<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 September 30, 1996
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 7,082,767 shares of Common Stock outstanding as of October
31,1996.
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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, 1996.
In the opinion of the Company, all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial position of
AFP Imaging Corporation as of September 30, 1996 and June 30, 1996, and the
results of its operations for the three month periods ended September 30, 1996
and 1995, and its cash flows for the three month periods then ended, have been
included.
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Item 1: FINANCIAL STATEMENTS
AFP Imaging Corporation and Subsidiaries
Consolidated Balance Sheets -- September 30, 1996 and June 30, 1996
<TABLE>
<CAPTION>
Assets September 30, June 30,
- ------ 1996 1996
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $2,847,696 $3,133,198
Accounts receivable, less allowance
for doubtful accounts of $222,600
and $238,000 respectively 4,543,770 6,020,129
Inventories 7,152,440 7,530,128
Prepaid expenses and other 168,782 163,374
------------ ------------
Total current assets 14,712,688 16,846,829
------------ ------------
Property and Equipment, (at cost) 7,026,817 7,103,500
Less accumulated depreciation (5,844,751) (5,833,067)
------------ ------------
1,182,066 1,270,433
------------ ------------
Intangible Assets,
net of accumulated amortization 1,818,806 1,907,112
------------ ------------
Other Assets 265,416 233,719
------------ ------------
$17,978,976 $20,258,093
============ ============
<CAPTION>
Liabilities and Stockholders' Equity September 30, June 30,
- ------------------------------------ 1996 1996
------------ ------------
<S> <C> <C>
Current Liabilities: (Note 3)
Current portion of long-term debt $143,332 $214,620
Accounts payable 1,397,035 1,364,937
Accrued expenses 1,404,403 1,684,377
Convertible subordinated debentures 200,000 200,000
------------ ------------
Total current liabilities 3,144,770 3,463,934
------------ ------------
Long Term Debt (Note 3) 5,398,581 7,278,072
------------ ------------
Convertible Subordinated Debentures (Note 3) -- 200,000
------------ ------------
Stockholders' Equity
Convertible Preferred Stock, Series A,
1,750,000 authorized, 1,724,984
shares issued and outstanding at
September 30, 1996 and at June 30, 1996 2,564,876 2,564,876
Convertible Preferred Stock, Series B,
824,844 authorized, 711,872
shares issued and outstanding at
September 30, 1996 and at June 30, 1996 854,247 854,247
Common Stock Warrants 25,314 25,314
Common Stock, $.01 par value,
30,000,000 shares authorized,
7,082,767 shares issued and
outstanding at September 30, 1996
and June 30, 1996, respectively 70,828 70,778
Paid-in capital in excess of par 8,178,243 8,175,793
Retained deficit (2,257,883) (2,374,921)
------------ ------------
Net equity 9,435,625 9,316,087
------------ ------------
$17,978,976 $20,258,093
============ ============
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these balance sheets.
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AFP Imaging Corporation and Subsidiaries
Consolidated Statements of Operations
Three Months Ended
September 30,
1996 1995
---------- ----------
Net Sales $8,109,942 $8,106,512
Cost of Sales 5,561,410 5,254,771
---------- ----------
Gross Profit 2,548,532 2,851,741
---------- ----------
Selling, General and
Administrative Expenses 2,105,202 2,236,836
Research and Development 158,260 310,184
---------- ----------
2,263,462 2,547,020
---------- ----------
Operating income 285,070 304,721
---------- ----------
Interest, net 143,032 201,930
---------- ----------
Income before provision for taxes 142,038 102,791
Provision for Income Taxes 25,000 10,000
---------- ----------
Net Income $117,038 $92,791
========== ==========
NET INCOME PER
COMMON SHARE $.01 $.01
========== ==========
WEIGHTED AVERAGE NUMBER OF
SHARES AND SHARE EQUIVALENTS
WEIGHTED AVERAGE NUMBER OF
OUTSTANDING 9,830,100 7,305,700
========== ==========
DIVIDENDS PER SHARE None None
The accompanying notes to consolidated financial statements are an integral
part of these statements.
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AFP Imaging Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
For The Three Months Ended September 30, 1996 and 1995
<TABLE>
<CAPTION>
Convertible Convertible Common Paid-in Capital
Preferred Preferred Stock Common In Excess of Retained
Stock (A) Stock (B) Warrants Stock Par Deficit Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance June 30, 1995 $1,278,194 $ -- $25,314 $64,493 $7,245,516 $(3,075,449) $5,538,068
Issuance of 10,000 shares of
common stock in connection with
the conversion of stock options -- -- -- 100 11,150 -- 11,250
Conversion of 75,572 shares of
preferred stock, Series A to 75,572
shares of common stock (196,487) -- -- 756 195,731 -- --
Net income for three months ended
September 30,1995 -- -- -- -- -- 92,791 92,791
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance September 30, 1995 $1,081,707 $ -- $25,314 $65,349 $7,452,397 $(2,982,658) $5,642,109
=========== =========== =========== =========== =========== =========== ===========
Balance June 30, 1996 $2,564,876 $854,247 $25,314 $70,778 $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 -- -- -- 50 2,450 -- 2,500
Net income for three months
ended September 30, 1996 -- -- -- -- -- 117,038 117,038
Balance September 30, 1996 $2,564,876 $854,247 $25,314 $70,828 $8,178,243 ($2,257,883) $9,435,625
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes to financial statements are
an integral part of these statements.
