<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, 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 7,170,518 shares of Common Stock outstanding as of March
31,1997.
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,
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 March 31, 1997 and June 30, 1996, and the results of
its operations for the three and nine month periods ended March 31, 1997 and
1996, and its cash flows for the nine month periods then ended, have been
included.
2
<PAGE>
Item 1: FINANCIAL STATEMENTS
AFP Imaging Corporation and Subsidiaries
Consolidated Balance Sheets - March 31, 1997 and June 30, 1996
--------------------------------------------------------------
<TABLE>
<CAPTION>
Assets March 31, June 30,
- ------ 1997 1996
----------- ----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 2,899,447 $ 3,133,198
Accounts receivable, less allowance
for doubtful accounts of $215,000
and $238,000 respectively 4,757,252 6,020,129
Inventories 6,184,918 7,530,128
Prepaid expenses and other 100,061 163,374
----------- -----------
Total current assets 13,941,678 16,846,829
----------- ----------
Property and Equipment, (at cost) 7,174,125 7,103,500
Less accumulated depreciation (6,012,951) (5,833,067)
----------- ----------
1,161,174 1,270,433
----------- ----------
Intangible Assets,
net of accumulated amortization 1,642,198 1,907,112
----------- ----------
Other Assets 233,178 233,719
----------- ----------
$16,978,228 $20,258,093
=========== ==========
<CAPTION>
Liabilities and Stockholders' Equity March 31, June 30,
- ------------------------------------ 1997 1996
---------- ----------
<S> <C> <C>
Current Liabilities: (Note 3)
Current portion of long-term debt $ 110,000 $ 214,620
Accounts payable 1,710,138 1,364,937
Accrued expenses 1,612,863 1,684,377
Convertible subordinated debentures 200,000 200,000
----------- -----------
Total current liabilities 3,633,001 3,463,934
----------- -----------
Long Term Debt (Note 3) 3,016,024 7,278,072
Convertible Subordinated Debentures (Note 3) - 200,000
----------- -----------
Stockholders' Equity
Convertible Preferred Stock, Series A,
1,750,000 authorized, 1,649,908 and
1,724,968 shares issued and outstanding
at March 31, 1997 and
June 30, 1996, respectively 2,474,804 2,564,876
Convertible Preferred Stock, Series B,
824,844 authorized, 711,872
shares issued and outstanding
at March 31, 1997 and June 30, 1996,
respectively 854,247 854,247
Common Stock Warrants 25,314 25,314
Common Stock, $.01 par value,
30,000,000 shares authorized, 7,170,518
and 7,077,767 shares issued and
outstanding at March 31, 1997
and June 30, 1996, respectively 71,706 70,778
Paid-in capital in excess of par 8,277,437 8,175,793
Retained deficit (1,374,305) (2,374,921)
---------- ----------
Net equity 10,329,203 9,316,087
---------- ----------
$16,978,228 $20,258,093
========== ==========
</TABLE>
The accompanying notes to consolidated
financial statements are an integral part of these balance sheets.
3
<PAGE>
AFP Imaging Corporation and Subsidiaries
Consolidated Statements of Operations
-------------------------------------
Three Months Ended
March 31,
1997 1996
---- ----
Net Sales $9,217,711 $8,928,072
Cost of Sales 6,157,415 6,045,291
---------- ---------
Gross Profit 3,060,296 2,882,781
--------- ---------
Selling, General and
Administrative Expenses 2,174,388 2,333,536
Research and Development 222,109 336,937
------- -------
2,396,497 2,670,473
--------- ---------
Operating income 663,799 212,308
------- -------
Interest, net 78,687 184,524
------ -------
Income before provision for taxes 585,112 27,784
Provision for Income Taxes 65,000 3,000
------ -----
Net Income $520,112 $24,784
======== =======
NET INCOME PER
COMMON SHARE $ .05 $ -
====== ====
WEIGHTED AVERAGE NUMBER OF
SHARES AND SHARE EQUIVALENTS
WEIGHTED AVERAGE NUMBER OF
OUTSTANDING 10,047,985 9,836,188
========== =========
DIVIDENDS PER SHARE None None
Nine Months Ended
March 31,
1997 1996
---- ----
Net Sales $26,469,996 $25,784,243
Cost of Sales 17,917,367 17,043,581
---------- ----------
Gross Profit 8,552,629 8,740,662
--------- ---------
Selling, General and
Administrative Expenses 6,505,394 6,950,055
Research and Development 591,083 999,043
------- -------
7,096,477 7,949,098
--------- ---------
Operating income 1,456,152 791,564
--------- -------
Interest, net 335,536 587,936
------- -------
Income before provision for taxes 1,120,616 203,628
Provision for Income Taxes 120,000 18,000
------- ------
Net Income $1,000,616 $185,628
========== ========
NET INCOME PER
COMMON SHARE $ .10 $.02
====== ====
WEIGHTED AVERAGE NUMBER OF
SHARES AND SHARE EQUIVALENTS
WEIGHTED AVERAGE NUMBER OF
OUTSTANDING 9,930,148 9,189,119
========= =========
DIVIDENDS PER SHARE None None
The accompanying notes to consolidated financial statements are an
integral part of these statements.
