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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, 1996
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Commission File Number 0-10832
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AFP Imaging Corporation
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(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
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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
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The registrant had 7,160,518 shares of Common Stock outstanding as of
January 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 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 December 31, 1996 and June 30, 1996, and the
results of its operations for the three and six month periods ended December
31, 1996 and 1995, and its cash flows for the six month periods then ended,
have been included.
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Item 1: FINANCIAL STATEMENTS
AFP Imaging Corporation and Subsidiaries
Consolidated Balance Sheets - December 31, 1996 and June 30, 1996
<TABLE>
<CAPTION>
Assets December 31, June 30,
- ------ 1996 1996
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 2,772,857 $ 3,133,198
Accounts receivable, less allowance
for doubtful accounts of $212,200
and $238,000 respectively 4,986,849 6,020,129
Inventories 6,436,799 7,530,128
Prepaid expenses and other 197,567 163,374
------------ ------------
Total current assets 14,394,072 16,846,829
------------ ------------
Property and Equipment, (at cost) 7,113,289 7,103,500
Less accumulated depreciation (5,930,451) (5,833,067)
------------ ------------
1,182,838 1,270,433
------------ ------------
Intangible Assets,
net of accumulated amortization 1,730,502 1,907,112
------------ ------------
Other Assets 313,763 233,719
------------ ------------
$ 17,621,175 $ 20,258,093
============ ============
<CAPTION>
Liabilities and Stockholders' Equity December 31, June 30,
- ------------------------------------ 1996 1996
------------ ------------
<S> <C> <C>
Current Liabilities: (Note 3)
Current portion of long-term debt $ 126,665 $ 214,620
Accounts payable 1,261,647 1,364,937
Accrued expenses 1,468,346 1,684,377
Convertible subordinated debentures 200,000 200,000
------------ ------------
Total current liabilities 3,056,658 3,463,934
------------ ------------
Long Term Debt (Note 3) 4,765,425 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 December 31, 1996 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 December 31, 1996 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, 7,160,518
and 7,077,767 shares issued and
outstanding at December 31, 1996
and June 30, 1996, respectively 71,606 70,778
Paid-in capital in excess of par 8,267,537 8,175,793
Retained deficit (1,894,416) (2,374,921)
------------ ------------
Net equity 9,799,092 9,316,087
------------ ------------
$ 17,621,175 $ 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
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales $ 9,142,343 $ 8,749,659 $17,252,285 $16,856,171
Cost of Sales 6,198,542 5,743,519 11,759,952 10,998,290
----------- ----------- ----------- -----------
Gross Profit 2,943,801 3,006,140 5,492,333 5,857,881
----------- ----------- ----------- -----------
Selling, General and
Administrative Expenses 2,225,804 2,379,683 4,331,006 4,616,519
Research and Development 210,714 351,922 368,974 662,106
----------- ----------- ----------- -----------
2,436,518 2,731,605 4,699,980 5,278,625
----------- ----------- ----------- -----------
Operating income 507,283 274,535 792,353 579,256
----------- ----------- ----------- -----------
Interest, net 113,816 201,482 256,848 403,412
----------- ----------- ----------- -----------
Income before provision for taxes 393,467 73,053 535,505 175,844
Provision for Income Taxes 30,000 5,000 55,000 15,000
----------- ----------- ----------- -----------
Net Income $ 363,467 $ 68,053 $ 480,505 $ 160,844
=========== =========== =========== ===========
NET INCOME PER
COMMON SHARE $ .04 $ .01 $ .05 $ .02
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
SHARES AND SHARE EQUIVALENTS
WEIGHTED AVERAGE NUMBER OF
OUTSTANDING 9,888,700 9,987,300 9,859,800 8,860,100
=========== =========== =========== ===========
DIVIDENDS PER SHARE None None None None
</TABLE>
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 Six Months Ended December 31, 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 59,880 shares of
common stock in connection with
the conversion of stock options -- -- -- 599 60,531 -- 61,130
Conversion of 138,072 shares of
preferred stock, Series A to 138,072
shares of common stock (358,987) -- -- 1,381 357,606 -- --
Conversion of Subordinated
Debentures to common stock -- -- -- 4,308 512,692 -- 517,000
Issuance of 1,371,461 shares of
preferred stock, Series A at
$1.20 per share 1,645,753 -- -- -- -- -- 1,645,753
Issuance of 711,872 shares of
preferred stock, Series B at
$1.20 per share -- 854,247 -- -- -- -- 854,247
Net income for six months ended
December 31, 1995 -- -- -- -- -- 160,844 160,844
---------- --------- --------- --------- ---------- ----------- ----------
Balance December 31, 1995 $2,564,960 $ 854,247 $ 25,314 $ 70,781 $8,176,345 $(2,914,605) $8,777,042
========== ========= ========= ========= ========== =========== ==========
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
Conversion of 75,060 shares of
preferred stock, Series A to 77,751
shares of common stock (90,072) -- -- 778 89,294 -- --
Net income for six months
ended December 31, 1996 -- -- -- -- -- 480,505 480,505
---------- --------- --------- --------- ---------- ----------- ----------
Balance December 31, 1996 $2,474,804 $ 854,247 $ 25,314 $ 71,606 $8,267,537 $(1,894,416) $9,799,092
========== ========= ========= ========= ========== =========== ==========
</TABLE>
The accompanying notes to financial statements are an
integral part of these statements.