5
<PAGE>
AFP Imaging Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For the Three Months Ended September 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $117,038 $92,791
Adjustments to reconcile net income to net cash provided
by operating activities-
Depreciation and amortization 214,692 296,905
Change in assets and liabilities
Decrease in accounts receivable 1,476,359 458,717
(Increase) Decrease in inventories 377,688 (117,170)
(Increase) in other assets and other (62,671) (14,729)
Increase (decrease) in accounts payable 32,098 (675,244)
(Decrease) in accrued expenses (279,974) (967,427)
----------- -----------
Total adjustments 1,758,192 (1,018,648)
----------- -----------
Net cash provided by (used by) operating activities 1,875,230 (926,157)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (9,953) (40,402)
Payment for Purchase of acquisition assets,
net of cash acquired -- (3,710,367)
----------- -----------
Net cash (used by) investing activities (9,953) (3,750,769)
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Borrowing of debt -- 4,640,601
Repayments of debt (2,150,779) (384,556)
----------- -----------
Net cash provided by (used by) financing activities (2,150,779) 4,256,045
----------- -----------
Net (decrease) in cash and cash equivalents (285,502) (420,881)
CASH AND CASH EQUIVALENTS, at beginning of period 3,133,198 523,590
----------- -----------
CASH AND CASH EQUIVALENTS, at end of period $2,847,696 $102,709
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these consolidated statements.
6
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AFP Imaging Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1996 and 1995
(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, 1996, and for the year then ended, included in the
Company's Annual Report on Form 10-K for the year ended June 30, 1996.
(2) Net earnings per common share-
Net income per common share has been computed using the weighted average number
of shares and share equivalents outstanding during the periods. The weighted
average number of shares outstanding does not include common stock equivalents
when there is a loss as their inclusion would be anitdilutive.
(3) Long and Short Term Debt:
The Company has a $9.85 million revolver and term loan senior credit facility.
It 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. This facility matures in July 1997, at
which time the Company expects to refinance with the same general terms and
covenants from the current lender. Therefore, the Company has classified the
revolver as a long term liability.
In August 1996, the Company made the scheduled sinking fund payment of $200,000
to an unaffiliated subordinate debenture holder.
(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.
7
<PAGE>
Item 2: Management's Discussion and Analysis of 1996 Financial Condition and
Results of Operation
Capital Resources and Liquidity
The Company's working capital at September 30, 1996 decreased approximately
$1.8 million as the funds generated from current assets were used to reduce the
long-term debt levels, offset by funds generated from operations.
The Company has a senior credit facility consisting of a $9.85 million revolver
and term loan facility. This facility is sufficient to finance ongoing working
capital requirements. The credit facility 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 matures in July 1997, at which time the Company expects
to refinance with the same general terms and covenants from the current lender.
Therefore, the Company has classified the revolver as a long term liability.
The Company has made the scheduled annual sinking fund payment equal to 20% of
the face value of the subordinated debentures to its remaining subordinated
debt holder.
Capital expenditures for fiscal 1997 consist of appropriate replacements in the
normal course of operations. The Company has committed to the purchase of a new
Business Information System including the upgrade of existing computer hardware
and a new fully integrated manufacturing software package. The Company has
committed to a three year lease for the hardware and software costs, to
minimize the use of working capital funds. The transaction will be recorded as
a capital asset in accordance with Generally Accepted Accounting Principles.
The Company's historical cash flows have been favorable. The Company is
dependent upon its existing credit facilities to finance its overall
operations. At September 30, 1996 the Company had available $1.0 million unused
lines of credit for short-term financing needs plus cash and cash equivalents
of $2.8 million. 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 demands, commitments or contingencies which are
reasonably likely to result in a material increase or decrease in its liquidity
within the foreseeable future.
Comparison of Three Months Fiscal 1997 Versus Three Months Fiscal 1996
Sales stayed relatively constant between the two periods. There was a decline
in graphic arts sales offset by an increase in medical and dental sales. Gross
profit as a percent of sales declined 3.8 percentage points due to a 3% net
change in material costs and a reclassification of certain overheads costs. The
net increase in material costs can be attributed to the sale of more
distributor goods which generally have a lower gross margin.
Selling, general and administrative costs decreased $132,000 or 6% due to the
reclassification of certain overhead costs, as mentioned above, and $55,000
less in amortization charges.
Research and development costs decreased $152,000 or 49%. The Company continues
to re-evaluate the market potential and investment products versus the
distribution of alternative outsourced products with respect to each
anticipated return on investment. The Company has reduced the associated
internal engineering and related costs.
Interest expense, net decreased $59,000 or 30% due to $28,000 less in interest
charges and $31,000 additional interest income earned. Long-term debt was
reduced by $2.1 million during the quarter and the private equity placement of
$2.5 million was completed October 1995.
8
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Part II Other Information
Item 6: Exhibits and Reports on Form 8-K.
(a) Exhibits
None
(b) Reports on Form 8-K
None
9
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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: November 12, 1996 _________________________
David Vozick
Chairman of the Board
Secretary, Treasurer
(Principal Financial Officer)
Date: November 12, 1996 _________________________
Donald Rabinovitch
President and Director
(Principal Executive Officer)
10
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