4
<PAGE>
AFP Imaging Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
For The Nine Months Ended March 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, 1995 $1,278,194 $ --- $25,314 $64,493
Retirement of 444 shares of
common stock at $1.44 per share (4)
Issuance of 59,880 shares of
common stock in connection with
the conversion of stock options --- --- --- 599
Conversion of 138,088 shares of
preferred stock, Series A to
138,088 shares of common stock (359,029) --- --- 1,381
Conversion of Subordinated
Debentures to common stock --- --- --- 4,308
Issuance of 1,371,461 shares of
preferred stock, Series A at
$1.20 per share 1,645,753 --- --- ---
Issuance of 711,872 shares of
preferred stock, Series B at
$1.20 per share --- 854,247 --- ---
Net income for nine months ended
March 31,1996 --- --- --- ---
---------- --------- ------- -------
Balance March 31, 1996 $2,564,918 $ 854,247 $25,314 $70,777
========== ========= ======= =======
Balance June 30, 1996 $2,564,876 $854,247 $25,314 $70,778
Issuance of 15,000 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
========== ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
Paid-in Capital
In Excess of Retained
Par Deficit Total
----------------- ------- -----
<S> <C> <C> <C>
Balance June 30, 1995 $7,245,516 $(3,075,449) $5,538,068
Retirement of 444 shares of
common stock at $1.44 per share (635) (639)
Issuance of 59,880 shares of
common stock in connection with
the conversion of stock options 60,531 --- 61,130
Conversion of 138,088 shares of
preferred stock, Series A to
138,088 shares of common stock 357,648 --- ---
Conversion of Subordinated
Debentures to common stock 512,692 --- 517,000
Issuance of 1,371,461 shares of
preferred stock, Series A at
$1.20 per share --- --- 1,645,753
Issuance of 711,872 shares of
preferred stock, Series B at
$1.20 per share --- --- 854,247
Net income for nine months ended
March 31,1996 --- 185,628 185,628
---------- ------------ ----------
Balance March 31, 1996 $8,175,752 $(2,889,821) $8,801,187
========== ============ ==========
Balance June 30, 1996 $8,175,793 $(2,374,921) $9,316,087
Issuance of 15,000 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
========== ============ ===========
</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 Nine Months Ended March 31, 1997 and 1996
-------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $1,000,616 $185,628
Adjustments to reconcile net income to net cash provided
by operating activities-
Depreciation and amortization 622,428 830,983
Change in assets and liabilities
Decrease in accounts receivable 1,262,877 246,386
(Increase) Decrease in inventories 1,345,210 (1,717,650)
(Increase) Decrease in other assets and other (14,640) 79,890
(Decrease) Increase in accounts payable 345,201 (381,223)
(Decrease) in accrued expenses (71,514) (1,001,123)
------ -----------
Total adjustments 3,489,562 (1,942,737)
--------- ----------
Net cash provided by (used by) operating activities 4,490,178 (1,757,109)
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (157,261) (165,946)
Issuance of Preferred Stock, Series A and B --- 2,500,000
Payment for Purchase of acquisition assets,
net of cash acquired --- (3,710,367)
---------- -----------
Net cash (used by) investing activities (157,261) (1,376,313)
------- ----------
CASH FLOW FROM FINANCING ACTIVITIES:
Borrowing of debt --- 5,750,861
Repayments of debt (4,566,668) (479,486)
--------- ---------
Net cash provided by (used by) financing activities (4,566,668) 5,271,375
--------- ---------
Net increase (decrease) in cash and cash equivalents (233,751) 2,137,953
CASH AND CASH EQUIVALENTS, at beginning of period 3,133,198 523,590
--------- -------
CASH AND CASH EQUIVALENTS, at end of period $2,899,447 $2,661,543
========== ==========
</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, 1997 and 1996
-----------------------
(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.
(6) Subsequent Event:
On April 17, 1997, the Company acquired Regam Medical Systems International AB
("Regam") of Sundsvall, Sweden. Regam is a leading manufacturer of a filmless,
digital dental radiography system. Regam has an installed base of over 3,500
units in Europe and Asia. The acquisition will be accounted for under the
purchase method. Existing capital funds were used to acquire Regam.
