------------ ------------ ------------ ------------
Common stock and common
stock equivalents 9,767,949 10,048,370 8,594,533 9,930,148
============ ============ ============ ============
DIVIDENDS PER SHARE None None None None
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
4
<PAGE>
AFP Imaging Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity
For the Nine Months Ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
Convertible Convertible Common
Preferred Preferred Stock Common
Stock (A) Stock (B) Warrants Stock
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance June 30, 1996 $ 2,564,876 $ 854,247 $ 25,314 $ 70,778
Issuance of 5,000 shares of
common stock in connection with
the conversion of stock options -- -- -- 150
Conversion of 75,060 shares of
Preferred Stock, Series A to
77,751 shares of common stock (90,072) -- -- 778
Net income for nine months ended
March 31, 1997 -- -- -- --
------------ ------------ ------------ ------------
Balance March 31, 1997 $ 2,474,804 $ 854,247 $ 25,314 $ 71,706
============ ============ ============ ============
Balance June 30, 1997 $ 2,171,071 $ 854,247 $ 25,314 $ 74,327
Issuance of 152,027 shares
of common stock in connection with
the conversion of common stock warrants -- -- (15,000) 1,520
Expiration of 103,138 common stock
warrants -- -- (10,314) --
Issuance of 24,500 shares
of common stock in connection with
the conversion of stock options -- -- -- 245
Conversion of 1,396,798 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
Foreign currency translation
adjustment -- -- -- --
Net loss for nine months
ended March 31, 1998 -- -- -- --
------------ ------------ ------------ ------------
Balance March 31, 1998 $ -0- $ -0- $ -0- $ 97,679
============ ============ ============ ============
<CAPTION>
Foreign
Paid-in Capital Currency
In Excess of Accumulated Translation
Par Deficit Adjustment Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance June 30, 1996 $ 8,175,793 $ (2,374,921) $ -- $ 9,316,087
Issuance of 5,000 shares of
common stock in connection with
the conversion of stock options 12,350 -- -- 12,500
Conversion of 75,060 shares of
Preferred Stock, Series A to
77,751 shares of common stock 89,294 -- -- --
Net income for nine months ended
March 31, 1997 -- 1,000,616 -- 1,000,616
------------ ------------ ------------ ------------
Balance March 31, 1997 $ 8,277,437 $ (1,374,305) $ -- $ 10,329,203
============ ============ ============ ============
Balance June 30, 1997 $ 8,578,549 $ (826,324) $ (3,800) $ 10,873,384
Issuance of 152,027 shares
of common stock in connection with
the conversion of common stock warrants 238,480 -- -- 225,000
Expiration of 103,138 common stock
warrants 10,314 -- -- --
Issuance of 24,500 shares
of common stock in connection with
the conversion of stock options 27,630 -- -- 27,875
Conversion of 1,396,798 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 -- -- --
Foreign currency translation
adjustment -- -- (1,304) (1,304)
Net loss for nine months
ended March 31, 1998 -- (2,702,795) -- (2,702,795)
------------ ------------ ------------ ------------
Balance March 31, 1998 $ 11,858,704 $ (3,529,119) $ (5,104) $ 8,422,160
============ ============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
5
<PAGE>
AFP Imaging Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For the Nine months Ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) $(2,702,795) $ 1,006,616
Adjustments to reconcile net income to net cash provided
by (used by) operating activities-
Non-cash effect of special charges 2,991,983 --
Depreciation and amortization 686,169 622,428
Change in assets and liabilities:
Decrease in accounts receivable 319,187 1,262,877
(Increase) decrease in inventories (517,508) 1,345,210
(Increase) in prepaid expenses and other assets (349,120) (14,640)
(Decrease) increase in accounts payable (425,884) 345,201
(Decrease) in accrued expenses (1,364,350) (71,514)
----------- -----------
Total adjustments 1,340,477 3,489,562
----------- -----------
Net cash provided by (used by) operating activities (1,362,318) 4,490,178
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in ProDen Systems, Inc. (3,483,229) --
Proceeds from collection of Notes Receivable 300,000 --
Capital expenditures (282,934) (157,261)
----------- -----------
Net cash (used by) investing activities (3,466,163) (157,261)
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Borrowing of debt 3,284,659 --
Repayment of debt -- (4,566,668)
Exercise of common stock warrants 225,000 --
Exercise of common stock options 27,875 --
----------- -----------
Net cash provided by (used by) financing activities 3,537,534 (4,566,668)
----------- -----------
EXCHANGE RATE EFFECTS ON CASH AND CASH EQUIVALENTS (1,304) --
----------- -----------
Net (decrease) in cash and cash equivalents (1,292,251) (233,751)
CASH AND CASH EQUIVALENTS, at beginning of period 1,858,287 3,133,198
----------- -----------
CASH AND CASH EQUIVALENTS, at end of period $ 566,036 $ 2,899,447
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
6
<PAGE>
AFP Imaging Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 1998
(1) General:
The accounting policies followed during the interim periods reported on are in
conformity with generally accepted accounting principles and are consistent
with those applied for annual periods, as described in the Company's financial
statements, as of June 30, 1997, and for the year then ended, included in the
Company's Annual Report on Form 10-K/A No. 1 for the year ended June 30, 1997.