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AFP Imaging Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For the Six Months Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 480,505 $ 160,844
Adjustments to reconcile net income to net cash provided
by operating activities-
Depreciation and amortization 420,160 591,585
Change in assets and liabilities
Decrease in accounts receivable 1,033,280 41,627
(Increase) Decrease in inventories 1,093,329 (480,873)
(Increase) in other assets and other (171,267) 23,492
(Decrease) in accounts payable (103,290) (590,150)
(Decrease) in accrued expenses (216,031) (1,002,654)
----------- -----------
Total adjustments 2,056,181 (1,416,973)
----------- -----------
Net cash provided by (used by) operating activities 2,536,686 (1,256,129)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (96,425) (97,388)
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 (96,425) (1,307,755)
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Borrowing of debt -- 5,098,071
Repayments of debt (2,800,602) (435,319)
----------- -----------
Net cash provided by (used by) financing activities (2,800,602) 4,662,752
----------- -----------
Net increase (decrease) in cash and cash equivalents (360,341) 2,098,868
CASH AND CASH EQUIVALENTS, at beginning of period 3,133,198 523,590
----------- -----------
CASH AND CASH EQUIVALENTS, at end of period $ 2,772,857 $ 2,622,458
=========== ===========
</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
Notes to Consolidated Financial Statements
December 31, 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.
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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 December 31, 1996 decreased approximately
$2,045,000 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. The final payment is due July 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.
The Company's historical cash flows have been favorable. The Company is
dependent upon its existing credit facilities to finance its overall
operations. At December 31, 1996 the Company had available $2.1 million unused
lines of credit for short-term financing needs plus cash and cash equivalents
of $2.7 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 Six Months Fiscal 1997 Versus Six Months Fiscal 1996
Sales increased $396,100 or 2% 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 declined 2.9
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 $285,000 or 6% due to the
reclassification of certain overhead costs, as mentioned above, and $171,000
less in amortization charges.
Research and development costs decreased $293,100 or 44%. The Company continues
to re-evaluate the market potential and investment in products 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 $146,500 or 36% due to $103,000 less in
interest charges and $44,000 additional interest income earned. Long-term debt
was reduced by $2.7 million during the period and the private equity placement
of $2.5 million was completed October 1995.
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Second Quarter Fiscal 1997 versus Second Quarter 1996
Net sales increased $393,000 or 4%. The dental and digital medical products
showed the most significant increase this quarter. Gross profit as a percent of
sales decreased 2.2 percentage points due to increases in the material cost of
goods, as explained previously. The aggregate of the expense items decreased
$295,100 or 11% in the second quarter for the same reasons as the six months
period. Interest expense net decreased 43% in this quarter due to a $634,000
reduction in long-term debt.
Part II Other Information
Item 4: Submission of Matters to a Vote of Security Holders
On December 19, 1996, 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 and (2) ratify the appointment of Arthur Andersen LLP as the
independent public accountant for the year ending June 30, 1997. The nominees
for election to the Board of Director received the following votes:
For Election Withhold Authority
------------ ------------------
David Vozick 8,173,934 19,439
Donald Rabinovitch 8,173,934 19,439
Robert Rosen 8,173,934 19,439
Frank O'Bryan 8,173,934 19,439
Robert Blatt 8,173,934 19,439
In connection with the appointment of Arthur Andersen LLP as the independent
public accountants, 8,185,453 shares voted for, 4,200 voted against and 3,720
shares abstained
Item 6: Exhibits and Reports on Form 8-K.
(a) Exhibits
None
(b) Reports on Form 8-K
None
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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: February 10, 1997 _______________________________
David Vozick
Chairman of the Board
Secretary, Treasurer
(Principal Financial Officer)
Date: February 10, 1997 _______________________________
Donald Rabinovitch
President and Director
(Principal Executive Officer)
10
