<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 December 31, 1997
-----------------
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 February
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 December 31, 1997 and June
30, 1997, and the results of its operations for the three and six month
periods ended December 31, 1997 and 1996, and its cash flows for the six month
periods then ended, have been included. In addition to the adjustments for
normal recurring accruals, the Company recorded charges in this quarter of
approximately $1.6 million associated with restructuring of its Swedish
operations.
2
<PAGE>
Item 1: FINANCIAL STATEMENTS
AFP Imaging Corporation and Subsidiaries
Consolidated Balance Sheets - December 31, 1997 and June 30, 1997
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
------------ ------------
<S> <C> <C>
Assets
- ------
Current Assets:
Cash and cash equivalents $ 1,083,229 $ 1,858,287
Accounts receivable, less allowance
for doubtful accounts of $259,000
and $277,900 respectively 4,695,743 5,816,106
Inventories 6,851,968 6,016,528
Prepaid expenses and other 79,747 650,095
------------ ------------
Total current assets 12,710,687 14,341,016
------------ ------------
Property and Equipment, (at cost) 7,842,477 7,511,752
Less accumulated depreciation (6,314,824) (6,113,123)
------------ ------------
1,527,653 1,398,629
------------ ------------
Intangible Assets,
net of accumulated amortization 6,415,942 4,441,453
------------ ------------
Other Assets 580,515 334,930
------------ ------------
$ 21,234,797 $ 20,516,028
============ ============
Liabilities and Stockholders' Equity
- ------------------------------------
Current Liabilities:
Current portion of long-term debt $ 1,008,547 $ 639,314
Accounts payable 1,269,046 1,801,973
Accrued expenses 2,303,359 2,789,241
------------ ------------
Total current liabilities 4,580,952 5,230,528
------------ ------------
Long Term Debt 6,498,985 4,412,116
------------ ------------
Shareholders' Equity
Convertible Preferred Stock, Series A,
1,750,000 authorized, -0- and
1,396,814 shares issued and outstanding
at December 31, 1997 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 December 31, 1997
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 December 31, 1997
and June 30, 1997, respectively 97,679 74,327
Paid-in capital in excess of par 11,858,704 8,578,549
Accumulated deficit (1,771,006) (826,324)
Cumulative translation adjustment (30,517) (3,800)
------------ ------------
Total shareholders' equity 10,154,860 10,873,384
------------ ------------
$ 21,234,797 $ 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 Six Months Ended
December 31, December 31,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Sales $ 8,871,753 $ 9,142,343 $ 17,765,373 $ 17,252,285
Cost of Sales 6,057,905 6,198,542 11,785,780 11,759,952
------------ ------------ ------------ ------------
Gross Profit 2,813,848 2,943,801 5,979,593 5,492,333
------------ ------------ ------------ ------------
Selling, General and
Administrative Expenses 2,289,891 2,225,804 4,701,545 4,331,006
Research and Development 191,394 210,714 392,719 368,974
Restructure/Integration costs of
Swedish Operations (Note 6) 1,620,983 -- 1,620,983 --
------------ ------------ ------------ ------------
4,102,268 2,436,518 6,715,247 4,699,980
------------ ------------ ------------ ------------
Operating income (loss) (1,288,420) 507,283 (735,654) 792,353
------------ ------------ ------------ ------------
Interest, net 63,949 113,816 158,548 256,848
------------ ------------ ------------ ------------
Income (loss) before provision for taxes (1,352,369) 393,467 (894,202) 535,505
Provision for Income Taxes -- 30,000 50,480 55,000
------------ ------------ ------------ ------------
Net Income (loss) ($ 1,352,369) $ 363,467 ($ 944,682) $ 480,505
============ ============ ============ ============
NET EARNINGS (LOSS) PER COMMON
SHARE (Note 2)
Basic ($ .14) $ .05 ($ .11) $ .07
============ ============ ============ ============
Diluted ($ .14) $ .04 ($ .11) $ .05
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING (Note 2)
Basic 9,767,900 7,160,500 8,701,200 7,095,700
============ ============ ============ ============
Diluted 9,767,900 9,888,700 8,701,200 9,859,800
============ ============ ============ ============
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 Six Months Ended December 31, 1997 and 1996
<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 -- -- -- 50
Conversion of 75,060 shares of
Preferred Stock, Series A to
77,751 shares of common stock (90,072) -- -- 778
Net income for six months ended
December 31, 1996 -- -- -- --
------------ ------------ ------------ ------------
Balance December 31, 1996 $ 2,474,804 $ 854,247 $ 25,314 $ 71,606
============ ============ ============ ============
