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
Quarter Ended April 30, 1996 Commission File Number
0-8354
IMGE, INC.
(Exact name of Registrant as specified in its Charter)
DELAWARE
95-2094565
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
285 Tanglewood Crossing
Lawrence, New York 11559
(Address of principal executive office)
(516) 239-8067
(Registrant's telephone number,
including area code)
Common Stock $.05 per shares outstanding
at April 30, 1996
(Number of shares outstanding of each class
of issuer's common stock)
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 report(s) and (2) has
been subject to such filing requirements for the
past 90 days.
Yes X No
This report contains a total of 12 pages.
IMGE, INC. AND SUBSIDIARIES
PART I. Financial Information
Item 1. Financial Statements
The condensed financial statements included herein
have been prepared by the registrant,
without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. 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; however, the registrant believes that the
disclosures are adequate to make the information
presented not misleading. It is suggested that these condensed
financial statements be read in conjunction with
the financial statements and the notes thereto included in the
registrant's annual report on Form 10-K for the
fiscal year ended October 31, 1995.
The condensed financial statements for the interim
periods included herein, which are
unaudited, include, in the opinion of management, all adjustments
(consisting only of normal recurring
adjustments) necessary to present fairly the financial position
and results of operations of the registrant for
the periods presented. The results of operations for interim
periods should not be considered indicative of
results to be expected for the full year.
2
IMGE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
April 30, Oct. 31,
ASSETS 1996 1995
Cash & Equivalents $9,630 $15
Accounts Receivable 34 16
Investment in IMNET Systems, Inc. (Notes 2 and 3) 2,436
12,023
$12,100 $12,054
LIABILITIES
Current Liabilities:
Acounts Payable $26
$17
Notes payable by subsidiary (Including $271 and
$251 of accrued interest) (Note 4) 648
629
674
646
Convertible notes due, 2000 (Including $191 and $189 of
accrued interest) (Note 4) 486
476
Total Liabilities $1,160
$1,122
Commitments and contingencies (Note 4)
STOCKHOLDERS' EQUITY (Notes 2 and 3)
Preferred stock, $.01 par-shares authorized 1,000,000;
no shares outstanding
Common stock, $.05 par-shares authorized 24,000,000;
outstanding 17,600,452 879
879
Additional paid-in capital 29,295
29,295
Net unrealized gain on securities available for sale
2,436 12,023
Deficit (21,670)
(31,265)
Total stockholders' equity 10,940
10,932
$12,100 $12,054
See accompanying notes to consolidated financial statements
3
IMGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share date)
(Unaudited)
Three months Ended April 30, Six Months
Ended April 30,
1996
1995 1996
1996
Revenue:
Other Income $ $32 $18
$48
Interest Income 96
96
Gain from sale of Imnet Systems, Inc.
stock (Note 2) 9,640
9,640
9,736 32 9,754
48
Expenses:
Interest 17 17
34 34
General and administrative
107 32 125 48
124 49
159 82
Net income (loss) $9,612 ($17) $9,595 ($34)
Per common share of stock:
Net income $0.55 $ $0.55
$
Average number of common shares
outstanding 17,600,477
17,600,477 17,600,477 17,600,477
See accompanying notes to consolidated financial statements
4
IMGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Notes 2 and 3)
(dollars in thousands)
Net
Unrealized
Gain (Loss) on
Additional Securities
Common Paid-in Available
Stock Capital For Sale
Deficit Total
Amounts at October 31, 1995 $879 $29,295 $12,023
($31,265) $10,932
Change in net unrealized gain on
securities available for sale (9,587)
(9,587)
Net income for six months
ended April 30, 1996 9,595 9,595
Amounts at April 30, 1996 $879 $29,295 $2,436
($21,670) $10,940
See accompanying notes to consolidated financial statements.
5
IMGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Notes 2 and 3)
(dollars in thousands)
Six Months Ended
April 30,
1996 1995
Cash flows from operating activities:
Net income (loss) $9,595 ($34)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Gain from sale of Imnet Systems, Inc. stock
(9,640)
Accounts receivable
(18) (24)
Accounts payable 9 5
Accrued interest on notes payable 29 34
Net cash from operating activities (25) (19)
Cash flows from investing activities:
Net proceeds from sale of Imnet Systems, Inc. stock 9,640
Cash from investing activities 9,640
Net increase (decrease) in cash 9,615 (19)
Cash at beginning of year 15 26
Cash at end of year $9,630 $7
See accompanying notes to consolidated financial statements.