(2) Net earnings per common share:
The Company's Preferred Stock, Series A and Series B were fully converted to
common stock as of December 31, 1997.
Effective December 31, 1997, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" (FAS 128)
which requires the replacement of primary and fully diluted earnings per share
with basic and diluted earnings per share, respectively. FAS 128 also requires
restatement of previously reported earnings per share information for certain
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
diluted weighted average number of shares outstanding does not include the
stock options and warrants, and the Preferred Stock Series A and Series B in
fiscal 1998, as such amounts are anti-dilutive when there is a loss.
(3) Long and Short Term Debt:
In July 1997, the Company renewed its $9.85 million revolver and term loan
facility with its senior lender for an additional three years. The interest
rate was reduced to 3/4% above prime and the term loan was increased to $1.45
million. The loan is collateralized by tangible and intangible assets,
provides for restrictions on borrowings and requires that certain financial
ratios and net worth be maintained. The Company is currently in compliance
with all the terms and conditions of its credit facility.
(4) Inventory:
The Company uses the gross margin method related to labor and overhead costs
during interim periods for inventory valuation.
(5) Income Taxes:
The Company's income tax provision is based on the income generated, offset by
the net operating loss tax carry forwards generated in prior years. No tax
benefit has been provided for the write-down of the acquisition goodwill to
net realizable value.
(6) Restructuring/Integration of Swedish Operations:
During the second quarter ended December 31, 1997, the Company implemented a
restructuring and integration program, associated with its Swedish business,
acquired in April 1997, which reduced operating income by $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 US. These costs
include severance and related social costs, production line set-up and
training costs in the US, and costs to terminate various contracts in Sweden.
This charge also includes an amount of $1.3 million to reduce the original
goodwill due to the recognized impairment in the value of the Swedish
operations. Such write-down was based on anticipated discounted cash flows of
this product line. Additional charges relating to the restructuring and
integration of these operations may be incurred during the remainder of fiscal
1998, however, such charges are not expected to be material to the annual
results of operations.
(7) Acquisition:
On December 24, 1997, the Company acquired, through its wholly owned
subsidiary, Dent-X International, Inc., ProDen Systems Inc., ("ProDen") of
Vancouver, Washington. ProDen is a manufacturer of intraoral dental camera
systems, utilizing proprietary technology. Existing capital funds were used to
acquire ProDen. The acquisition was accounted for under the purchase method.
During the third 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 management's estimate of the value of the
in-process research and development projects acquired for which the commercial
application was indeterminable as of the acquisition date. This charge may be
adjusted during the remainder of fiscal 1998 pending the finalization of an
appraisal performed by an independent third party. However, such adjustments
are not expected to be material to the annual results of operations.
7
<PAGE>
Item 2: Management's Discussion and Analysis of Fiscal 1998 Financial
Condition and Results of Operation
Capital Resources and Liquidity
The Company's working capital at March 31, 1998 decreased approximately
$104,000. The Company acquired the assets and liabilities of ProDen Systems,
Inc., ("ProDen") in December 1997 for $3.5 million in cash and notes payable.
The Company used a portion of its available cash to finance this purchase.
The Company has a senior credit facility consisting of a $9.85 million
revolver and term loan facility. This credit line is sufficient to finance
ongoing working capital requirements. The revolver loan is secured by
available and eligible inventory, accounts receivable, and specific
intangibles. This facility requires that certain financial ratios and net
worth amounts be maintained. The Company is currently in compliance with all
of its financial ratios, covenants, and terms. This facility was renewed in
July 1997 and expires in July 2000. The Company renegotiated a lower interest
rate and increased availability based on stated terms and asset amounts. Other
terms, conditions and covenants of the new facility are similar to those of
the previous facility.
