<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, 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 7,634,461 shares of Common Stock outstanding as of October
31,1997.
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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/A No. 1 for the year ended
June 30, 1997.
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, 1997 and June 30, 1997, and the results
of its operations for the three month periods ended September 30, 1997 and 1996,
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, 1997 and June 30, 1997
September 30, June 30,
1997 1997
------------- --------
Assets
Current Assets:
Cash and cash equivalents $ 1,640,793 $ 1,858,287
Accounts receivable, less allowance for
doubtful accounts of $266,600 and
$277,900 respectively 4,866,260 5,816,106
Inventories 6,398,952 6,016,528
Prepaid expenses and other 555,131 650,095
------------- -------------
Total current assets 13,461,136 14,341,016
------------- -------------
Property and Equipment, (at cost) 7,684,836 7,511,752
Less accumulated depreciation (6,237,712) (6,113,123)
------------- -------------
1,447,124 1,398,629
------------- -------------
Intangible Assets,
net of accumulated amortization 4,408,004 4,441,453
------------- -------------
Other Assets 352,982 334,930
------------- -------------
$ 19,669,246 $ 20,516,028
============= =============
Liabilities and Stockholders' Equity
Current Liabilities:
Current portion of long-term debt $ 367,010 $ 639,314
Accounts payable 1,879,339 1,801,973
Accrued expenses 1,948,461 2,789,241
------------- -------------
Total current liabilities 4,194,810 5,230,528
------------- -------------
Long Term Debt 3,917,547 4,412,116
------------- -------------
Shareholders' Equity
Convertible Preferred Stock, Series A,
1,750,000 authorized, 1,372,417 and
1,396,814 shares issued and outstanding
at September 30, 1997 and June 30, 1997,
respectively 2,141,814 2,171,071
Convertible Preferred Stock, Series B,
824,844 authorized, 711,872 shares issued
and outstanding at September 30, 1997 and
June 30, 1997 854,247 854,247
Common Stock Warrants 10,314 25,314
Common Stock, $.01 par value, 30,000,000
shares authorized, 7,634,461 and
7,432,698 shares issued and outstanding
at September 30, 1997 and June 30, 1997,
respectively 76,343 74,327
Paid-in capital in excess of par 8,873,665 8,578,549
Accumulated deficit (418,637) (826,324)
Cumulative translation adjustment 19,143 (3,800)
------------- -------------
Total shareholders' equity 11,556,889 10,873,384
------------- -------------
$ 19,669,246 $ 20,516,028
============= =============
The accompanying notes to financial statements are an integral part of
these consolidated balance sheets.
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AFP Imaging Corporation and Subsidiaries
Consolidated Statements of Operations
1997 1996
---------- ----------
Net Sales $8,893,620 $8,109,942
Cost of Sales 5,727,875 5,561,410
---------- ----------
Gross Profit 3,165,745 2,548,532
---------- ----------
Selling, General and
Administrative Expenses 2,411,654 2,105,202
Research and Development Expenses 201,325 158,260
---------- ----------
Operating income 2,612,979 2,263,462
---------- ----------
552,766 285,070
---------- ----------
Interest, net 94,599 143,032
---------- ----------
Income before provision for taxes 458,167 142,038
Provision for Income Taxes 50,480 25,000
---------- ----------
Net Income $407,687 $117,038
========== ===========
NET EARNINGS PER
COMMON SHARE $.04 $.01
========== ===========
WEIGHTED AVERAGE NUMBER OF
SHARES AND SHARE EQUIVALENTS
OUTSTANDING $10,267,175 9,830,100
========== ===========
DIVIDENDS PER SHARE None None
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
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AFP Imaging Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity
For the Three Months Ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
Foreign
Convertible Convertible Common Paid-in-Capital Currency
Preferred Preferred Stock Common In Excess of Accumulated Translation
Stock (A) Stock (B) Warrants Stock Par Deficit Adjustment Total
----------- ----------- -------- ------ --------------- ----------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
=========== ========= ======== ======== =========== ============= ========== ===========
Balance June 30, 1997 $ 2,171,071 $ 854,247 $ 25,314 $ 74,327 $ 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. --- --- (15,000) 1,520 238,480 --- --- 225,000
Issuance of 24,500
shares of common stock
in connection with the
conversion of stock
options --- --- --- 245 27,630 --- --- 27,875
Conversion of 24,381
shares of preferred
stock, Series A to
25,220 shares of
common stock (29,257) --- --- 251 29,006 --- --- ---
Foreign currency
translation adjustment --- --- --- --- --- --- 22,943 22,943
Net income for three
months ended
September 30, 1997 --- --- --- --- --- 407,687 --- 407,687
----------- --------- -------- -------- ----------- ------------- ---------- -----------
Balance September
30, 1997 $ 2,141,814 $ 854,247 $ 10,314 $ 76,343 $ 8,873,665 $ (418,637) $ 19,143 $11,556,889
=========== ========= ======== ======== =========== ============= ========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