6
IMGE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BUSINESS AND DISCONTINUED OPERATIONS
Prior to October 5, 1992, IMGE, Inc. (the "Company")
through its subsidiary, IMGE Corporation of
Delaware (the "Subsidiary") was engaged in the business of the
design, manufacture, marketing and servicing
of PC based document image processing systems (the "Imaging
Business"). On October 5, 1992, the assets of
the Subsidiary were exchanged for an investment interest and
certain other rights and payments in a privately
owned corporation, IMNET Systems, Inc. ("IMNET"). As a result of
the exchange, the Company changed its
name from IMNET, Inc. to IMGE, Inc. IMNET is now actively
engaged in the Imaging Business previously
conducted by the Subsidiary.
(2) LIQUIDITY
Prior to February 15, 1996, the assets of the Company
were its holding of 473,813 shares of IMNET
common stock. In addition, IMNET had agreed to provide minimal
financial support (up to $96,000 per year,
plus additional rights of the Company to borrow up to $30,000 per
year) to subsidize the operational costs and
essential activities of the Company. This support expired on
January 16, 1996.
On July 20, 1995, IMNET raised $38.5 million by offering
3,450,000 shares of its common stock to the
public in an initial public offering. Commencing January 16,
1996, the Company's investment in IMNET could
be actively traded on the NASDAQ national market.
On February 15, 1996, the Company sold 400,000 shares of
IMNET through underwriters led by Volpe
Welty & Company. The net proceeds to the Company were
$9,640,000. A total of 2,875,000 shares of IMNET
were offered in a secondary public offering to the public at a
price of $25.50 per share. Of those shares,
IMNET sold 798,500 shares and selling shareholders, other than
IMGE, sold 1,676,500 shares. The Company
had previously written off its entire investment in IMNET
however, due to available net operating loss
carryovers, the Company does not anticipate any federal tax
liability on this gain. The Company had also
agreed not to sell any of its remaining 73,813 shares of IMNET
until May 15, 1996 (See Note 6).
The Company is actively exploring various business
opportunities in which to invest the net proceeds
from the IMNET stock sale (See Note 6).
7
IMGE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(3) INVESTMENT IN IMNET SYSTEMS, INC.
The Copmpany's investment in IMNET is classified as
available for sale and stated at market
value ($2,436,000 at April 30,1996) with a corresponding
unrealized gain excluded from earnings and
reported as a seperate component of shareholders' equity.
(4) SUBORDINATED NOTES OF THE SUBSIDIARY
Subordinated Notes in the amount of $377,000 plus
interest owned by investors and approximately $4.2
million plus accrued interest owned by the Company are
subordinate to approximately $18.2 million plus
accrued interest of notes owed by the Subsidiary to the Company.
A civil action has been filed against the Company and
the Subsidiary by a holder of Subordinated
Notes in the principal amount of $326,900 plus accrued interest,
demanding payment. Due to the inability of
the Subsidiary to repay its indebtedness to the Company, the
Subsidiary suspended the payment of interest
and principal (at maturity) under the Subordinated Notes and but
for the terms of such subordination, would
be considered in default in the payment thereof. The Company
believes that the Subordinated Notes issued
by the Subsidiary are subordinate to all but $5 million of the
indebtedness owed by the Subsidiary to the
Company. Certain of the Subordinated Notes provide that if the
Subsidiary defaults in the payment of "Senior
Indebtedness" or "Senior Debt" (as defined), the Subordinated
Notes shall not be payable unless and until the
Subsidiary has paid in full all such debt then outstanding. The
Company believes that the loans which it has
provided to the Subsidiary qualify for treatment as Senior Debt
within the meaning of the Subordinated Notes.
Other Subordinated Notes provide for the unconditional
subordination in the event of a default by the
Subsidiary in the payment of any indebtedness owed by the
Subsidiary. Additionally, the Company never
assumed these obligations of the Subsidiary.
