<PAGE>
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarterly Period Ended September 30, 1999
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 9,271,054 shares of Common Stock outstanding as of November
1,1999.
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 for the year ended June 30,
1999.
In the opinion of the Company, all adjustments necessary to present fairly the
financial position of AFP Imaging Corporation as of September 30, 1999 and June
30, 1999, and the results of its operations for the three month periods ended
September 30, 1999 and 1998, and its cash flows for the three months periods
then ended, have been included.
2
<PAGE>
Item 1: FINANCIAL STATEMENTS
AFP Imaging Corporation and Subsidiaries
Consolidated Balance Sheets - September 30, 1999 and June 30, 1999
<TABLE>
<CAPTION>
Assets September 30, June 30,
- ------ 1999 1999
------------ -----------
<S> <C> <C>
Current Assets
Cash and cash equivalents $435,425 $249,053
Accounts receivable, less allowance
for doubtful accounts of $434,000
and $427,000 respectively 3,284,546 3,923,514
Inventories 5,170,744 5,494,828
Prepaid expenses and other 262,712 89,958
----------- -----------
Total current assets 9,153,427 9,757,353
----------- -----------
Property and Equipment, (at cost) 8,013,042 8,035,982
Less accumulated depreciation (6,891,086) (6,810,006)
----------- -----------
1,121,956 1,225,976
----------- -----------
Intangible Assets,
net of accumulated amortization 2,744,543 2,804,822
----------- -----------
Other Assets 229,544 197,933
----------- -----------
$13,249,470 $13,986,084
=========== ===========
<CAPTION>
Liabilities and Stockholders' Equity Assets September 30, June 30,
- ------------------------------------------- 1999 1999
------------ -----------
<S> <C> <C>
Current Liabilities:
Current portion of long-term debt $4,331,331 $ 427,958
Accounts payable 1,037,136 965,945
Accrued expenses 890,911 1,409,666
----------- -----------
Total current liabilities 6,259,378 2,803,569
----------- -----------
Long Term Debt 1,776,533 5,974,216
----------- -----------
Shareholders' Equity
Common Stock, $.01 par value, 30,000,000
shares authorized, 9,271,054
shares issued and outstanding
at September 30, 1999 and
June 30, 1999, 92,710 92,710
Paid-in capital in excess of par 11,491,001 11,491,001
Accumulated deficit (6,358,836) (6,360,831)
Accumulated other comprehensive loss (11,316) (14,581)
----------- -----------
Total shareholders' equity 5,213,559 5,208,299
----------- -----------
$13,249,470 $13,986,084
=========== ===========
</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
September 30
1999 1998
---- ----
<S> <C> <C>
Net Sales $ 6,400,193 $ 7,331,109
Cost of Sales 4,116,836 5,001,650
----------- -----------
Gross Profit 2,283,357 2,329,459
----------- -----------
Selling, General and
Administrative Expenses 2,031,092 2,033,225
Research and Development 137,220 298,209
----------- -----------
2,168,312 2,331,434
----------- -----------
Operating Income (loss) 115,045 (1,975)
----------- -----------
Interest, net 116,210 159,469
----------- -----------
Loss before provision for taxes (1,165) (161,444)
Provision (Benefit) for Income Taxes (3,160) 12,000
----------- -----------
Net Income (Loss) $ 1,995 ($ 173,444)
=========== ===========
NET INCOME (LOSS) PER SHARE
Basic $ --- ($.02)
=====
Diluted $ --- ($.02)
=====
Weighted average outstanding
Common stock
Basic 9,271,054 9,767,949
=========== ===========
Diluted 9,275,346 9,767,949
=========== ===========
</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 and Comprehensive Income (Loss)
For the Three Months Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
Accumulated
Paid-in Other
Comprehensive Common Capital In Accumulated Comprehensive
Loss Stock Excess of Par Deficit Income (Loss) Total
---- ----- ------------- ------- ------------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance June 30, 1998 $--- $97,679 $11,858,704 $(4,153,889) $(8,509) $7,793,985
Foreign currency translation
adjustment 4,898 --- --- --- 4,898 4,898
Net loss for three months
ended September 30, 1998 (173,444) --- --- (173,444) --- (173,444)
---------
Comprehensive Loss $(168,541) --- --- --- --- ---
========= ------- ----------- ------------ ------- ---------
Balance September 30, 1998 $97,679 $11,858,704 $(4,327,333) $(3,611) $7,625,439
======= =========== =========== ======= ==========
Balance June 30, 1999 $--- $92,710 $11,491,001 $(6,360,831) $(14,581) $5,208,299
Foreign currency translation
Adjustment 3,265 --- --- --- 3,265 3,265
Net income for three months
ended September 30, 1999 $1,995 --- --- 1,995 --- 1,995
---------
Comprehensive Income $5,260 --- --- --- --- ---
========= ------- ----------- ------------ ------- ---------
Balance September 30, 1999 $92,710 $11,491,001 $(6,358,836) $(11,316) $5,213,559
======= =========== =========== ======= ==========
</TABLE>
The accompanying notes to conslidated financial statements are an
integral part of these consolidated statements.