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 six months
ended December 31, 1997 -- -- -- --
------------ ------------ ------------ ------------
Balance December 31, 1997 $ -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 2,450 -- -- 2,500
Conversion of 75,060 shares of
Preferred Stock, Series A to
77,751 shares of common stock 89,294 -- -- --
Net income for six months ended
December 31, 1996 -- 480,505 -- 480,505
------------ ------------ ------------ ------------
Balance December 31, 1996 $ 8,267,537 $ (1,894,416) $ -- $ 9,799,092
============ ============ ============ ============
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 -- -- (26,717) (26,717)
Net loss for six months
ended December 31, 1997 -- (944,682) -- (944,682)
------------ ------------ ------------ ------------
Balance December 31, 1997 $ 11,858,704 ($ 1,771,006) ($ 30,517) $ 10,154,860
============ ============ ============ ============
</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 Six Months Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) ($ 944,682) $ 480,505
Adjustments to reconcile net income to net cash provided
by operating activities-
Non-cash effect of write-down of intangibles
to net realizable value 1,291,983 --
Depreciation and amortization 431,180 420,160
Change in assets and liabilities:
Decrease in accounts receivable 1,186,388 1,033,280
(Increase) decrease in inventories (574,545) 1,093,329
(Increase) in other assets and other (54,422) (171,267)
(Decrease) in accounts payable (835,153) (103,290)
(Decrease) in accrued expenses (485,882) (216,031)
----------- -----------
Total adjustments 959,549 2,056,181
----------- -----------
Net cash provided by operating activities 14,867 2,536,686
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in ProDen Systems, Inc. (3,483,229) --
Proceeds from collection of Notes Receivable 300,000 --
Capital expenditures (191,131) (96,425)
----------- -----------
Net cash (used by) investing activities (3,374,360) (96,425)
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Borrowing of debt 2,358,277 --
Repayments of debt -- (2,800,602)
Exercise of common stock warrants 225,000 --
Exercise of common stock options 27,875 --
----------- -----------
Net cash provided by (used by) financing activities 2,611,152 (2,800,602)
----------- -----------
EXCHANGE RATE EFFECTS ON CASH AND CASH EQUIVALENTS (26,717) --
----------- -----------
Net (decrease) in cash and cash equivalents (775,058) (360,341)
CASH AND CASH EQUIVALENTS, at beginning of period 1,858,287 3,133,198
----------- -----------
CASH AND CASH EQUIVALENTS, at end of period $ 1,083,229 $ 2,772,857
=========== ===========
</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
December 31, 1997
(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 have been 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 958,120
stock options and warrants, and does not include 2,108,670 shares of 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 include an amount of $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 video imaging technology. ProDen has an
installed base in the United States, Asia and Europe. Existing capital funds
were used to acquire ProDen. The acquisition was accounted for under the
purchase method and is reflected in the consolidated financial statements as
of December 31, 1997. The accounting for this transaction is of a preliminary
basis and is subject to certain purchase accounting adjustments. These
adjustments may include an allocation of the purchase price to in-process
research and development expenditures.
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 December 31, 1997 decreased approximately
$1.0 million. 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 funds generated from current assets were used to reduce revolver
debt.
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 December 31, 1997 the Company had available $4.1 million of
unused lines of credit for short-term financing needs plus cash and cash
equivalents of $1.1 million.
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. 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 Six Months Fiscal 1998 Versus Six 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. Operating
income would have been $901,781 and $443,614 for the six months ended and
three months ended December 31, 1997, respectively, had the Company not
incurred these non-recurring restructure/integration costs.
On December 24, 1997, the Company acquired the assets and liabilities of
ProDen, a manufacturer of intraoral dental cameras. The goodwill and other
assets of $3.4 million associated with this acquisition are being amortized
over ten to fifteen years on a straight-line basis. The Company did not have
any associated revenue and expense in this period.