(5) INCOME TAXES
The Company has unused net operating loss carryforwards
for tax purposes of approximately $50,000 which
expire in 2009, $50,000 which expire in 2008, $450,000 which
expire in 2004 and $2,100,000 which expire in 2003.
In addition, after offsetting the $9,595,000 year to date profits
the Company has separate return loss year
carryovers of approximately $160,000 which can be utilized
against future taxable income and expire in 2003. No
financial statement benefit has been recognized. In addition,
the Company has research and development tax
credits of $450,000.
8
IMGE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Concluded)
(6) SUBSEQUENT EVENTS
On June 12, 1996, IMGE entered into a Letter of Intent
for a proposed acquisition of the business of a
privately owned company that acquires first lien real estate tax
certificates issued by local governments. As a
precondition to the acquisition, the Company will have a $25
million, non-recourse, three year commitment from
a financial institution that will permit the Company to borrow up
to $25 million against tax certificates at 98% of
the value. The Chief Operating Officer of the business will join
the Company as President and Chief Operating
Officer of a subsidiary that will acquire that business. The
financing commitment is expected to be enlarged as
the funds are needed to expand the portfolio. The projected
closing date for the acquisition is July 31, 1996. It
is projected that approximately $2 million of Company funds will
be needed for the acquisition and operation of
this business.
As of June 12, 1996, IMGE completed the sale of an
additional 27,000 of its shares of IMNET Systems,
Inc. and received net proceeds of $835,000 reducing the
Company's holdings to 46,813 shares.
Messrs. Michael Wise and H. Irwin Levy, members of the
Board of Directors of IMGE, Inc., have been
employed as consultants to seek and evaluate further acquisition
opportunities.
9
IMGE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
RESULTS OF OPERATIONS
The Company's income from operations was $9,736,000 as
compared to a $17,000 loss for the same quarter
last year. The difference is due primarily to a $9,640,000 gain
from the February, 1996 sale of 400,000 shares
of IMNET Systems, Inc. ("IMNET"). Additionally there was a
decrease in other income of $32,000, due to
the discontinuance of funding from IMNET, an increase in interest
income of $96,000 due to interest earned
from cash proceeds on the February sale of IMNET stock and a
$75,000 increase in general and administrative
expenses. The six month income from operations was $9,590,000 as
compared to a $34,000 loss for the
comparable six month period in 1995. The difference is due to
the aforementioned $9,640,000 stock gain, a
$30,000 decrease in other income, a $96,000 increase in interest
income, and a $77,000 increase in general and
administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
Prior to February 15, 1996, the assets of the Company were
its holding of 473,813 shares of IMNET common
stock. In addition, IMNET had agreed to provide minimal
financial support (up to $96,000 per year, plus
additional rights of the Company to borrow up to $30,000 per
year) to subsidize the operational costs and
essential activities of the Company. This support expired on
January 16, 1996.
On July 20, 1995, IMNET raised $38.5 million by offering
3,450,000 shares of its common stock to the public
in an initial public offering. Commencing January 16, 1996, the
Company's investment in IMNET could be
actively traded on the NASDAQ exchange.
On February 15, 1996, the Company sold 400,000 shares of
IMNET through underwriters led by Volpe Welty
& Company. The net proceeds to the Company were $9,640,000. A
total of 2,875,000 shares of IMNET were
offered in a secondary public offering to the public at a price
of $25.50 per share. Of those shares, IMNET
sold 798,500 shares and selling shareholders, other than IMGE,
sold 1,676,500 shares. The Company had
previously written off its entire investment in IMNET however,
due to available net operating loss carryovers,
the Company does not anticipate any federal tax liability on this
gain. The Company had also agreed not to
sell any of its remaining 73,813 shares of IMNET until May 15,
1996.
The Company is actively exploring various business
opportunities in which to invest the net proceeds from the
IMNET stock sale.
The third party liabilities of the Company and the Subsidiary
respectively consist principally of the Convertible
Notes issued by the Company in the unpaid principal
non-discounted amount of $400,000, and the remaining
Subordinated Notes issued by the Subsidiary in the unpaid
principal amount of $377,000. The indebtedness
of the Subsidiary to the Company, in the approximate principal
amount of $18.2 million, plus accrued interest,
also remains outstanding.