5
<PAGE>
AFP Imaging Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For the Three Months Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) $1,995 ($173,444)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities-
Accretion of Imputed interest on note payable -- 38,733
Depreciation and amortization 182,779 213,873
Change in assets and liabilities:
Decrease (Increase) in accounts receivable 638,968 (401,716)
Decrease in inventories 324,084 158,903
(Increase) Decrease in prepaid expenses and other assets (211,178) 192,342
Increase in accounts payable 71,191 573,360
(Decrease) in accrued expenses (518,755) (492,842)
----------- -----------
Total adjustments 487,089 282,653
----------- -----------
Net cash provided by operating activities 489,084 109,209
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (11,667) (80,082)
----------- -----------
Net cash (used by) investing activities (11,667) (80,082)
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Borrowing of debt -- 532,178
Repayment of debt (294,310) (85,810)
----------- -----------
Net cash (used by) provided by financing activities (294,310) 446,368
----------- -----------
EXCHANGE RATE EFFECTS ON CASH AND CASH EQUIVALENTS 3,265 4,898
----------- -----------
Net increase in cash and cash equivalents 186,372 480,393
CASH AND CASH EQUIVALENTS, at beginning of period 249,053 594,992
----------- -----------
CASH AND CASH EQUIVALENTS, at end of period $ 435,425 $ 1,075,385
=========== ===========
</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
September 30, 1999
(1) General:
The accounting policies followed during the interim periods reported on herein
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 included in the Company's Annual Report on Form 10-K for
the year ended June 30, 1999.
(2) Net earnings per common share:
The diluted weighted average number of shares outstanding include 4,292 shares
of common stock issuable upon exercise of outstanding stock options in fiscal
2000. It does not include 149,192 shares of common stock issuable upon exercise
of outstanding stock options in fiscal 1999, as such amounts are anti-dilutive
when there is a loss.
(3) Long and Short Term Debt:
As of September 30, 1999, the Company had an $8.4 million revolver loan and a
$1.45 million term loan (together the "Credit Facility") at an interest rate of
3/4% above prime. The Credit Facility is collateralized by accounts receivable,
eligible inventory, equipment, life insurance policies and proceeds thereof,
trademarks, licenses, patents, and general intangibles. The arrangement provides
for restrictions on borrowings, requires certain financial ratios related to
total debt, unsubordinated debt to tangible net worth and current assets to
current liabilities be maintained and requires minimum levels of working
capital, net worth and cash flow. As of September 30, 1999, the Company has
exceeded maximum levels of the debt service coverage ratio covenant, due to the
losses recorded in the past quarters. The Company has obtained a waiver from its
lender permitting the temporary non-compliance with the required financial
ratios. The Company expects that it will remain in non-compliance through the
quarter ended December 31, 1999, but will continue to be able to obtain waivers
from its lenders.
On August 11, 1999, the Company renegotiated and significantly reduced the $2.5
million Subordinated Promissory Note issued in December 1997. This Note had been
in dispute and no payments had been made. The Company paid $150,000 to the Note
Holder and a new six year Subordinated Note for $850,000 was issued; interest
only (fixed at 7.75%) will be paid for the first three years, then the Company
will make thirty-six equal monthly payments of $23,611.11 plus interest on the
unpaid balance.