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AFP Imaging Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For the Three Months Ended September 30, 1997 and 1996
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $407,687 $117,038
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization 207,919 214,692
Change in assets and liabilities:
Decrease in accounts receivable 949,846 1,476,359
(Increase) decrease in inventories (382,424) 377,688
(Increase) in other assets and other (36,569) (62,671)
Increase in accounts payable 77,366 32,098
(Decrease) in accrued expenses (840,780) (279,974)
---------- ----------
Total adjustments (24,642) 1,758,192
---------- ----------
Net cash provided by operating activities 383,045 1,875,230
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITES:
Capital expenditures (109,484) (9,953)
---------- ----------
Net cash (used by) investing activities (109,484) (9,953)
---------- ----------
CASH FLOW FROM FINANCING ACTIVITIES:
Repayment of debt (766,873) (2,150,779)
Exercise of common stock warrants 225,000 --
Exercise of common stock options 27,875 --
---------- ----------
Net cash (used by) financing activities (513,998) (2,150,779)
---------- ----------
EXCHANGE RATE EFFECTS ON CASH AND CASH EQUIVALENTS 22,943 --
---------- ----------
Net (decrease) in cash and cash equivalents (217,494) (285,502)
CASH AND CASH EQUIVALENTS, at beginning of period 1,858,287 3,133,198
---------- ----------
CASH AND CASH EQUIVALENTS, at end of period $1,640,793 $2,847,696
========== ==========
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
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AFP Imaging Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 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:
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:
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.
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 September 30, 1997 decreased approximately
$662,570. 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 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 September 30, 1997 the Company had available $4.6 million of unused lines of
credit for short-term financing needs plus cash and cash equivalents of $1.64
million.
During fiscal 1997, the Company loaned an unaffiliated dental company $300,000
backed by notes secured by the stock and assets of the borrower. Such amount was
repaid in full, with interest, on October 1, 1997, the due date.
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 manufacturing software package. The
Company signed a three year lease for the hardware and software costs which has
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 Three Months Fiscal 1998 Versus Three 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 $2.9 million in cash and notes payables. The
goodwill of $3.0 million associated with this acquisition is being amortized
over fifteen years on a straight-line basis.
Sales increased $783,700 or 10% between the two periods. There was a slight
increase in graphic arts and medical sales, and a 22% increase in the Company's
expanding dental products line. This excludes the sales from the newly acquired
dental line. Gross profit as a percent of sales decreased four percentage points
due to the sales of more distributor goods which generally have lower gross
margins. Initial sales of the new electronic imaging equipment had a higher cost
of goods due to initial foreign sourcing of components.
Selling, general and administrative costs increased $306,450 or 14.5% due to
costs associated with the newly acquired Regam product line. The Company also
hired an investor relations consultant this year.
Research and development costs increased $43,000 or 27%. The Company has added
new engineers and consultants to further the development of its electronic
dental imaging line. 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 $48,400 or 34% due to a lower interest rate and
$1.2 million less in debt. Consolidated debt was reduced by $767,000 during the
period.
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
<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: November 14, 1997 /s/ David Vozick
-------------------------
David Vozick
Chairman of the Board
Secretary, Treasurer
(Principal Financial Officer)
Date: November 14, 1997 /s/ Donald Rabinovitch
--------------------------
Donald Rabinovitch
President and Director
(Principal Executive Officer)
10
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> SEP-30-1997
<CASH> 1,640,793
<SECURITIES> 0
<RECEIVABLES> 5,132,860
<ALLOWANCES> 266,600
<INVENTORY> 6,398,952
<CURRENT-ASSETS> 13,461,136
<PP&E> 7,684,836
<DEPRECIATION> 6,237,712
<TOTAL-ASSETS> 19,669,246
<CURRENT-LIABILITIES> 3,917,547
<BONDS> 0
0
2,996,061
<COMMON> 76,343
<OTHER-SE> 8,484,485
<TOTAL-LIABILITY-AND-EQUITY> 19,669,246
<SALES> 8,893,620
<TOTAL-REVENUES> 8,893,620
<CGS> 5,727,875
<TOTAL-COSTS> 2,612,979
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 94,599
<INCOME-PRETAX> 458,167
<INCOME-TAX> 50,480
<INCOME-CONTINUING> 407,687
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 407,687
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