10
IMGE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
LIQUIDITY AND CAPITAL RESOURCES (continued)
In April 1995, the Board of Directors of the Company and the
Subsidiary adopted resolutions and reached
agreement pursuant to which the debt owed to the Company by the
Subsidiary in the amount of $12.5 million,
principal and accrued interest ("Debt Portion") has been paid.
The Debt Portion is part of the indebtedness
owed by the Subsidiary to the Company in the principal amount of
$27.2 million, and which is past due and
in default. In consideration of full satisfaction and release of
the Debt Portion, the Company and the
Subsidiary agreed to the delivery and acceptance of 108.45 shares
of Series A preferred stock and 251,330.61
shares of common stock of IMNET. The remaining indebtedness owed
by the Subsidiary to the Company in
the principal amount of $18.2 million plus accrued interest
remains unreleased and outstanding.
A civil action has been filed against the Company and the
Subsidiary by a holder of Subordinated Notes in
the principal amount of $326,900 plus accrued interest, demanding
payment. Due to the inability of the
Subsidiary to repay its indebtedness to the Company, the
Subsidiary suspended the payment of interest and
principal (at maturity) under the Subordinated Notes and but for
the terms of such subordination, would be
considered in default in the payment thereof. The Company
believes that the Subordinated Notes issued by
the Subsidiary are subordinate to all by $5 million of the
indebtedness owed by the Subsidiary to the Company.
Certain of the Subordinated Notes provide that if the Subsidiary
defaults in the payment of "Senior
Indebtedness" or "Senior Debt" (as defined), the Subordinated
Notes shall not be payable unless and until the
subsidiary has paid in full all such debt then outstanding. The
Company believes that the loans which it has
provided to the Subsidiary qualify for treatment as Senior Debt
within the meaning of the Subordinated Notes.
Other Subordinated Notes provide for unconditional subordination
in the even of a default by the Subsidiary
in the payment of any indebtedness owed by the Subsidiary.
Additionally, the Company never assumed these
obligations of the Subsidiary.
On June 12, 1996, IMGE entered into a Letter of Intent for a
proposed acquisition of the business of a
privately owned company that acquires first lien real estate tax
certificates issued by local governments. As
a precondition to the acquisition, the Company will have a $25
million, non-recourse, three year commitment
from a financial institution that will permit the Company to
borrow up to $25 million against tax certificates
at 98% of the value. The Chief Operating Officer of the business
will join the Company as President and
Chief Operating Officer of a subsidiary that will acquire that
business. The financing commitment is expected
to be enlarged as the funds are needed to expand the portfolio.
The projected closing date for the acquisition
is July 31, 1996. It is projected that approximately $2 million
of Company funds will be needed for the
acquisition and operation of this business.
As of June 12, 1996, IMGE completed the sale of an
additional 27,000 of its shares of IMNET Systems,
Inc. and received net proceeds of $835,000, thereby reducing the
Company's holdings to 46,813 shares.
Messrs. Michael Wise and H. Irwin Levy, members of the
Board of Directors of IMGE, Inc., have been
employed as consultants to seek and evaluate further acquisition
opportunities.
11
IMGE, INC. AND SUBSIDIARIES
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the
following person on behalf of the registrant and in the
capacities and on the date indicated.
June 13, 1996 By:
Jerry Woloszczuk
Vice President/Asst.
Secretary
12
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<NAME> IMGE, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-END> APR-30-1996
<CASH> 9,630
<SECURITIES> 2,436<F1>
<RECEIVABLES> 34
<ALLOWANCES> 0
<INVENTORY> 0
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<CURRENT-LIABILITIES> 674
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0
0
<COMMON> 879
<OTHER-SE> 10,061<F2>
<TOTAL-LIABILITY-AND-EQUITY> 12,100
<SALES> 0
<TOTAL-REVENUES> 9,754
<CGS> 0
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<FN>
<F1>Securities are stated at market value with a corresponding unrealized
gain excluded from earnings, however, reported as a separate component
of stockholders' equity.
<F2>Other stockholders' equity includes the following: (i) $29,295 in
additional paid-in capital; (ii) $2,436 in unrealized gain on
securities available for sale; (iii) and a $21,270 accumulated
deficit.
</FN>
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