On August 11, 1999, the Company and ACG Nystromgruppen AB ("Nystrom") of Sweden,
agreed to an immediate reduction and restructuring of the Nystrom Subordinated
Note Payable. The Company paid $100,000 to Nystrom plus accrued interest from
April 17, 1999 to August 10, 1999, and the principal amount of the amended
Nystrom Subordinated Note Payable was reduced to $800,000 in total, to be paid
over a six year period. Interest only will be paid quarterly for the first three
years, followed by thirty-six equal monthly payments of $22,222.22 plus
interest, paid quarterly, on the unpaid balance. Interest will remain at LIBOR +
2% for the six year period.
(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 (benefit) for fiscal 2000 and 1999 relates to
state and foreign income or capital taxes net of any refunds received. No income
tax benefits related to the losses reported in fiscal 1999 have been recorded,
in accordance with Statement of Financial Accounting Standards Board Statement
109.
(6) Adoption of New Accounting Pronouncement:
The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for
reporting certain information about each segment of the Company.
The Company does not believe that pronouncements which have been issued but have
not yet become effective will have a material impact on the Company's financial
position or results of operations.
7
<PAGE>
(7) Segment Information:
The Company operates in two distinct industry segments: medical/dental and
graphic arts. The Company's business segments are based on differences in the
nature of their operations, including distribution channels and customers. The
composition of the segments and measure of segment profit is consistent with
that used in making strategic decisions. Medical/dental segment operations are
conducted under the Dent-X and AFP tradenames and consists of the design,
development, manufacturing and marketing of medical and dental image systems and
all related accessories. The graphic arts segment operates under the LogE
tradename and includes products such as paper and film developers.
The segment information for the three months ended September 30, 1999 and 1998
is shown below. Segment information related to operating income (loss) include
costs directly attributable to each segment's operations.
<TABLE>
<CAPTION>
Operating Depreciation Net
Income & Capital Interest
Net Sales (Loss) Assets Amortization Expenditures Expense
--------- ------ ------ ------------ ------------ -------
<S> <C> <C> <C> <C> <C> <C>
For the three months ended
September 30, 1999
Medical/Dental $5,547,253 $68,443 $11,461,919 $180,679 $11,667 $86,210
Graphic Arts 852,940 46,602 1,787,551 2,100 - 30,000
---------- ------- ----------- -------- ------- -------
Consolidated $6,400,193 $115,045 $13,249,470 $182,779 $11,667 $116,210
---------- ------- ----------- -------- ------- -------
For the three months ended
September 30, 1998
Medical/Dental $6,039,015 $(25,932) $16,814,262 $210,829 $76,842 $127,427
Graphic Arts 1,292,094 23,957 2,243,720 3,044 3,240 32,042
---------- ------- ----------- -------- ------- -------
Consolidated $7,331,109 $(1,975) $19,057,982 $213,873 $80,082 $159,469
========== ======= =========== ======== ======= ========
</TABLE>
Item 2: Management's Discussion and Analysis of Fiscal 2000 Financial Condition
and Results of Operation
Capital Resources, Liquidity and Results of Operations
The Company's working capital at September 30, 1999, decreased approximately
$4,060,000 from June 30, 1999. Approximately $4,161,000 is due to the
reclassification of the Company's credit facility from long-term debt to
short-term debt. The facility expires in July 2000. The Company expects to renew
this facility with similar terms and conditions prior to its expiration,
however, pursuant to Generally Accepted Accounting Principles such debt is
classified as a current liability. There was approximately $100,000 of net
working capital generated from operations.
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 assuming that the Company's does not have
significant losses from operations for a material period of time. 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 covenants and terms, with the exception of the debt service coverage
ratio. Its senior lender has waived compliance with such coverage ratio for the
quarter ended September 30, 1999. The lender has agreed to this waiver after
noting that Fiscal 1999 operations were negatively impacted by the significant
operating expenses associated with the Company's new digital dental product
lines. This facility was renewed in July 1997 and expires in July 2000. The
Company is dependent upon its existing credit facilities to finance its overall
operations. At September 30, 1999, the Company currently had available $989,000
of unused lines of credit for short-term financing needs plus cash and cash
equivalents of $435,000.