Sales increased $513,000 or 3% between the two periods. There was a decrease
in digital medical sales due to some adjustments in OEM contracts, and a 12%
increase in the Company's expanding dental products line. This excludes the
sales from the newly acquired dental lines. Gross profit as a percent of sales
increased approximately 2 percentage points due to favorable changes in the
product mix, and better market pricing of the Company's products.
Selling, general and administrative costs increased $370,500 or 8.5% 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 $23,700 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.
Interest expense, net decreased $98,300 or 38% due to a lower interest rate
and $460,000 less in interest-bearing debt. Excluding the acquisition debt
incurred on December 24, 1997, the Company reduced its revolver borrowing by
$440,000.
Comparison of Second Quarter Fiscal 1998 Versus Second Quarter Fiscal 1997
Net sales decreased $271,000 or 3%. Digital medical sales decreased, as
explained previously, and the dental products showed the most significant
increase this quarter. Gross profit as a percent of sales stayed relatively
constant between the periods. The aggregate of the expense items, excluding
the integration and restructure of the Swedish operations, increased $45,000
or 2% in the second quarter for the same reasons as the six month period.
Interest expense net decreased 44% in this quarter due to a reduction in
interest-bearing debt levels and a lower interest rate.
Part II Other Information
Item 4: Submission of Matters to a Vote of Security Holders
On December 18, 1997, the Company held an Annual Meeting of Shareholders to:
(1) elect five directors for a term of one year or until their successors are
duly elected; (2) amend the Company's 1995 Stock Option Plan to increase the
number of shares available for issuance upon the exercise of options granted
from 600,000 shares of common stock to 1,100,000 shares of common stock and;
(3) ratify the appointment of Arthur Andersen LLP as the independent public
auditors of the Corporation's accounts for the year ending June 30, 1998. The
nominees for election to the Board of Directors received the following votes:
For Election Withheld Authority
------------ ------------------
David Vozick 9,035,298 21,073
Donald Rabinovitch 9,037,033 19,338
Robert Rosen 9,037,233 19,138
Jack Becker 9,037,233 19,138
Robert Blatt 9,037,233 19,138
In connection with the proposal to amend the Company's 1995 Stock Option Plan
to increase from 600,000 to 1,100,000 the number of common shares eligible for
issuance; 6,600,400 shares voted for, 9999 shares abstained and 118,533 shares
voted against. In connection with the appointment of Arthur Andersen LLP as
the independent public accountants, 9,643,501 shares voted for, 5,520 shares
abstained, and 7,620 shares voted against.
Item 6: Exhibits and Reports on Form 8-K.
(a) Exhibits
99.1 Form S-8 Registration Statement under the Securities Act of 1933
A Form S-8 Registration Statement under the Securities Act of 1933
was filed on December 31, 1997 to register the common stock upon
exercise of options granted or which may become available for
regrant under the Company's 1992 Employee Stock Option Plan and the
1995 Stock Option Plan, or granted pursuant to the Stock Option
Agreement dated September 19, 1997, between the Company and Robert
L. Rosen.
(b) Reports on Form 8-K
A Current Report on Form 8-K was filed on January 8, 1998, to
report the acquisition of ProDen Systems, Inc., of Vancouver,
Washington.
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: February 19, 1998 ----------------------------------
David Vozick
Chairman of the Board
Secretary, Treasurer
(Principal Financial Officer)
Date: February 19, 1998 ----------------------------------
Donald Rabinovitch
President and Director
(Principal Executive Officer)
10
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,083,229
<SECURITIES> 0
<RECEIVABLES> 4,954,743
<ALLOWANCES> 259,000
<INVENTORY> 6,851,968
<CURRENT-ASSETS> 12,710,687
<PP&E> 7,842,477
<DEPRECIATION> 6,314,824
<TOTAL-ASSETS> 21,234,797
<CURRENT-LIABILITIES> 4,580,952
<BONDS> 0
0
0
<COMMON> 97,679
<OTHER-SE> 10,087,698
<TOTAL-LIABILITY-AND-EQUITY> 21,234,797
<SALES> 17,765,373
<TOTAL-REVENUES> 17,765,373
<CGS> 11,785,780
<TOTAL-COSTS> 6,715,247
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 158,548
<INCOME-PRETAX> (894,202)
<INCOME-TAX> 50,480
<INCOME-CONTINUING> (944,682)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (944,682)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
</TABLE>