The Company's historical cash flows have been favorable, however, the Company
is dependent upon its existing credit facilities to finance its overall
operations. At March 31, 1998 the Company had available $3.0 million of unused
lines of credit for short-term financing needs plus cash and cash equivalents
of $566,000.
Capital expenditures for fiscal 1998 consist of appropriate replacements in
the normal course of operations. In fiscal 1997, the Company committed to the
purchase of a new Business Information System including the upgrade of
existing computer hardware and a new fully integrated financial and
manufacturing software package. This system was fully implemented during the
third quarter fiscal 1998. Management has been assured that this new system
fully satisfies all Year 2000 compliance issues. The Company signed a
three-year lease for the hardware and software costs which have been recorded
as a capital lease.
The Company expects its need for working capital will continue to be financed
by operations, and anticipates financing future capital equipment 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.
Comparison of Nine Months Fiscal 1998 Versus Nine Months 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 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 the charge for the Restructure/Integration of the Swedish
operations. The remaining goodwill is being amortized over fourteen years on a
straight-line basis. Also included are $329,000 of costs to shutdown and
relocate the manufacturing operations, marketing, technical service and
customer support operations from Sweden to the US and $175,000 of
under-absorption of manufacturing overheads. These costs also include
severance and required social tax payments to former employees.
On December 24, 1997, the Company acquired the assets and liabilities of
ProDen, a manufacturer of intraoral dental cameras. The Company originally
recorded $3.45 million of goodwill associated with this acquisition. During
the third quarter fiscal 1998, a portion of the purchase price was
re-allocated to in-process research and development expenditures, resulting in
a charge of $1.7 million. The remaining goodwill of $1.75 million is being
amortized over fifteen years on a straight-line basis. ProDen had operating
losses of $140,000 during the third quarter of fiscal 1998 due to the delayed
release of specific products and software upgrades. The Company continues to
invest in ProDen's product development.
Sales decreased $156,000 or .6% between the two periods. There were no
significant changes in the sales mix between the two periods. Gross profit as
a percent of sales remained relatively constant between the two periods.
Selling, general and administrative costs increased $440,200 or 6.7% due to
costs to promote the new digital dental products in the market place, and the
amortization of associated acquisition costs.
8
<PAGE>
Research and development costs increased $57,700 or 6%. The Company continues
to invest in sustaining engineering and related costs. Where applicable, the
Company is acting as a master distributor for products developed by others.
The Company has also increased its efforts to expand and develop its emerging
digital dental products.
Interest expense, net decreased $77,200 due to a lower interest rate, and a
slightly lower borrowing base during the comparable periods.
Comparison of Second Quarter Fiscal 1998 Versus Second Quarter Fiscal 1997
Net sales decreased $669,100 or 7.3%. Digital medical sales decreased and the
dental products showed the most significant increase this quarter. Gross
profit as a percent of sales decreased 3.5 percentage points due to a shift in
product mix toward more distributor goods this quarter. The aggregate of the
expense items increased $103,000 or 4% in the third quarter due to operating
costs associated with the two acquisitions. Interest expense net increased 27%
in this quarter due to increased borrowings to initially fund the ProDen
operations.
Part II Other Information
Item 6: Exhibits and Reports on Form 8-K.
(a) None
(b) None
9
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto authorized.
Date: May 15, 1998
------------------------------------
David Vozick
Chairman of the Board
Secretary, Treasurer
(Principal Financial Officer)
Date: May 15, 1998
------------------------------------
Donald Rabinovitch
President and Director
(Principal Executive Officer)
10
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 566,036
<SECURITIES> 0
<RECEIVABLES> 5,815,122
<ALLOWANCES> 252,178
<INVENTORY> 6,794,931
<CURRENT-ASSETS> 13,139,398
<PP&E> 7,902,190
<DEPRECIATION> 6,404,054
<TOTAL-ASSETS> 19,959,280
<CURRENT-LIABILITIES> 4,132,848
<BONDS> 0
0
0
<COMMON> 97,679
<OTHER-SE> 8,329,585
<TOTAL-LIABILITY-AND-EQUITY> 19,959,280
<SALES> 26,313,956
<TOTAL-REVENUES> 26,313,956
<CGS> 17,792,499
<TOTAL-COSTS> 10,915,486
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 258,286
<INCOME-PRETAX> (2,652,315)
<INCOME-TAX> 50,480
<INCOME-CONTINUING> (2,702,795)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,702,795)
<EPS-PRIMARY> (.31)
<EPS-DILUTED> (.31)
</TABLE>