Capital expenditures for the first quarter of Fiscal 2000 were minimal. Capital
expenditures for the balance of Fiscal 2000 will consist of computer workstation
upgrades and production tooling and other appropriate replacements in the normal
course of operations. Management has not approved nor expects any significant
capital expenditures for Fiscal 2000. The Company's historical operating cash
flows have been positive; however, the Company is dependent upon its existing
credit facilities to finance its ongoing working capital requirements.
The Company expects its need for working capital will continue to be financed by
operations and from borrowings on its credit facility. The Company is presently
unaware of any other trends, demands, commitments or contingencies which are
reasonably likely to result in a material increase or decrease in its liquidity
or capital resources in the foreseeable future, except for any ongoing losses
from its operations. No assurances can be given that the Company will have
favorable cash flow in the near term, that the senior lender will grant further
waivers to the Company, or that the Company will successfully renegotiate its
credit facility.
8
<PAGE>
Year 2000 Compliance
The Company has developed and substantially completed a plan to ensure that all
of its manufactured and developed products as well as internal systems are
compliant with the requirements to process transactions and function properly in
the year 2000. As described above, all of the Company's internal information
systems have been replaced with fully compliant new software and systems. The
total cost of the software, implementation and hardware were capitalized as
incurred. The Company continues to test and upgrade its internal information
systems as part of an overall operational plan to replace older systems with
more efficient current technology. The Company believes that all significant
costs related to the Year 2000 compliance issue have been incurred.
The Company also consulted with its processing banks and payroll service
provider to ensure that their services are Year 2000 compliant. The Company has
been advised by these service providers that all of these external information
services and systems are Year 2000 compliant. The Company has contacted its
vendors, on whom it relies, to assure that their systems are or will be Year
2000 compliant. The Company has evaluated these responses to ensure that
critical vendors are Year 2000 compliant, or has reviewed alternate sourcing of
these materials to Year 2000 compliant vendors. The Company has reviewed their
own plant equipment and has determined that such equipment is either Year 2000
compliant or not affected by the Year 2000 issues.
The Company has developed contingency plans to address the most reasonably
likely worst case scenarios from the potential Year 2000 disruption. The
Company's Year 2000 efforts are ongoing and will continue to evolve as new
information becomes available. The Company does not anticipate a major
interruption of its business activities, however, this will be dependent in part
upon the ability of third party vendors to be Year 2000 compliant. Although the
Company has implemented the actions described above to address these third party
issues, it has no direct ability to influence compliance actions by such
parties. The Company does not know, at this time, of any of its products,
processes or systems which, if found to be non-Year 2000 Compliant, would have
any significant impact. Accordingly, while the Company believes its actions
should help reduce the possible effects of the Year 2000 risks, it is unable to
eliminate the ultimate effects on the Company's operating results.
Euro Conversion
A single currency called the euro was introduced in Europe on January 1, 1999.
Eleven of the fifteen member countries of the European Union agreed to adopt the
euro as their common legal currency on that date. Fixed conversion rates between
these participating countries' existing currencies and the euro were established
as of that date, to remain legal tender as denominations until at least January
1, 2002. Beginning in January 2002, new euro-denominated bills and coins will be
issued. The Company has addressed the issues raised by the euro currency
conversion. All third-party computer and financial systems have the ability to
process euro-denominated transactions. The Company has also addressed the issue
of the impact of one common currency on pricing.
Comparison of Three Months Fiscal 2000 Versus Three Months Fiscal 1999
Sales decreased $931,000 or 13% between the two periods. The Company's product
lines, other than dental, experienced a general decrease in sales volume, with
the graphic arts business the most significant. Fluctuating world markets,
combined with the strong US dollar, continue to adversely effect the Company's
export sales. The Company continues to explore and develop potential
distribution channels and new products through engineering efforts, aggressive
marketing, as well as repositioning its product pricing in the marketplace. The
Company has increased its efforts in the dental imaging sector by adding
products for redistribution. The result is the dental products have shown growth
in sales. Gross profit as a percent of sales increased 3.9 percentage points.