7
<PAGE>
Item 2: Management's Discussion and Analysis of Fiscal 1997 Financial Condition
and Results of Operation
Capital Resources and Liquidity
The Company's working capital at March 31, 1997 decreased approximately
$2,457,200. The funds generated from current assets were used to reduce the
long-term debt levels, offset by funds generated from operations. In the past
nine months, the Company has reduced debt by $4.38 million.
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. The final payment is due August 1, 1997.
Capital expenditures for fiscal 1997 consist of appropriate replacements in the
normal course of operations, with specific improvement of computer work
stations. 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 leased
asset in accordance with Generally Accepted Accounting Principles, once the
system is operational.
The Company's historical cash flows have been favorable. The Company is
dependent upon its existing credit facilities to finance its overall operations.
At March 31, 1997 the Company had available $3.2 million of unused lines of
credit for short-term financing needs plus cash and cash equivalents of $2.9
million, a portion of which was used for the Regam acquisition. 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 within the foreseeable future.
Comparison of Nine Months Fiscal 1997 Versus Nine Months Fiscal 1996
Sales increased $685,800 or 2.7% between the two periods. There was a decline in
graphic arts sales due to changing market conditions offset by an increase in
medical and dental sales. Gross profit as a percent of sales decreased 1.6
percentage points due to a 2% net increase in material costs and a
reclassification of certain overheads costs. The net increase in material costs
can be attributed to the increased sales of distributor goods, which generally
have lower gross margins.
Selling, general and administrative costs decreased $445,000 or 6% due to the
reclassification of certain overhead costs, elimination of redundant costs and
lower amortization charges.
Research and development costs decreased $408,000 or 41%. The Company continues
to re-evaluate the market potential and investment in product engineering versus
the distribution of alternative outsourced products with respect to each's
anticipated profitability. The Company continues to invest in sustaining
engineering and related costs while the market potential and return of other new
products is being analyzed.
Interest expense, net decreased $252,000 or 43% due to $205,000 less in interest
charges and $47,000 additional interest income earned. Long-term debt was
reduced by $4.38 million during the period and the private equity placement of
$2.5 million was completed October 1995.
8
<PAGE>
Third Quarter Fiscal 1997 versus Second Quarter 1996
Net sales increased $290,000 or 4%. The dental and digital medical products
showed the most significant increase this quarter. Gross profit as a percent of
sales increased 1.0 percentage point due to the slight increases in the material
cost of goods, offset by reallocation of overhead costs below the gross margin,
as explained previously. The aggregate of the expense items decreased $274,000
or 10% in the third quarter for the same reasons as the nine months period.
Interest expense net decreased $102,000 or 48% in this quarter due to a $1.8
million reduction in debt.
Part II Other Information
Item 6: Exhibits and Reports on Form 8-K.
(a) Exhibits
A Financial Data Schedule (27) as part of Form 10Q/A was filed on April 18,
1997, to amend the December 31, 1996 Form 10Q.
27. Financial Data Schedule
(b) Reports on Form 8-K
A Current Report on Form 8-K was filed on May 2, 1997 to report the
acquisition of Regam Medical Systems International AB of Sundsvall, Sweden. The
financial statements for Regam Medical Systems International AB for the year
ended August 31, 1996 will be filed in connection with the Current Report on
Form 8-K/A.
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 13, 1997 /s/ David Vozick
-----------------------------
David Vozick
Chairman of the Board
Secretary, Treasurer
(Principal Financial Officer)
Date: May 13, 1997 /s/ Donald Rabinovitch
-----------------------------
Donald Rabinovitch
President and Director
(Principal Executive Officer)
10
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,899,447
<SECURITIES> 0
<RECEIVABLES> 4,972,252
<ALLOWANCES> 215,000
<INVENTORY> 6,184,918
<CURRENT-ASSETS> 13,941,678
<PP&E> 7,174,125
<DEPRECIATION> 6,012,951
<TOTAL-ASSETS> 16,978,228
<CURRENT-LIABILITIES> 3,633,001
<BONDS> 0
0
3,329,051
<COMMON> 71,706
<OTHER-SE> 6,928,446
<TOTAL-LIABILITY-AND-EQUITY> 16,978,228
<SALES> 26,469,996
<TOTAL-REVENUES> 26,469,996
<CGS> 17,917,367
<TOTAL-COSTS> 7,096,477
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 335,536
<INCOME-PRETAX> 1,120,616
<INCOME-TAX> 120,000
<INCOME-CONTINUING> 1,000,616
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,000,616
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
</TABLE>