Material costs remained at approximately the same percentage, however,
manufacturing overheads were significantly reduced through management's
restructuring efforts and cost-cutting programs, including discontinuance of
non-profitable product lines, closing of facilities, and the elimination of
redundancies.
Selling, general and administrative costs stayed approximately the same for the
two periods. Management's cost restructuring programs included the continuance
of its worldwide marketing and sales efforts to preserve customer share and the
reduction of costs in other ancillary departments.
Research and development costs decreased approximately $161,000 or 54%. The
Company closed its engineering facility in Vancouver, Washington, effective June
30, 1999. The work has been relocated to the Elmsford, NY facility. The Company
has focused on the continued refinement of its digital dental products in order
to reduce costs and maintain market share. Additionally, the Company continues
to invest in sustaining engineering and related costs for its analog products.
Where applicable, the Company is acting as master import distributors for
products developed by others.
Interest expense net, decreased approximately $43,300, or 27% between the two
periods. Corporate debt was reduced approximately $294,000 since June 30, 1999.
Additionally, two subordinated notes payable were significantly reduced and
restructured of as of August 1999 (See footnote 2 to Consolidated Financial
Statements for further discussion).
9
<PAGE>
Other
On March 19, 1999, the Company's Common Stock was de-listed from the NASDAQ
SmallCap Exchange as the Company's shares did not maintain a closing bid price
greater than $1.00 for 30 consecutive days. The Company is now listed on the
NASDAQ Over the Counter Bulletin Board.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative and Hedging
Activities. SFAS No. 133 establishes a comprehensive standard on accounting for
derivative and hedging activities and is effective for periods beginning after
January 15, 2001. Management does not believe that the future adoption of SFAS
No. 133 will have a material effect on the Company's financial position and
results of operations.
This Quarterly Report on Form 10Q contains certain forward-looking statements
within the meaning of the Private Securities Reform Act of 1995. These
forward-looking statements involve risks and uncertainties that could cause
actual results to differ materially from those in any such forward-looking
statements. Such factors include, but are not limited to, adverse changes in
general economic conditions, the ability of the Company to repay its loans,
including changes in the specific markets for the Company's services, the
ability of the Company to successfully design, develop, manufacture and sell new
products, adverse business conditions, increased competition, pricing pressures,
risk associated with foreign operations, the ability to attract and retain key
personnel, difficulties in obtaining adequate long-term financing to meet the
Company's obligations, various regulatory requirements throughout the world, and
other factors.
Part II Other Information
Item 4:
Item 6: Exhibits and Reports on Form 8-K.
(a) None
(b) Reports on Form 8-K
None
10
<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 duly authorized.
AFP IMAGING CORPORATION
-------------------------
David Vozick
Chairman of the Board
Secretary, Treasurer
Date: November 9, 1999
-------------------------
Donald Rabinovitch
President and Director
Date: November 9, 1999
-------------------------
Elise Nissen
Chief Financial Officer
Date: November 9, 1999
11
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1.000
<CASH> 435,425
<SECURITIES> 0
<RECEIVABLES> 3,718,546
<ALLOWANCES> 434,000
<INVENTORY> 5,170,744
<CURRENT-ASSETS> 9,153,427
<PP&E> 8,013,042
<DEPRECIATION> 6,891,086
<TOTAL-ASSETS> 13,249,470
<CURRENT-LIABILITIES> 6,259,378
<BONDS> 0
0
0
<COMMON> 92,710
<OTHER-SE> 5,120,849
<TOTAL-LIABILITY-AND-EQUITY> 13,249,470
<SALES> 6,400,193
<TOTAL-REVENUES> 6,400,193
<CGS> 4,116,836
<TOTAL-COSTS> 2,168,312
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 116,210
<INCOME-PRETAX> (1,165)
<INCOME-TAX> (3,160)
<INCOME-CONTINUING> 1,955
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,995
<EPS-BASIC> .00
<EPS-DILUTED> .00
</TABLE>
